A way of distinguishing between different types of innovation and innovative activities is in terms of the degree of ‘newness’ of the product. Seven types of innovation can be classified in this way:
Referred to as ‘new-to-world products’, such innovations perform an entirely new function and create new markets. Examples include the microwave oven, the mobile telephone, and Viagra. Such innovations are comparatively rare and pose the highest risks and often incur the highest costs.
These are innovations that improve the performance of an existing function. This type of innovation is more common than the ‘new-to-the-world’ type, and is often the prime objective of innovation research and development activity. An example is the development of digital photography. ‘Improved performance’ encompasses a range of different types of innovation. At one extreme, it may involve the development and use of a brand new technology (e.g. digital watches); at the other, it may mean an extension or improvement of the technology currently used by improved design or better materials. An example in this category is the development of the Dyson vacuum cleaner.
A considerable amount of innovative activity involves developing new applications for existing products. The amount of development activity required can vary enormously. In some cases, the tech nology and product can be applied in a new context with little or no further development, e.g. in the case of the hovercraft, whereas for other products or technologies, widening the scope of applica tion requires substantial research and development work, e.g. in finding new applications for laser technology.
This type of innovation may be used to improve performance or extend functions of existing products. Typical was the addition of Internet capabilities on mobile phones and the ability to access Facebook from one’s own mobile phone.
This can be seen as a variation on the ‘improved performance’ product; a new product which performs the same functions as a previous product, but at a lower cost. A lower cost product may enable the marketer to extend applications of the product by reaching more buyers for whom the product was previously too expensive or not cost effective. Innovative activity aimed at reducing product cost is common for many products including computers, pharmaceutical and fashion clothing products.
Often, ‘new products’ are no more than an update or change in styling to old ones. This type of innovative activity is prevalent in the car and clothing markets. It is a progressive innovation that generally involves lower costs and risks than ‘new-to-the-world’ types of innovation. However, such low cost, low risk modifications sometimes turn into major investments carrying high risk which may not have been the original intention.
At the opposite extreme to the entirely new product is the ‘new’ product which might simply be a result of repackaging, renaming or re-branding. Although requiring careful planning and management, this type of innovation involves fewer management issues than those raised by the development of products which are entirely new. One could argue that such products are not new at all, and should not be treated as innovations. The test of what constitutes a ‘new product’, and the degree of ‘newness’ is the extent to which the market (i.e. customers) perceive the product to be new. A repackaged or re-branded product, if perceived as new by the market, is in a sense an innovation and should be marketed as such. Repackaging, renaming and re-branding are tactical aspects of product innovation. They are really part of a ‘product regeneration’ strategy. Examples in recent years include the re-branding of Mars’ ‘Snickers’ snack product (previously ‘Marathon’) and the ‘repackaging’ of British Airways.
We have seen that ‘innovation’ encompasses a broad spectrum of different types of activity, ranging from development of entirely new products and technologies to repackaging existing ones. It is entirely new products that pose greatest problems in terms of effective management and attendant risk. It is with managing this high risk type of innovation activity that much of what follows in this chapter is concerned.
Having established the variety of innovation activities we now examine some of the issues in the management of innovation, in particular the ‘ingredients’ in the successful management of innovation, and some of the current issues influencing the future environment for innovation and new product development.
Managing innovations: critical factors
Innovation is crucial to long-term success in an organization, yet the risks are high with significant rates of new product failure. The managerial issues and problems to which this dilemma gives rise are considerable. A combination of the recognized importance of innovation and the high risk of failure has meant that his area of company activity has attracted substantial attention and research in recent years. Much of this has focused on attempts to look for empirical evidence that can establish the key ingredients in the successful management of innovation. There are no ‘recipes’ for certain success, but research has been instrumental in establishing some of the critical factors in the process. By way of example, we have outlined a selection of research programmes in this area, together with a brief summary of their findings.
Successful product launches
Morley’s13 study of over 2,000 new product launches was very comprehensive. It found that only one in seven of the new product launches researched could be considered successful when considering sales and market share. Those that were successful exhibited the following characteristics compared to their less successful counterparts:
Conclusions drawn about successful new products were very much along the lines of what one would expect. For example, it is understandable that new products with a well-known company or brand name that are heavily promoted stand more chance of success than their lesser-known weakly promoted counterparts. However, a finding from his study regarding successful new products is perhaps more surprising, namely that prices for successful new products tended to be above average for the sector.
The continuum of product innovation
Amongst the most difficult markets in which to succeed with new products is the grocery, particularly the luxury foods, market. Despite this, Ben and Jerry’s brand of ice creams, which is not the cheapest of product ranges in this product category on the market, continue to be extremely successful. The brand’s marketers have refused to be drawn into a price war against competitors and continue to support the brand’s positioning at the top end of the marketplace to good effect.
Service products like HeartSWell Lodge, in Plymouth, are models of social and financial success. It opened in August 2001, having been funded by charitable donations. It provides support to families of complex high risk patients, yet it is run on business lines. Many units in the main hospital use the facility for carers of their patients in paediatrics, trauma, neurosciences and the hyperbaric oxygen centre.
One of the earliest systematic studies of success and failure in new product development was Project SAPPHO. Under the direction of Cyril Freeman14 at the University of Sussex, an extensive and detailed research programme was designed to investigate the key factors for success in innovation. Twentynine pairs of similar innovation project were examined; in each pair, one project was successful and the other a comparative failure. Using a carefully designed statistical analysis, Freeman and his team were able to establish a pattern of factors which appeared to distinguish between success and failure in the various pairings. Project SAPPHO found that the successful innovator tended to be distinguished by the following five elements:
A summary of critical factors in successful innovation
These studies are a sample of empirical research done in this area. What emerges from these and other studies is that there are a set of critical factors in successful innovation which point the way to key areas for managing this activity. A summary of these ingredients is that offered by Twiss,who lists seven critical factors:
He points out that there will be cases where innovations succeed in spite of poor management, but absence of one or more of the above factors is more likely to lead to innovative failure. Evidence suggests that companies seem to be learning to manage the process of new product development, especially the idea generation and screening stages, more effectively than in the past.
The McKinsey Report
A slightly different approach to investigating innovative success of new products is exemplified by a report from McKinsey & Co.15 which sought primarily to establish the essentials of a well managed company. They found certain factors associated with the success of a number of firms acknowledged as being leaders, especially in product innovation. The ten companies selected in the study were International Business Machines, Emerson Electric, Texas Instruments, McDonald’s, Hewlett-Packard, Johnson & Johnson, ZM, Digital Equipment, Procter & Gamble and Dana. The eight key factors for success McKinsey found were:
The future environment for new product development
In a résumé of the future for new product development, Crawford isolated four sets of factors or trends that will influence the future for new product development:
Reduced reward factors: Crawford argues that a number of trends will tend to reduce the rewards (and the incentive) for product innovation in the future:
All these factors serve to make innovation less rewarding (financially) for the innovator. Increased cost factors: The increased pace of technological progress has increased costs of pioneering new technologies and products. Some of the more advanced technologies are beyond the resources of many individual companies. We are thus likely to see a much greater use of collaborative developments between companies or companies and government in the future. An example of company collaboration on new product development was the development of the Advanced Photo system (APS) technology. The costs and risks of developing this technology were considered so great that collaboration between otherwise competitor companies comprising Kodak, Nikon, Canon, Minolta and Fujifilm took place.
An example of competitor and government collaboration for new product development is the development of the European Airbus which involved companies and governments in four European countries (Spain, Germany, France and the United Kingdom) forming a consortium to develop this product.
Increased difficulty factors: These are tending to increase the uncertainty and level of difficulty associated with innovation:
Positive forces: A number of factors will tend to promote the progress of new product development in the future:
Strategies for innovation
Later we shall look at the stages in new product development, from idea generation to commercialization and launch. The first prerequisite for developing and launching new products is to determine the overall strategic approach to innovation and its use within corporate strategy. Twiss distinguishes the following possible strategies for innovation:
We now examine these to see what is involved in the variety of corporate approaches to innovation strategies:
This strategy can be high risk, but with high potential pay-off. It requires an effective research and development department, also a positive marketing element that recognizes new market opportunities that can rapidly change new product ideas into commercial products. This type of strategy is usually undertaken by larger players and often occurs in an industry dominated by a small number of major companies. An example of an organization which practises this approach to innovation is Apple who are often at the forefront of new technologies.
This is the opposite of an offensive strategy: it is a low risk, low pay-off strategy. The company offering it needs an established market share, and has to be able to maintain profit levels through low manufacturing costs even when price competition is intense. At the same time, the company must possess appropriate technological ability to react swiftly to technological advances by competitors. This approach is best suited to companies whose strengths are in marketing rather than research and development. An example is IBM, which uses its well established corporate credentials and service and quality levels rather than competing at the edge of technological development.
A licensing strategy is also known as ‘absorbtive strategy’. This allows the company to make profits by buying technological innovations of another company, so reducing the need for an effective inhouse research and development department. There is little to gain from discovering what can be obtained from another source more cheaply. Licensing out your own technology to competing companies also has its advantages. It may reduce the company’s market share in the long run, but licensing fees can be obtained from the sale of an innovation which competition would eventually develop and match itself. Pilkington’s have used licensing strategies very effectively and profitably with their ‘float glass’ production technology. The Dutch company, Philips have also pursued a strategy of licensing to good effect. Philips has a strong technology and innovation base and the company has been responsible for many of the most successful ‘new-to-world’ products. Examples of Philips’ inventions range from the cassette tape through to the laser disc. Leading consumer goods companies throughout the world, including Sony and others, have licensed Philips’ technologies, and as is the intention with licensing, to the benefit of both parties.
This strategy aims to avoid direct competitive confrontations. Instead, the company analyses existing market leaders to discover their strengths and weaknesses and related gaps in the market. This technological strategy fits in with a more general ‘niche marketing’ corporate strategy, and it is applied usually by smaller companies in a large and expanding market. The Wharfedale speaker company, famous for producing very high quality speakers, have always sought to avoid challenging their often much larger competitors, instead concentrating their new products on those segments who seek professional quality sound reproduction.
The company may be in the position to create a completely new market because of technological advances facilitating the development of entirely new products. This strategy has the advantage of there being little initial competition and it can be very profitable. Sony established a whole new market when they developed their then revolutionary ‘Walkman’ product.
This strategy is one that is applied to a product, which owing to technological advances, reduces the total market size for the old product. It allows a company to apply new technology to someone else’s market, so benefiting their own company, but harming others in the market with a subsequent reduction in total market size. This type of strategy will succeed in the long run only if the company follows its maverick strategy with an offensive strategy to retain its technological lead over the competition. An example of a company pursuing a maverick strategy for a product range is Procter & Gamble’s range of ‘Fairy’ brand products. Most of the products in the ‘Fairy’ cleaning product range are claimed to be much more effective in their cleaning properties than those of competitors. This means much less of the product is needed for each cleaning operation, and although initially more expensive, is claimed to be much better value.
Rather than licensing to gain a competitor’s innovations, a company could try to ‘poach’ the opposition’s personnel. This strategy is not wholly ethical, although it is a low cost method of acquiring technology and can prove to be fruitful. A further problem is the fact that such personnel will tend to rate low on loyalty and will probably be equally likely to leave your company if they are given a better offer elsewhere.
An alternative to acquiring personnel is to acquire a whole company through takeover or a merger. Some small companies are highly creative, entrepreneurial and strategically offensive. They do, however, have limitations regarding research and development funds, and may not be effective in production and marketing. This makes them attractive and easy targets for large companies who are less likely to create such innovation and adopt such offensive strategies themselves. The takeover of an already established small company can be much less of a risk to a large company than trying to develop the technology itself.
As we can see from this typology of innovation strategies, there are a number of alternatives for achieving innovation objectives. In fact we can now add another strategy which has emerged in recent years, namely, a guerrilla marketing strategy. This is a strategy that relies on imagination rather than a large marketing budget. Guerrilla marketing tactics target customers in unexpected places which makes the idea of what is being marketed memorable. Such tactics involve public relations stunts, giving the product away in public places and using mobile digital technologies to engage customers and create a memorable event.
Clearly, innovation strategies have a major bearing on the focus of new product development and the means of achieving product innovation. The selection of appropriate innovation and new product development strategies will depend on many factors, including company, competitor and customer considerations. However, a key input to innovation strategies and decisions is technology itself, and in particular the way that technology is developing and likely to change in the future. No discussion of innovation, particularly the formation of innovation strategies, would be complete, therefore, without some consideration of technological forecasting.
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