brian tramel

Research & Technology Executive CouncilPresentation Materials2005 Conference~ Technology Innovation at CODELCOSeptember 12, 2005

The New Innovation DisciplineSummary of Council Findings and Excerpts of Leading Practices

© 2005 Corporate Executive Board

2© 2004 Corporate Executive Board

“An Honourable Temple”A revival of ancient Roman architecture… …required new technologies

and tools to complete

• Moved over 70 million pounds of material to heights of almost 300 feet

• Allowed lateral movement of materials

Source: King, Ross, Brunelleschi’s Dome. Penguin Books, 2000; Council research.

Ox-Hoist Castello

Horizontal Arches Herringbone Brick Work

• Guaranteed stability

• Copied from the Pantheon in Rome

• Enabled construction without the use of scaffolding


Innovation, but to What End?Investment in Innovation* fails to correlate to an increase

in shareholder return for minerals and mining firms…

Average Expenditure on Innovation as a Proportion of SalesMinerals and Mining Sector, 1995–2000

…a troubling phenomenon echoed by technology executives across industries

R&D “Pain Points”Selected Quotes from Council Members, 2004

Missing Piece of the Puzzle“We’ve found that an innovation may indeed be technically brilliant, but it won’t be enough to deliver market success if we fail to defi ne what business model will truly capture value in the marketplace.” EVP and CTO, Manufacturing Company

Speed: No Longer Suffi cient“In our industry, speed used to be a source of differentiation. That’s no longer true. Everyone has mastered speed-to-mar-ket, so we’re searching for new ways to set our products apart from competitors.” VP, Worldwide Technology Development, Electronic Components Company

Relentless Pressure to Innovate“After we invest in a breakthrough platform, we fi nd that across the years we end up spending just as much on the re-freshes! To keep our competitive edge, an inordinate amount of our R&D investment must go to reinvent the platform products.” SVP and CTO, Materials Company

Source: Productscan Marketing Intelligence Service; Council research.* Innovation is defined in this segment as the combined investment on exploration and R&D.

▲▲ Aluminum

✕ Copper

✕ Lead/Zinc

+ Nickel

Gold

Platinum

Diversifi ed

20%

▲▲

▲▲

▲▲▲▲

▲▲

▲▲

▲▲

▲▲✕

✕✕✕✕

✕✕✕

✕

✕✕

✕

✕

✕

✕

✕

✕

✕✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

✕

(10%)

5%

0% 10%5%

Return on Shareholder Funds (% pa)

(Exploration + R&D) / Sales Revenues


Trend #1: Narrowing Windows of Technology Exclusivity Case in Point

Standardization of product development practices and open access to external technologies enable rapid replication of technical innovation

Trend #2: Weakening Intellectual Asset Protection Case in Point

Increasing pressure on large corporations to enter markets where IP enforcement is lax and regulatory interpretation unpredictable

Trend #3: Decline of Corporate Innovation Advantage Case in Point

As capital and skill barriers-to-entry fall, more organizations participate in the innovation marketplace, reducing the comparative advantage of large corporate R&D programs

The Diffi culty of DifferentiationSustainable competitive advantage becomes more elusive for innovators

Three Converging Forces Impacting Competitive Differentiation

Source: Consumer Electronics Association; Gussow, Dave, “Listen Up!” St. Petersburg Times, 7 June 2004; NPD Techworld; Stupay, Paul, “Making Open Innovation Work for You,” R&D, 1 June 2004; Business Leadership Forum research; Council research.

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Sales

Time

* U.S. companies with more than 25,000 employees.

In 2001, Chinese manufacturer copies VW Jetta at 20% lower price

“Could they ever make counterfeit cars in China? Good grief, no! A car is too complex a product.”

Martin Poste, Head of VW Asia, 1996

1981 1999

41%Percentage of Industrial

R&D by Large* Companies

71%

VCRs DVDs Apple iPod

LCDTVs

Years from Launch to 50%

Price Reduction 12

3

8


Crowding Out Competitive StrategyTwo decades of improvements to technology development practice have focused on process efficiency more than competitive differentiation…

Adoption Timeline for Significant Management Practices, 1980s and 1990s

Source: International Journal of Technology Management ; R&D ; R&D Management ; Research Technology Management ; Technology Review ; Council research.

1980s 1990s

• Centers of Excellence• Corporate Venture Capital• New Business Incubation• PACE (Product and Cycle-Time Excellence)1

• Project Stage-Gating2

• Scenario Planning• Technology Platforms• Technology Roadmapping

• Concurrent Engineering• Cross-Functional Project Teams• Design for Six Sigma• Rapid Prototyping• Standardized Alliance Management• Voice of the Customer

…and the current innovation discourse continues to emphasize operational issues over those that are strategic

Distribution of Terms Mentioned in Common Technical Publications (See Source List)2001–Present

64%

36%Frequency of

Effi ciency/Operational Terms(e.g., productivity, technology transfer, time/speed-to-market, product quality, cost reduction)

Frequency of Strategic/Competitive Terms

(e.g., competitive advantage, sustainability, profi tability, competitive position, differentiation, revenue growth)

1 The PACE® product development process was developed by PRTM in 1986.2 The Stage-Gate® methodology was developed by Robert Cooper in 1988.


Missing One Leg of the StoolPowerful technologies derailed by competitive factors

Source: Edwards, Cliff, “Will Souping Up TiVo Save It?,” BusinessWeek, 17 May 2004; Greene, Jay, “Microsoft Plays Video Leapfrog,” BusinessWeek, 10 May 2004; Frederick, Jim, “The Console Wars: Game On,” Time Asia, 15 December 2003; “Japan: Electronics Giants Fail to Spark,” Economist Intelligence Unit e-business forum 5 no. 324, 3 November 2003; Mitchell, W., “Playing Leap-Frog with Elephants: EMI Ltd. And CT Scanner Competition in the 1970s,” Center for International Business Education, Case # 97-13 (http://www.umich.edu/~cibe/publications/abstracts.html#emi); Pithkethly, Robert “Safe Haven for Ideas and Inventions,” Financial Times, 10 October 2004; Serwer, Andy, “Why the Street Isn’t Hip to Electronic Arts’ Game,” Fortune, 21 February 2005; Wall, Kendra, “Let the Games Begin,” Upside, November 2001; Council research.

Company Path to Failure Innovative Technology

Customer Demand

Competitive Advantage

Failure to Anticipate Competing Business ModelsTiVo pioneers digital video recording (DVR) technology, crystallizing an emerging consumer need and achieving 72% market share by 2001. TiVo, however, fails to foresee (and prepare for) incumbent cable TV providers adding similar features to their monthly service offerings. Unable to effectively compete with this new business model, TiVo market share plummets to 39% in just two years.

?

Underestimating Competitor CapabilitiesIn late 2000, Sony’s PlayStation 2 game console inaugurates the 128-bit gaming market, rocketing to a dominant 70% share of the game console market with units selling at $299 each. As competitors respond with similar features and a lower price, PlayStation sales volume falls by one-third over six months. In 2003, Sony slashes prices (and margins) to meet the $180 price point of its competitors but fails to stem the decline in sales.

?

Insuffi cient Business Model AnalysisEMI introduces the fi rst commercial CT scanner in 1973, quickly establishing a dominant position in a market that would grow to $77 million by 1975. The company’s assumption that it could meet the complex distribution and service needs of the medical equipment market proved overly optimistic, however, and market share fell in the face of competition from established industry players. While the machine’s inventor won the Nobel Prize for his accomplishment, the company was forced to sell its scanner business to GE in 1981 for a fraction of its initial value.

?


Source: Council research.

A World of HurtExecutives from across industries and geographies are grappling with a set of vexing problems

A Growing Business-Skills Gap“We recognize the need to provide R&D with more business skills, but frankly, I’m concerned it will distract many of my staff from technical skills development, or it will send mixed signals about what we want them to be good at.”

VP of Innovation,Consumer Products Company

Managing Risk in New Markets“We’re trying to leverage our core technologies to move into new business areas, but we just don’t have enough understanding of those markets to properly defi ne the risks, let alone manage them.”

Director of R&D,Specialty Chemicals Company

Unable to Identify Business-Builders

“It takes a special breed of R&D manager to own a new business initiative. Usually you can’t tell whether you’ve assigned the right person until they’ve succeeded or, more likely, fl amed out.”

VP of R&D,Chemicals Company

“Failing Fast” Without Killing Future Blockbusters

“We want to get better at killing projects early in the pipeline, but we know so little at that stage. What if we accidentally kill a blockbuster?”

Chief Technology Offi cer,Energy Company

Commoditization: Inevitable?“Even when we make differentiated components, they just get rolled up into undifferentiated end-products. Our industry is headed toward a situation where all competition is going to be based on price.”

Vice President,Research Labs, High Tech

Company

Risk-Averse BU Sponsors“The problem with trying to pursue anything risky or discontinuous is that the BUs are short-term focused and risk-averse. The long term simply gets ‘starved out.’”

Director of R&D,Manufacturing Company

(Hyper)Competition in the External Innovation Market

“The external market is so crowded now that reaping the benefi ts from partnerships is harder than ever; we need a new ‘edge’ if we have any hope of getting the best opportunities.”

Senior Director of Strategic Research Initiatives,

Pharmaceuticals Company

Partner Selection: Sacrifi cing Quality for Speed

“We’ve entered some alliances where we simply didn’t court our partners long enough. We jumped into the deal only to discover that the partners didn’t have the capabilities we thought they did.”

VP of R&D,Retail/Consumer Products

Company


The New Innovation DisciplineLeading company practices profi led during the 2004 executive retreat series*

I. Accelerating

Commercial Risk Resolution

II. Demonstrating

Business Value for Early-Stage R&D

III.Building a

Differentiated Innovation Network

QuestionWhat tools can enable R&D to effi ciently resolve projects’ business uncertainty while expanding business model options?

QuestionHow can R&D focus early-stage screening and funding tools on the long-term creation of business value?

QuestionHow should R&D design partnerships to create distinctive advantage in a crowded market for external innovation?

Practices

Critical Uncertainty Prioritization

Flexible stage-gate process pulls forward resolution of each project’s most critical uncertainties

Practices

Differentiation-Based Opportunity Screens

“Stage Zero” project screens combine assessment of technology distinctiveness and sustainable differentiation

Practices

Continuous AllianceImprovement Discipline

Centralized partnership management competency builds tools and processes to pre-empt common alliance pitfalls

Business-Model Option Trees

Comprehensive business model alternative generation sequenced prior to major technology investment

Business Impossible’s Mapping

Enterprise-level projects identified and prioritized by clustering operating-unit input

Supplier Innovation Partnerships

Objective and transparent supplier evaluation process serves as foundation for mutually beneficial innovation alliances

Business Outcomes Portfolio Funding

Portfolio allocation built back from corporate strategic objectives and project scorecards based on auditable business outcomes

Low-Capital Innovation Partnering

Alternative to traditional corporate venturing approach uses intangible deal “currencies” for small-company partnerships

®

* We will only cover brief excerpts of the complete case studies in today’s discussion. The case studies in their entirety are available to all Research & Technology Executive Council members.


Column I:Accelerating Commercial Risk Resolution

© 2004 Corporate Executive Board Column I: Accelerating Commercial Risk Resolution 10

Trouble in ParadiseWhile extremely valuable for encouraging process discipline, traditional “stage-gate” approaches can stifle pursuit of nontraditional innovations

Constraints on Business Value from Traditional Development Processes

Scale-UpTesting and ValidationDevelopment

Build Business

Case

Proof of Concept

Product Launch

Idea Filter

Challenge #1Traditional processes often leave most critical

uncertainties until late in development

ConsequenceWasted resources and effort

spent on “slow-to-fail” projects

Challenge #2Traditional processes often bias new

technology toward familiar business models

ConsequenceMissed opportunities to differentiate through innovative business models

One Size Fits All

All ideas move through same process, regardless of proximity to existing business

1Sequential Reduction

of UncertaintyGate reviews focus on “locking down” ideas as development progresses, making it diffi cult to reopen “resolved” issues

4Bias Toward Existing

Business ModelsFew mechanisms encourage project teams to look beyond existing ways of bringing technology to market

3Priority on Technology

UncertaintyTraditional processes focus on reducing technology uncertainty fi rst, regardless of relative importance

2



Accelerating Uncertainty ResolutionAir Products redesigns business plan creation to quickly resolve project uncertainties and avoid overinvestment

Conventional Business Plan Construction

Air Products’ Approach to Planning New Businesses

Source: Air Products and Chemicals, Inc. ; Leifer, Richard et al., Radical Innovation, Harvard Business School Press: Boston, 2000: 63–65; McGrath, Rita Gunther and Ian MacMillan, The Entrepreneurial Mindset, Harvard Business School Press: Boston, 2000: 231–266; Corporate Strategy Board research; Council research.

Submit Planand

ExecutePull Market, Sales, Cost,and Competitive Data

Develop Estimates forNew Business Idea

Sales [ ] + xCosts [ ] – yShare [ ] + z

Calculate Financialsand Run Simulations

. .. .

. .. ...

Historical data is lacking and proxies are imprecise

White-Space

Drawbacks

Estimates based on assumptions that are not made explicit

Financial valuations are biased toward best-case result

Plans and gate-review expectations based on experience from

dissimilar past projects

Tie Milestones to Operational Activities

1

3

2

Often fund full implementation when NPV

is actually negative

Submit Planand

Execute

Recognizes which data is not available, and specifi es

data types to collect

White-Space

Benefi ts

Prioritizes data to collect based on impact on project

valuation

Regularly reprioritizes activities to resolve next most critical uncertainty

Defi nes revenue and investment levels required to make opportunity worthwhile

Flawed projects killed sooner; funding scales with evidence of NPV estimate

LearningPlan

Technology Could we develop a one-step nanotechnology coating for LCD monitors and TVs?

Market Would the LCD industry buy enough of such a coating to cover our investments?

OrganizationDo we know how R&D, production, and sales teams should work together to bring such a coating to customers?

ResourcesDo we have the staff capabilities, fi nancial resources, and lead time versus competitors to successfully develop this coating?

Known “Yes”

Unclear Known “No”

Representative Questions

Third Priority

First Priority

Second Priority

Fourth Priority

StrategicAssumptions List

Strategic Assumptions Financial Lever

Leverage

Market

1. The market demand for LCD nanotechnology coating will be at least 26 million square meters in four years

Revenue ±80%

2. The market will sustain a price point of $10 per square meter of coating Revenue ±70%

3. Total raw materials prices will remain under $4 per kilogram in four years Costs ±10%

…

Technology

4. We can buy or develop a proprietary nanotechnology coating for LCDs within three years

Costs ±50%

5. Our technology will have equal or superior performance characteristics than current technologies

Revenue ±20%

6. Customers’ manufacturing processes will still need coatings in three years and beyond Revenue ±30%

…

Organization

7. Our R&D teams work with operations and logistics to track total production costs Costs ±30%

8. Twelve of our current sales teams will be sufficient to sell this coating to the LCD industry

Revenue/Costs ±60%

9. …

Resources

10. Cash flows from core businesses will be sufficient for investment Costs/ROA ±10%

11. Production at anticipated scale can be done while improving corporate ROA ROA ±40%

12. …

Priority

1

2

10

4

9

7

8

3

11

6

Learning-BasedMilestones

Strategic Assumptions by Priority Ranking

High Priority Medium Priority Low Priority

Operational Milestones 1 2 3 4 5 6 7 8 9 10 11

A. Market Research

B. Technical Feasibility Check

C. Prototype Developed

D. Customer Technical Testing

E. Small-Batch Production

F. Prototype Sales

G. Pilot Plant Production

ReverseIncome Statement

White-Space Project2006 Income Statement

Revenue $172 M

Costs (COGS & SGA) $129 M

Operating Margin 25.0%

Operating Income $43 M

Return on Assets 20.0%

» $215 M capital


Component #2:Integrated Business–Technology Develop-

ment

Owens Corning’s development process jointly cre-ates and evaluates technology and business model options

Component #1:Business Model Options Expansion

Owens Corning equips project teams to consider a comprehensive set of business model options early in development

Expanding OptionsOwens Corning reconstructs its stage-gate process to evaluate multiple

business model options early in development while technology requirements remain fluid

Revamped Business Development Process

Licensing Option

Services Option

PartnershipOption

Retail Option

Stage 0Initial

Evaluation

Stage 1Assessment

Stage 2Option

Expansion

Stage 3Development

Stage 4Launch

Stage 5ProcessAudit

• Early opportunity definition

• Select Project Review Board

• Begin business operation

• Transfer to operations

• Review project (six to nine months post-launch)

• Compare actual versus projected financials

• Identify lessons learned

Select Business Model

• Commercialize product

• Develop capital infrastructure

• Marketing evaluation• Gather information• Select core team

• Team must propose at least three options

• One option must require no CapEx

• Define “what’s possible”

• Define technology options

• Evaluate and select one business model option

Defi ne Business

Model Options

New Product or Business

• > $1 M CapExor

• Will depart from some element of existing business models

Business Model Development

Technology Development

Develop Technology (If Needed)

Source: Owens Corning; Council research.


Column II:Demonstrating Business Value for Early-Stage R&D

© 2004 Corporate Executive Board Column II: Demonstrating Business Value for Early-Stage R&D 14

Tripping Up at the StartProject selection processes leave early-stage effort disconnected from long-term business value

Traditional Project Funding

Challenge #2Funding process bifurcates into “technology-led” or “operations-led” projects rather than breakthrough technology in long-term interest of business units

ConsequenceR&D portfolio overweights incremental projects

Long-Term R&D Short-Term R&D

Source of Projects Technology Insight Operating Unit

Requests

Allocation Control R&D Operating Units

Typical Allocation 10% 90%

Connection to Business Needs Low High

Long-Term Focus High Low

“Technology Council” splits R&D funding into long- and short-term buckets

Traditional Project Screening

Challenge #1Project screening tools inadequately capture

long-term business value of technology concepts

ConsequenceR&D develops “breakthrough” technologies

that are too easily replicated

Project Scorecard

Points

1. Alignment of project with corporate strategy

2. Alignment with known customer or user need

3. Technical feasibility

4. Degree of IP protection/competitive insulation

5. Likely project value

Planning assumptions focus more on market demand than competitive positioning…

…and differentiation is assessed from an IP standpoint rather than broader business model considerations.



Asking the Right QuestionsCorning’s screening discipline selects differentiated opportunities that will drive competitive advantage

New Opportunity Assessment Questions

Yes

No

Is the competitive advantage sustainable?

Activities• Forward-looking competitive

intelligence

• Competitor technology roadmap projections

• Industry scenario planning

• War gaming exercises

4

Yes

NoWill Corning capabilities deliver a differentiated

solution?

Activities• Industry structure/value-chain

mapping

• Competitor IP/patent portfolio assessment

• Preferred partner/customer profile

• Customer feature preferences analysis

3

Yes

NoDoes the need demand a step change in cost

or capability?

Activities• Component criticality-fit matrix

• Technical performance barrier identification

• Testing alternative technology solutions

• Price–performance modeling

2

Explore Short-Term Commercialization: Fast followers would erode long-term advantage

Do Not Fund Opportunity: Product unlikely to provide attractive margins

Redirect Opportunity to BU NBD: Better positioned to pursue incremental innovation

Proceed to Stage 1

Development

Source: Corning, Inc. ; Newry Corp; Vantage Point Associates; Council research.

Explore Short-Term Commercialization: If a short-term customer need exists, seek quick win in brief window of opportunity

Yes

NoAre market mega-trends

creating a pressing customer need?

Activities• Long-term scenario analysis

• Market research

• Consultation with system integrators and innovators

• Ideation with out-of-industry thought leaders

1

Component #1:Demand Trend

Analysis

Component #2:Critical Technology

Identifi cation

Component #3:Differentiation Potential

Assessment

Component #4:Sustainable Advantage

Check


Translating Financial Goals to R&D RequirementsOverview of Shell’s “Business-to-Technology” Mapping Process

Business Goals Disaggregating Goals to Operational Per for mance Targets “Impossibles”

50%Reserves

Add 150 Million Barrels by 2005

30%Production Rate

10% Costs

10% Capex

100% 100%

60%Reservoir

30%Borehole Interface

10% Facilities

100%

30%Flow Prediction

30%Gas Sweep Profi le

20%Attic Reserve Identifi cation

20%Other

100%

30%Imaging Hydrocarbons

in Sands Less Than10 Meters Thick

40%Predict, Monitor and Control Waterfront

Movement in Complex Reservoirs

30%High Seismic

Resolution Below Near-Surface Carbonates

“How will my unit meet outyear fi nancial

performance imperatives?”

“What technology break throughs would enable my performance targets?”

“What are the specifi c operational drivers within my fi nancial goals? What performance improvements

credibly sum to 100% of the goal?”

Source: Shell; Council research.


Foundation for ChangeFour key components form the basis of Caterpillar’s business outcomes approach

Major Components of Caterpillar’s Business Outcome Portfolio Funding

Sustainability

Growth

Cost, Quality, Profi tability

Best Products and ServicesBucket Locator Project

Wheel Motor Project

Auto-Dig

Project

▲

▲▲

“Smart Machine” Project

Best Products

Project Team

Portfolio Review Team

Best Products and Services Best Products and Services –– Smart Machines Smart Machines

2004 EXEMPT FUNDING: $xx M

TECHNOLOGIES- System management: powertrain, engine, implement

- Auto functions: auto-load, -blade, -shift, ride control….- Planning: excavation optimization, dig to plan,- Operator interface – easy to understand and use.- System Interaction: earth/machine performance- Advance system enablers: Cyl. Position, valve, pump, …

BENEFITSGeneral Construction Product Enhancements- Buried object mapping

- >20% productivity increase with less skill required = $xx MProduct cost advantage = $xx M- Smart axle & left hand steering control

- MWL, ADT, MG, OHT. LWL

TTT attachment sales opportunity = $xx M- Autoload, Autospread, Autoheading

- 10-15% productivity improvement

MG Controls & Features = $xx M NPV- >20%productivity increase with less skill required. Easy to use.

Component #1:Enterprise Objective–Based

FundingIndividual projects are funded on the basis of how well they serve Enterprise Objectives—CEO-defi ned long-term corporate goals for which group presidents are held accountable

Component #2:Business Outcome–Based

Project Defi nitionFor each Enterprise Objective, Research and businesses jointly defi ne Business Outcomes— discrete business value drivers that technology can affect—as the basis of project scorecards

Component #3:Research-Led

Project SelectionProjects are prioritized based on ability to impact Business Outcomes; teams of 6 Sigma–trained research managers determine the make-up of distinct portfolios for each Enterprise Objective

Component #4:Auditable Impact Documentation

Project teams build forecasts of projects’ expected contribution based on Business Outcomes analysis; project teams are incented to defi ne auditable measures, strengthening credibility

Challenge AddressedWeak link between research projects and corporate priorities

Challenge AddressedToo many subscale, incremental projects

Challenge AddressedWeak link between research projects and business needs

Challenge AddressedForecasts lack credibility with business units

Critical Process ChangeLink Research funding to specifi c enterprise-level objectives

Critical Process ChangeRe-scope the portfolio so all projects address defi ned business value drivers

Critical Process ChangeEvaluate and approve projects on the basis of project impact on business value drivers

Critical Process ChangeFor each project, quantify future value estimates that tie to business value drivers

Source: Caterpillar, Inc. ; Council research.

®


Column III:Building a Differentiated Innovation Network

© 2004 Corporate Executive Board Column III: Building a Differentiated Innovation Network 19

Hitting the Wall

Source: Roberts, E. B., “Benchmarking Global Strategic Management of Technology,” Research-Technology Management, March–April 2001; Bramford, James, et al., “Launching a World-Class Joint Venture” Harvard Business Review, 1 February 2004; Council research.

Alliances Meeting

Expectations*

Alliances Failing

Expectations47%53%

* Returns exceeding cost of capital.

With an expanding base of companies engaging in R&D alliances…

Companies Relying Heavily on External Sources of TechnologySurvey of 209 Large Companies, by Home Country or Region

…and alliance management continuing to pose a challenge for many practitioners…

Alliances Failure Rate2001

… suboptimal practices limit R&D’s ability to sustain competitive advantage through partnerships

Impediments to Building an Advantaged Innovation Network

“Dumb Money” at the Table

Reliance on capital as sole “deal currency” leaves corporate VC without advantage over private VC

$

4

Uncoordinated Partnership Management

Misaligned incentives with peer functions (notably procurement) create confl icting messages to current and potential partners

R&DPartnerProcurement

3

Absence of a Long-Term Plan for Joint Value Capture

Lack of “value symmetry” with partner results in early termination of relationships, leaving true capabilities untapped

CompanyPartner

2

Overprotective Approach to Innovation Sharing

Alliance partners shield projects from each other, limiting opportunities for “non-obvious” technology-application matches

1

●

●

●

■

■■

▲

▲

▲

1995 1998 20010%

50%

100%

◆ Japan

Europe

▲ North AmericaPercentage of Companies


Innovation Market Realities

Limitations of Current Practice

Emerging Alliance Imperatives

Narrowing Source Exclusivity Absence of a Long-Term Plan for Joint Value Capture

Become Partner of ChoiceAttract exclusive opportunities via alliance reputation and access to asymmetric information

Limited Opportunity for Due Diligence


Obtain Privileged Insight Gain unique information regarding candidate partner capabilities—allowing fast, informed decisions

Escalating Costs of Entry Undifferentiated Value Proposition for Partners

Expand Alliance “Tradables”Leverage full range of monetary and nonmonetary assets to create compelling partner value proposition

Increasing Alliance Complexity Uncoordinated Partnership Management

Upgrade Alliance ManagementEstablish alliance management as a core competency within R&D

Raising the Bar for Alliance-Based Advantage A suddenly crowded market for external innovation demands new competencies

of companies seeking competitive advantage through partnerships

Innovation Market Realities

Limitations of Current Practice

Emerging Alliance Imperatives

Narrowing Source Exclusivity Absence of a Long-Term Plan for Joint Value Capture

Become Partner of ChoiceAttract exclusive opportunities via alliance reputation and access to asymmetric information

Limited Opportunity for Due Diligence


Obtain Privileged Insight Gain unique information regarding candidate partner capabilities—allowing fast, informed decisions

Escalating Costs of Entry Undifferentiated Value Proposition for Partners

Expand Alliance “Tradables”Leverage full range of monetary and nonmonetary assets to create a compelling partner value proposition

Increasing Alliance Complexity Uncoordinated Partnership Management

Upgrade Alliance ManagementEstablish alliance management as a core competency within R&D

Opportunity Identifi cation

Opportunity Evaluation

Partner Recruitment

Value Capture

Alliance Stages

Differentiated Alliance Competency



Alliance Performance Model

• Model of alliance success/failure factors based on key findings of lessons learned process

Alliances Evaluations

• ~120 Voice of the Alliance™ assessments

• 65 Voice of the Alliance™ interventions

Uncovering Lessons LearnedLilly conducts a comprehensive analysis of its alliance history

to surface patterns of success factors and failure points

Lilly’s Alliance Lessons Learned Process

Strategy

Decision Making

Leadership

Skills/Competence

Team CoordinationConfl ict Management

Flexibility

Knowledge Management

Organizational Values

Commitment

Trust/Fairness80%

60%

40%

20%

0%Performance Management

Roles

Lilly

Partner

Strategic Fit

Operational Fit

Cultural Fit

Communications

Voice of the Alliance™ ToolIllustrative Data

Source: Eli Lilly and Company; Council research.

… …

RiskCommitment

KnowledgeManagement

Team Coordination

Alliance Portfolio Review

• Review of 192 Alliances (1990–present) across all alliance stages

Lessons Learned Database

• 61 shared learnings documented from past alliance assessments and interventions

LAMP Lessons Learned

Alliance Life Cycle

Performance Model Features

• Predictive model encompasses all alliance stages, distinguishes between types of alliances: early-stage discovery, in-licensing compound, etc.

Top Findings of Lessons Learned Process

• Front-loaded alliance management activities position the partnership for success

• Early anticipation of roadblocks is more efficient than after-the-fact remediation

100%


Laying the FoundationClorox structures its supplier innovation partnering strategy with carefully conceived

incentives and evaluation tools that deliver differentiated innovation capability

Overview of Clorox’s Innovation Partnering Strategy

Communicate Supplier Benefi ts

• Clorox sets out unique benefits for suppliers to encourage innovation co-development

• Benefits provide significant value to suppliers at minimal cost to Clorox

Share Scoring Results

• Objectivity and transparency of scoring criteria enable suppliers to chart a path to improvement

Score Supplier Capabilities

• Clorox rates suppliers based on objective criteria focused on demonstrated innovation output and alignment with Clorox’s business and needs

Innovation Alignment

Component #1: Comprehensive Benefi ts PortfolioInnovative suppliers receive informational, co-development, and procurement benefi ts

1Component #2: Objective Supplier Evaluation CriteriaClorox rates supplier ability to meet its innovation needs; objectivity enables supplier improvement

2Component #3: Communication of Innovation AssessmentClorox shares scoring results and criteria with suppliers along with unattributed scores of supplier competitors

3

• Partner of Choice StatusCommitment to balancing innovation investments with supplier “wins” attracts innovative suppliers to Clorox

• Vetted Partnership CapabilitiesClear understanding of supplier innovation capabilities helps Clorox evaluate potential partners

• Supplier Capability AlignmentTo increase scores (and attain benefits) suppliers add projects, shift priorities in Clorox’s interests

• Supplier Portfolio DisclosureOver time, suppliers allow Clorox to search out-of-industry portfolios for non-obvious connections to Clorox’s technology needs

Advantages

Source: The Clorox Company; Council research.


Take Venture Partnerships FurtherKodak’s venture network relies on the exchange of a broad

array of benefits across participating parties

Exchange of “Intangibles” Across the Partner Network

Entrepreneurs and Start-Up Companies

Institutional and Corporate Venture Capitalists

VC partners provide Kodak……targeted deal flow…business due diligence on start-ups…expertise in start-up governance

1

Start-up partners provide Kodak……access to complementary technologies,

products, services, and business models…resources to support Kodak development…new applications and increased demand

for Kodak products…favorable terms on future development

and commercialization agreements…options to increase ownership in future

4

Kodak provides start-up partners……technical expertise…marketing and distribution alliances…market and technical validation…access to Kodak’s infrastructure

3

Kodak provides VC partners……technology and market due diligence…validation of start-up technologies…access to Kodak technical expertise…Kodak-identified deal flow

2

Source: Eastman Kodak Company; Council research.


The New Innovation MandateCompetitive differentiation emerges as a critical discipline to capture returns on innovation

Time

Returns onTechnicalInnovation

Failure Path: Technology for Technology’s Sake

R&D investments disconnected from market need

Failure Path: Inability to Get PaidGains from technical innovation accrue

to customers but not to innovators

Established Discipline:Technical Expertise

“What’s Possible?”

Attributes and Tools Attributes and Tools

Reducing Technical Uncertainty

• Project Stage-Gating• Technology Platforms and Reuse• Centers of Expertise• Technology Roadmapping

Reducing Customer Uncertainty

• Voice of the Customer for R&D• Design for Six Sigma• Cross-Functional Alignment with

Sales and Marketing


• Project Stage-Gating• Technology Platforms and Reuse• Centers of Excellence• Technology Roadmapping

Improving Discipline:Customer Insight“What’s Needed?”

Emerging Discipline:Competitive Differentiation“What Will Prevail Competitively?”

Attributes and Tools


• Project Stage-Gating• Technology Platforms and Reuse• Centers of Expertise• Technology Roadmapping

Reducing Customer Uncertainty

• Voice of the Customer for R&D• Design for Six Sigma• Cross-Functional Alignment with

Sales & Marketing


Reducing Competitive Uncertainty

• Early-Stage Business Model Options • Critical Path Risk Resolution • Business-Skilled R&D Managers • “Locked In” Alliance Advantage

Research & Technology Executive Council

Corporate Executive Board2000 Pennsylvania Avenue NW

Washington, DC 20006Telephone: +1-202-777-5000

Fax: +1-202-777-5100

The Corporate Executive Board Company (UK) Ltd.Victoria House

Fourth Floor37–63 Southampton Row

Bloomsbury SquareLondon WC1B 4DR

United KingdomTelephone: +44-(0)20-7632-6000

Fax: +44-(0)20-7632-6001

w w w . r t e c . e x e c u t i v e b o a r d . c o m

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brian tramel

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