Professor Rebecca Henderson

MIT Sloan School of Management Phone: (617) 253-6618, Email: Rhenderson@mit.edu,

http://www.mit.edu/people/rhenders/home.html

Material produced and owned byMaterial produced and owned by

Effective innovation strategies answer Effective innovation strategies answer three key questions:three key questions:

How will we Create value?

How will weCapture value?

How will weDeliver value?

How will we create value?How will we create value?– How will the technology evolve?How will the technology evolve?– How will the market change? How will the market change?

How will we capture value?How will we capture value?– How should we design the business model? How should we design the business model? – Where should we compete in the value chain? Where should we compete in the value chain? – How should we compete if standards are important? How should we compete if standards are important?

How will we deliver value?How will we deliver value?– How do we manage the core business and growth How do we manage the core business and growth

simultaneously?simultaneously?– How do we use our strategy to drive real resource allocation?How do we use our strategy to drive real resource allocation?

Why have a strategy?Why have a strategy?

Why have a strategy?Why have a strategy?

1. 1. To make choicesTo make choices

Is This Your Project Pipeline?

Overcommitment destroys Overcommitment destroys productivityproductivity

Average

Value-Added

Time on

Engineering

Tasks

Number of Projects per Engineer

100%

80%

60%

40%

0%

20%

65431 2

The Timing and Impact of Management The Timing and Impact of Management AttentionAttention

Phases

Index of Attention and

Influence

High

Low

ACTUAL

ACTIVITYMANAGEMENT

PROFILE

KnowledgeAcquisition

ConceptInvestigation

BasicDesign

Prototype Building

PilotProduction

Manufacturing Ramp-Up

ABILITYTO INFLUENCEOUTCOME

Why is it so hard to kill Why is it so hard to kill project #26?project #26? It’s a “good” project!It’s a “good” project!

– It meets NPV, ROI goalsIt meets NPV, ROI goals

– An important customer wants itAn important customer wants it

– The CEO/my boss wants itThe CEO/my boss wants it

– It’s Frank’s projectIt’s Frank’s project

– It might be the project that saves my baconIt might be the project that saves my bacon Good managers can meet stretch goals (and I’m a Good managers can meet stretch goals (and I’m a

good manager)good manager) Making difficult decisions takes time Making difficult decisions takes time

and eats energyand eats energy

What can be done?What can be done?

Measure capacity, track resourcesMeasure capacity, track resources Make real decisions with real dataMake real decisions with real data Use decision tools that allow you to view initiatives in Use decision tools that allow you to view initiatives in

comparison to each other and within the context of comparison to each other and within the context of your strategic objectivesyour strategic objectives

Measure capacity,Measure capacity,track resourcestrack resources

Track Resources Over TimeTrack Resources Over Time

0

1500

3000

4500

6000

11-Sep

1-Jan

23-Apr

13-Aug

3-Dec

24-M

ar

14-Jul

3-Nov

HOURS PER MONTH

Exploratory projects

Innovation projects

Product Support

Administration

CAPACITY

Making real decisionsMaking real decisionswith real datawith real data

Technology Strategy in PracticeTechnology Strategy in Practice

Strategies are worthless unless they are linked to real Strategies are worthless unless they are linked to real resource allocation decisionsresource allocation decisions

DecideDecide– Who will make the decisionsWho will make the decisions

– How oftenHow often

– By what criteriaBy what criteria

An Assignment Given to Small Groups An Assignment Given to Small Groups of Managers at XYZ Co.of Managers at XYZ Co.

1.1. Identify the salient characteristics of your Identify the salient characteristics of your organization’s “innovation funnel”organization’s “innovation funnel”

1.1. Where do new ideas come fromWhere do new ideas come from

2.2. When are decisions made?When are decisions made?

3.3. Who is involved in these decisions?Who is involved in these decisions?

2. Draw a diagram of the innovation funnel that captures 2. Draw a diagram of the innovation funnel that captures these characteristicsthese characteristics

The innovation funnelThe innovation funnel

Phase I Phase II Phase III Launch

The Innovation Funnel:The Innovation Funnel:

Defined separation between stages: Clearly defined criteria: a Defined separation between stages: Clearly defined criteria: a way to kill “living dead” projectsway to kill “living dead” projects

Senior managers engaged Senior managers engaged at the right timeat the right time Capture ideas from everywhere, manage ideas in an organized Capture ideas from everywhere, manage ideas in an organized

way so that they turn into productsway so that they turn into products A continuous process: A continuous process: Does this fit with our strategy?Does this fit with our strategy? A picture of the business: an overview of the shape of the A picture of the business: an overview of the shape of the

pipelinepipeline Give teams the freedom they need between gatesGive teams the freedom they need between gates

An Innovation Funnel Example An Innovation Funnel Example

Initial marketing and technical

concepts

Idea

Generation

CharterContract

Launch Proposal

Post Launch Review

GatekeeperGatekeeper

Gatekeeper

Gatekeeper

Feasibility

Concept refinement and

prototype creation

Product optimization

Commercialization Production & Distribution

CapabilityLaunch &

Rollout

One page description of proposed project including objective, rationale and development routes. Early Commercial Assessment

Cross-functional development plan including project plan as contract between team and Gatekeeper.

Launch Plan including CEP approval request.

Tracks success of and key learnings from launched products

KEY

= GATE

= DOCUMENT

Gates:Gates: are major milestonesare major milestones are intended to allow passage of the projects are intended to allow passage of the projects more likely to more likely to

succeed succeed by sacrificing projects by sacrificing projects more likely to fail more likely to fail as early as as early as possiblepossible

focus decision-making. At a gate, a decision is made to either:focus decision-making. At a gate, a decision is made to either:

– Continue working on the project, moving it along to Continue working on the project, moving it along to the next stage in the funnel; orthe next stage in the funnel; or

– Stop working on the project, shelving it or canceling Stop working on the project, shelving it or canceling it; orit; or

– Get additional information and reconsider the project Get additional information and reconsider the project for passage through the same gate once that for passage through the same gate once that information becomes availableinformation becomes available

Example: The Key Questions Example: The Key Questions Answered By Each PhaseAnswered By Each Phase

PhaseReview 1 Phase

Review 2 PhaseReview 3

PortfolioReview

Phase 1:Concept

Investigation

Phase 2:Feasibility

Phase 3:Development

Phase 4:Post

Release

CurrentProductSupport

ENTER

EXIT

•Does the product make sense from marketing, technical & financial perspectives?

If yes, thenconcept

approved& full teamallocated

•What is the product spec?

•Can we develop it within budget and schedule?

•Can we produce it at the required cost & volume?

If yes, thenprototypeapproved

& full teamallocated

•Has the product been fully verified and validated?

•Have production objectives been met?

If yes, thenfull manufacturing

approved& sub-team

allocated

•Does the idea fit roughly with our strategy and resource availability?

If yes, thenconcept documentapproved

& sub-team allocated

•Is the product meeting safety, efficacy and business targets in the market?

If yes, thencloseoutapproved

& handoff toproduct support

PhaseReview 4

IdeaGeneration

Reasons to have a strategy:Reasons to have a strategy:

22. . To be able to change itTo be able to change it

Initially, PDAs did not seem to be a Initially, PDAs did not seem to be a threat to PCs:threat to PCs:

Speed,Power,Memory

Time

PCs

PDAs

?

PDAs sold to customers with different PDAs sold to customers with different needs:needs:

Speed,Power,Memory

Weight/cost

PCs

PDAs

But as PDAs improve they may come to But as PDAs improve they may come to challenge PCschallenge PCs

?Speed,Power,Memory

Weight/cost

PCs

PDAs

Or consumer preferences may changeOr consumer preferences may change

?

Speed,Power,Memory

Weight/cost

PCs

PDAs

How shall we capture How shall we capture value?value?

Uniqueness, Complementary Assets & Uniqueness, Complementary Assets & the Structure of the Value Chainthe Structure of the Value Chain

The second of two key questions:The second of two key questions:

How will we Create value?

How will weCapture value?

How will weDeliver value?

How shall we capture value?How shall we capture value?

How should we design the business model? How should we design the business model?

Where should we compete in the value chain?Where should we compete in the value chain?

How should we compete if standards are How should we compete if standards are important? important?

Three key ideas:Three key ideas:

UniquenessUniqueness– Controlling the knowledge generated by an innovationControlling the knowledge generated by an innovation

Complementary assetsComplementary assets– Controlling the assets that maximize the profits from Controlling the assets that maximize the profits from

innovatinginnovating

Understanding the dynamics of the value chainUnderstanding the dynamics of the value chain– Should we buy our suppliers? Distributors?Should we buy our suppliers? Distributors?– Should we outsource our manufacturing… Should we outsource our manufacturing…

distribution… sales… capability?distribution… sales… capability?

Sources of UniquenessSources of Uniqueness

Intellectual property protectionIntellectual property protection– PatentsPatents

• Finite lengthFinite length• The right to prohibit “producing”The right to prohibit “producing”

– CopyrightsCopyrights• The right to prohibit “copying”The right to prohibit “copying”

SecrecySecrecy– Trade secrets & non compete clausesTrade secrets & non compete clauses

– ““Tacit” knowledgeTacit” knowledge SpeedSpeed