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Competing in the innovation pentathlon
Keith Goffin
Professor, Innovation Management, Stuttgart Institute of Management and Technology (SIMT), Stuttgart, Germany
Rolf Pfeiffer
Export-Akademie, Baden-Wurttemberg, Germany
Abstract
Innovation management requires performance in five areas: innovation strategy; creativity and ideas management; portfolio management; project management; and human resource management.
In a study by the Cranfield School of Management and the Export-Akademie Baden Wurttemberg, data on innovation performance were collected from about 200 companies in the electronics and engineering sectors in the UK and Germany. Three key issues in managing innovation were identified: misunderstanding the role of innovation; too many development projects; perceiving innovation as a single discipline.
This overview of the study concludes that both service sector and manufacturing sector companies can benefit by measuring performance critically in each of the above five areas of innovation management.
Keywords
innovation performance management, innovation strategy, creativity and ideas management, portfolio management, project management, human resource management
Article Text
Manufacturing companies and service providers alike need to become more innovative, but first of all they need to understand what innovation is, as well as how to manage and nurture it. Research has shown innovation management requires performance in five areas - just like a pentathlon.
Increasing international competition is forcing many manufacturing companies to look for ways to become more innovative. However, improving the performance of a company in this area is a real challenge. For example, UK companies are often criticised for having good ideas but not bringing them successfully to market. Whereas in Germany, there has been extensive public debate on whether high labour costs are reducing competitiveness, and innovation is seen as the most effective way to counter this. However, a major new study has found that managers in both countries are facing remarkably similar issues. In the study by Cranfield School of Management and the Export-Akademie Baden-Wurttemberg in Germany, data on innovation performance were collected from nearly 200 companies in the electronics and engineering sectors in Germany and the UK. Detailed case studies were conducted at 16 companies and over 80 managers were interviewed. The study revealed some of the key issues in managing innovation.
Issue 1: Misunderstanding the role of innovation
Many organisations perceive innovation as being synonymous with inventions and breakthroughs. The danger is that R&D is then seen as the only department directly responsible for innovation with the focus solely on product innovation. However, companies need to drive all forms of innovation (Diagram 1).
There is more to innovation than new products - leading companies look for contributions from other areas
For example, the key role of process innovation as a source of competitive advantage is often overlooked (see box - Process Innovation). Similarly, manufacturing companies can also benefit from services that differentiate their products (see box - The VW Golf).
Process Innovation - Tetley Teabags
When Tetley developed the round teabag, it knew that this new product could capture significant market share. However, it also knew that competitors would be able to copy this innovation fairly quickly. Consequently, the company decided not to talk to its normal supplier of manufacturing equipment about the new requirements. Instead it hired PA Consulting to develop a new manufacturing line for round teabags. When the new product was introduced, the competition was unable to obtain similar manufacturing equipment quickly and Tetley kept its lead longer.
Issue 2: Too many development projects
New products play a major role in revenue generation and market leaders use measures such as revenues from new products as key performance indicators. The study found that, on average, 26% of revenue at engineering companies is earned from products less than three years old. However, many companies are slow at replacing old products.
In attempting to accelerate product innovation there is a trap into which many companies fall. Faster new product development requires companies to become adept at setting priorities and improving the development process from one project to the next. One electronics manufacturer studied, where 90% of revenue is earned from products less than three years old, reviews how well each project was accomplished (using set criteria) and uses this knowledge to accelerate new product development. Simply pushing more projects into R&D does not increase output - usually the opposite occurs.
Innovation in After-Sales Service - The VW Golf
During product design, Volkswagen evaluates the probability of each part of a car being damaged in an accident and the associated repair costs. This is important because car insurance companies closely monitor the costs of repairing accident damage and use this information in the calculation of which insurance category applies to a particular model of car. Hence, repair costs have a direct influence on the cost of insurance, which itself has a major impact on product sales. The cost of insuring the latest model of the Golf has been reduced through bolt-on instead of welded panels, and bumpers moulded in three separate parts (to allow partial replacement). The lower insurance costs have given VW a competitive edge and forced competitors to make expensive changes in the design of their products and production lines.
Issue 3: Perceiving innovation as a single discipline
Some years ago a book was published entitled The Innovation Marathon. Innovation needs constant and long-term attention from managers and in this sense the metaphor was appropriate. However, the implication that innovation management is high performance in a single discipline is wrong. The research showed that innovation management requires good performance in five different areas - so a better analogy is a pentathlon (Diagram 2).
Key areas of innovation management - the 'Innovation Pentathlon'.
The five areas of innovation management are:
- Innovation strategy. This includes communication of the role of innovation within a company, deciding how to use technology and driving performance improvements through appropriate performance indicators.
- Creativity and ideas management. Stimulating good ideas, which address customer requirements, is crucial. Since innovation includes new products, services and processes, the scope for ideas is wide and therefore all employees should be involved.
- Portfolio management. Once ideas have been generated, an efficient process is needed to choose the best ones for implementation. Resources are always limited, so they should be focused on the priorities. Leading companies ensure that their innovation portfolio contains a good balance of new products, processes, and business and service innovations.
- Project management. The capability to quickly turn ideas into new products, services and processes is fundamental. Fast time-to-market, high product quality and acceptable development costs are all typical goals for companies. The most common way of achieving these goals is to use cross-functional teams, but problems often occur. However, post-project reviews are seldom used to identify areas for improvement.
- Human resource management. Underlying all efforts of innovation management is the need to create a culture in which employees are motivated to contribute to innovation (see box - Motivating Employees).
Motivating Employees to Contribute to Innovation - Fischer GmbH
Many companies want to become more innovative but do not pass this message on to their employees. Fischer, a manufacturer of industrial fixing devices based in southern Germany, takes a different approach. MD Klaus Fischer has extended the generation of ideas across all functions. Every employee's contribution to innovation is assessed during annual appraisals. R&D engineers are measured on patents and the speed and effectiveness with which these are converted into products. Other employees are assessed on contributions to process innovation - cost reductions in both manufacturing and business processes. In all appraisals a rating on a 1-5 scale is used to 'score' an employee's overall contribution to innovation. Although the ratings are subjective, they are derived from discussions between employees and their managers. Fischer has found that these discussions, backed by reward and recognition, have acted as a catalyst in increasing overall innovation performance.
Lessons for service and manufacturing companies
Can the service sector learn from manufacturing? Yes - and leading service companies are now focusing on innovation and applying ideas from manufacturing. Whether you are in the manufacturing or service sector, the first step towards improvement is to determine current performance. Competing in the innovation pentathlon requires your company to look critically at performance in each of the five areas of innovation management - so don't get left behind!
The full report, Innovation Management in UK and German Manufacturing Companies by Goffin and Pfeiffer, Anglo-German Foundation Report Series, ISBN 1-900834-17-0, costs £12 from York Publishing Services, tel: 01904-430033; fax: 01904-430868.
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