Changing times –preparing for the ‘New Economy’

By: Dr. Scott Edgett

Perhaps your company’s product innovation process is one of the casualties of the Great Recession. Yet, you know that a steady release of new products or services into the marketplace remains the only way to stay strong and grow in an increasingly competitive world. Companies need to produce more with less, to make it faster, and to do it with reduced personnel. What do you do? Read more in this article by Dr. Scott J. Edgett.

We have found some common themes and approaches that seem to be working.  These emerging methods for process adaptation—both successful and unsuccessful—that we are observing in innovators worldwide provide some interesting perspectives on how you may be able to reinvigorate your innovation processes.

As we all try to move forward through what will likely be a long and bumpy economic recovery, two key imperatives are emerging for those of us with an eye on creating future value for our companies:

1. We cannot manage the past; and,
2. Innovation, in each industry, is moving forward whether or not our companies are moving with it.

As we know, the nature of recovery differs depending upon your type of industry and the parts of the world in which your customers are based. Still, the above principles apply.

Eight Common Themes

So, given the need to keep innovating despite continuing resource crunches, what are other companies doing to keep moving ahead? What does it mean for new product development efforts? We see eight common themes in companies that are preparing themselves for this “new economy”. Perhaps you will recognize some of them in yours:

1. There is a serious attempt to reinvigorate the product innovation process to be more effective and efficient.
2. There is increasing pressure to launch more new products into the market faster for short-term revenue growth.
3. Companies are looking for a mechanism to fast track low-risk projects.
4. There are fewer resources available to develop and launch new products.
5. Budgets are tighter but growth targets remain the same or higher.
6. Turnover among key personnel (voluntary and involuntary) has resulted in a lack of knowledgeable people who understand the internal product innovation development processes.
7. There is a need to allow more flexibility in the new product development process to address new business realities.
8. Organizations feel pressure resulting from the sense that the competition is moving ahead faster than they are.

So how are organizations dealing with these pressures?  Most companies are trying to reinvigorate their product innovation processes to be more effective and efficient. No surprise here. As times get tough, R&D, the same as other parts of the organization, must do its part to ensure that resources are deployed as effectively and efficiently as possible. What this has meant is a review of internal processes to ensure that they are lean. This is not a new concept as many top performers regularly review their product innovation process every few years to ensure any creep of unnecessary work is removed and any new learnings are incorporated into the process.

Emphasis on Efficiency and Effectiveness

What is new is the increased emphasis on Lean. However, care must be taken when applying Lean principles that were originally developed for a manufacturing setting to a R&D environment. Product innovation is a very different process than manufacturing. Innovation is project-based rather than a continuous flow. Thus, it is much less repetitive and predictable with much more uncertainty. Missing and fluid information is the norm in R&D, not standardization and repetition as in manufacturing. That said, there are still some parallels and some principles that do cross over between the two. The cautionary message here is that an over-zealous application of Lean principles can do much damage to innovation. If adapted and applied properly, though, they can aid in achieving more effective and efficient innovation practices.

Example 1: In one large Fortune 100 company, the organization undertook a massive cost cutting initiative using Lean as the framework. This worked very well in the large manufacturing operations, as well as in some other parts of the organization. However, when it came to the R&D department, this same rigid thinking caused much damage to the organization’s ability to be innovative. The mistake was in not adapting from continuous thinking to project-based thinking. The cost cutting targets were achieved, but with unforeseen consequences: the amount of Innovation went down, new product launches declined, smart people began leaving the company, and, eventually top line performance suffered. Yes, cost cutting was achieved but there was heavy damage to the revenue line as the number and quality of new product launches declined. The types of new products became more incremental in nature, making still less top line impact. This organization is now trying to reverse the damage, but it will take time. Meanwhile, their competitors are gaining ground.

Example 2: Another large organization undertook a similar mandate to cut costs using Lean thinking, but they adapted the Lean principles to their R&D and innovation processes. They took the time to understand how R&D differs from manufacturing and where changes would support a performance increase. The result was that this company focused on understanding, not only what it would take to do fewer projects, but how to ensure that these projects had a larger impact in the marketplace. They concentrated on project selection and resource allocation techniques that could achieve significant impact without damaging the innovation culture they had worked so hard to develop over the years. In other words, they achieved the goal of becoming more effective and efficient without losing the innovative culture. The end result was a stronger pipeline and better revenue results from new products.

Innovation Buckets

The pressure to get more new products to market faster while simultaneously dealing with fewer resources and tighter budgets is as strong as ever. Do more with less – sound familiar? With strong pressure for revenue growth, business units are looking to R&D and asking what products can be launched in the near term and/or moved ahead on the roadmap to help produce revenue in this or the next quarter. This is fine in the short term as long as the end cost is not a general dumbing down of the innovation pipeline. Real growth cannot be sustained with minor incremental innovation. Eventually you are going to need the bigger and bolder innovation projects. That takes time and resources.

One solution we are seeing more frequently is the division of resources into two separate innovation buckets: one for the short-term and one for the long-term. This permits R&D to help accelerate to market short-term products, but it also ensures that some people are still working on the larger projects that will contribute true top line growth in the future. As we know, next year the business units are going to want more new products and will begin to get frustrated with the revenue results that the incremental quick hit projects are generating. As one executive said “we are busy fools – we need to break this cycle of short-term thinking or things will never change”.

Example: Another company refreshed their five-stage innovation process by introducing a three-stage and two-stage process for more flexibility. The five-stage remains for large and complex projects with high risk. The incremental low risk projects are put through a three-stage process, while a two-stage process is now used for simple change request orders from the sales force. This revised multi-routing for projects enables more speed and lower costs for lower risk projects while ensuring that higher risk projects still receive the level of rigor they require. This approach also permits better utilization and targeting of scarce resources.

Training Returns

Finally, we see companies coming to terms with the fall-out from high levels of turnover among key personnel. In the past few years, many companies have trimmed their workforces or not replaced people who have left. The result of this is that we have lost a lot of corporate memory and are now faced with retraining people to run innovation projects or participate as team members. We see companies reinstating training to help these people quickly get up to speed. This training is usually combined with on-board training for people in new roles and, if we are lucky, new hires.

The reasons that organizations have spent so much time in the past developing solid innovation processes and practices has not gone away. If we do not bring our organizational capabilities up to speed quickly many of the problems of the past will begin to resurface: increasing new product failure rates, projects late-to-market and project cost overruns.

I could go on but you are probably beginning to get the picture. Companies are preparing themselves to move forward recognizing that, while the need for effective and efficient processes still exists, cost cutting by itself is not the answer. A balance is required between the need to be very cost effective and the need to still have the organizational ability to grow the top line revenue.

2010 Benchmarking Study

If your organization is struggling with any of these challenges, then our latest 2010 benchmarking study may be of interest to you. The study was designed to further explore many of the issues that we have been discussing above to provide solid base line metrics on how the top performing companies are faring. The results, as well as nine organizations will present at the Stage-Gate Innovation Summit 2010 the latest benchmark findings from our 2010 Benchmarking Study. For additional information on this event see www.stage-gate.com.

By Scott J. Edgett