Profitability from New Product Development: why or why not

1. Profitability from New Product Development: why or why not? Parry M. Norling Visiting Fellow Chemical Heritage Foundation We�re here today to talk about new products, packaging, filling the cartons and honoring the developments of Tetra Pak and the inventors of Tetra Recart who have shown that innovation is alive and well in one part of the paper industry.We�re here today to talk about new products, packaging, filling the cartons and honoring the developments of Tetra Pak and the inventors of Tetra Recart who have shown that innovation is alive and well in one part of the paper industry.

2. The Messages New Product Development is risky business; often avoided by well established firms A New Product Development Strategy can improve the odds of success New Product Development can be the first step in a series of profitable innovative efforts for a firm Tetra Pak took the risks, has taken the early steps in a series of innovative efforts, and appears to have improved the odds for success in new product development thanks to the inventors of Tetra Recart. Lots of advice is available on how to be more successful in new product development � I�ll confine myself to just several perspectives with these four messages -- Lots of advice is available on how to be more successful in new product development � I�ll confine myself to just several perspectives with these four messages --

3. Barriers to Innovation Innovation has never been easy. We can look back to 1515Innovation has never been easy. We can look back to 1515

4. Machiavelli: The Prince, Chapter VI1515 Machiavelli in 1515 in the Prince observed that � � there is nothing more difficult�, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of opponents who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them. That was true in 1515 and is certainly the case today In cre dul ityMachiavelli in 1515 in the Prince observed that � � there is nothing more difficult�, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of opponents who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them. That was true in 1515 and is certainly the case today In cre dul ity

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6. New Product Development is risky business R&D and new product development is risky business. Tetra Pak took the risks. I�m especially grateful to some other Swedes who made it possible for me to be here today. If it were not for the brave Swedes who took the risk and the rode the Kalmar Nyckel in 1638 to where I live today� I would not be living in the city of Wilmington Delaware as it is today with its fine Swedish heritage � have the chance to ride the reproduction of the ship on the Chesapeake Bay and have friends who crew on the Kalmar Nyckel. ( additional notes:The Kalmar Nyckel (Key of Kalmar) was a Swedish pinnace built in 1620 which carried the settlers of the colony of New Sweden to the area that is now Wilmington, Delaware. It was named after the city of Kalmar The ship set sail, piloted by Peter Minuit, from Gothenburg in November 1637 but encountered a severe storm in the North Sea and diverted to Holland for repairs. It departed again New Year's Day 1638, arriving in their new colony in March 1638. It made successive four trips from Sweden which is a record unchallenged by any other colonial vessel. Later, she served the Swedish Navy in the Swedish-Danish War, then became a merchant ship, and finally was lost off the City of Kalmar in the late 17th Century. A reproduction of the ship�(http://www.kalmarnyckel.org/|) was built in the 1990s and is used today for tourist and educational purposes.) R&D and new product development is risky business. Tetra Pak took the risks. I�m especially grateful to some other Swedes who made it possible for me to be here today. If it were not for the brave Swedes who took the risk and the rode the Kalmar Nyckel in 1638 to where I live today� I would not be living in the city of Wilmington Delaware as it is today with its fine Swedish heritage � have the chance to ride the reproduction of the ship on the Chesapeake Bay and have friends who crew on the Kalmar Nyckel. ( additional notes:The Kalmar Nyckel (Key of Kalmar) was a Swedish pinnace built in 1620 which carried the settlers of the colony of New Sweden to the area that is now Wilmington, Delaware. It was named after the city of Kalmar The ship set sail, piloted by Peter Minuit, from Gothenburg in November 1637 but encountered a severe storm in the North Sea and diverted to Holland for repairs. It departed again New Year's Day 1638, arriving in their new colony in March 1638. It made successive four trips from Sweden which is a record unchallenged by any other colonial vessel. Later, she served the Swedish Navy in the Swedish-Danish War, then became a merchant ship, and finally was lost off the City of Kalmar in the late 17th Century. A reproduction of the ship�(http://www.kalmarnyckel.org/|) was built in the 1990s and is used today for tourist and educational purposes.)

7. New Product Development is risky business And had not my great grandparents � Anders Olsson and Lisa Olsdotter taken the risk to leave Nora ,ride the Bark to the new world and settle in the Swedish community, Bishop Hill Illinois � I would not be here today.And had not my great grandparents � Anders Olsson and Lisa Olsdotter taken the risk to leave Nora ,ride the Bark to the new world and settle in the Swedish community, Bishop Hill Illinois � I would not be here today.

8. But how risky is R&D and new product development? Studies by Stevens and Burley of the patent literature with extensive interviews with R&D managers indicate that in the development of significantly new products, it takes some 3000 ideas -- which on second thought become 300 practical ideas -- those that might be recorded in a lab notebook -- which are implemented in a series of projects� many of which are terminated -- giving 1.7 product launches and ultimately one commercial success . It�s odds such as these that keep many established firms from developing really new products. But note that the odds of success increase along the way from .03% to 60% -- as knowledge is developed in the project by those skillful in Research and Development � exemplified by those we honored yesterday and today. But how risky is R&D and new product development? Studies by Stevens and Burley of the patent literature with extensive interviews with R&D managers indicate that in the development of significantly new products, it takes some 3000 ideas -- which on second thought become 300 practical ideas -- those that might be recorded in a lab notebook -- which are implemented in a series of projects� many of which are terminated -- giving 1.7 product launches and ultimately one commercial success . It�s odds such as these that keep many established firms from developing really new products. But note that the odds of success increase along the way from .03% to 60% -- as knowledge is developed in the project by those skillful in Research and Development � exemplified by those we honored yesterday and today.

9. The chances for failure are greatestwhen you know the least about the technology being developed and/or the target market The �Familiarity Matrix� allows mapping of R&D projects based on the extent of knowledge about technologies and markets Ed Roberts at MIT created the �Familiarity Matrix� which allows mapping of R&D projects based on the amount of knowledge one has on the target markets and the technology being developed � this is quite significant and use of this framework can help develop a strategy for new product development and can help improve the odds of success and improved profitability for the firm.Ed Roberts at MIT created the �Familiarity Matrix� which allows mapping of R&D projects based on the amount of knowledge one has on the target markets and the technology being developed � this is quite significant and use of this framework can help develop a strategy for new product development and can help improve the odds of success and improved profitability for the firm.

10. Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes On the matrix one can decide whether the technology being developed is quite familiar to those in the firm, new to the firm which has some familiarity with the technology, or is quite new and totally unfamiliar to the firm � and likewise for the target markets � familiar, somewhat familiar but new, or totally new and unfamiliar. For the involved projects, as the level of knowledge decreases, the odds of success for the project falls off greatly.On the matrix one can decide whether the technology being developed is quite familiar to those in the firm, new to the firm which has some familiarity with the technology, or is quite new and totally unfamiliar to the firm � and likewise for the target markets � familiar, somewhat familiar but new, or totally new and unfamiliar. For the involved projects, as the level of knowledge decreases, the odds of success for the project falls off greatly.

11. Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes One can even give names to each of the boxes As the �newness� of the technology increases one goes from market penetration to product extension and then product expansion with new functionality and uses. As a firm invades new markets one goes to market extension and then expansion. When both technology and markets are new it is the business itself that is being extended and expanded. In the extreme the business itself is reinvented in the upper right hand box with a new business model -- One can even give names to each of the boxes As the �newness� of the technology increases one goes from market penetration to product extension and then product expansion with new functionality and uses. As a firm invades new markets one goes to market extension and then expansion. When both technology and markets are new it is the business itself that is being extended and expanded. In the extreme the business itself is reinvented in the upper right hand box with a new business model --

12. Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes And one can give rough odds of success for projects in each of the boxes . For example a new product with new technology in an existing market has a 50% chance of success These were the odds that Tetra Pak was facing in the 8 year development effort for Tetra Recart. The odds are difficult to establish, but from the literature these estimates have been made. But one must remember, we are talking about an ever changing situation as the extent of knowledge improves during the life of a successful project. These figures represent the odds of success as a project is launched.And one can give rough odds of success for projects in each of the boxes . For example a new product with new technology in an existing market has a 50% chance of success These were the odds that Tetra Pak was facing in the 8 year development effort for Tetra Recart. The odds are difficult to establish, but from the literature these estimates have been made. But one must remember, we are talking about an ever changing situation as the extent of knowledge improves during the life of a successful project. These figures represent the odds of success as a project is launched.

13. Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes For an existing product in a new market the odds of success are 15% For an existing product in a new market the odds of success are 15%

14. Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes An improved product in an existing market has a 75% chance of success;. And then for the entirely new business � in what is called suicide square the odds are only .03%. An improved product in an existing market has a 75% chance of success;. And then for the entirely new business � in what is called suicide square the odds are only .03%.

15. Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes and a new product in a new market has only a 5% chance. You can see that it makes sense to take these projects in a certain order; going after the higher probabilities of success first as you learn both about the markets and about the new technologies � as seems to be the case with Tetra Pak. and a new product in a new market has only a 5% chance. You can see that it makes sense to take these projects in a certain order; going after the higher probabilities of success first as you learn both about the markets and about the new technologies � as seems to be the case with Tetra Pak.

16. Now that the new product has overcome the odds and has made it into the marketplace � well that�s only the beginning. Geoffrey Moore has taught us that during the lifetime of a product family , the firm gets the greatest profitability from different types of innovation at different points in the life cycle of that product family. Initially the profits come from the invention of the new product, the tailoring of that product in different applications, and the improvement of the product to meet the increasing customer requirements. But to maintain and grow profits there are innovative opportunities in other areas in the future as you can see in this chart � process innovation, marketing innovation, business model innovation and finally structural innovation. We can look at each of these for Tetra Recart. Now that the new product has overcome the odds and has made it into the marketplace � well that�s only the beginning. Geoffrey Moore has taught us that during the lifetime of a product family , the firm gets the greatest profitability from different types of innovation at different points in the life cycle of that product family. Initially the profits come from the invention of the new product, the tailoring of that product in different applications, and the improvement of the product to meet the increasing customer requirements. But to maintain and grow profits there are innovative opportunities in other areas in the future as you can see in this chart � process innovation, marketing innovation, business model innovation and finally structural innovation. We can look at each of these for Tetra Recart.

17. Different types of Innovation Disruptive Innovation � an invention that can displace the present market leader or create an entirely new market Initially it�s disruptive innovation. The Tetra Pak retortable carton shows the potential of replacing metal cans and glass jars � both on a cost and performance basis. A system is provided for filling and sterilizing the new package at speeds comparable to cans and jars. The invention is awarded the DuPont Diamond Award for Packaging in 2002. (Tetra Recart� Retorting is a food processing method normally used for metal and glass packaging where the food is packaged first, then heated for 20 minutes or longer at high temperature in a large retort oven to sterilize it and make it safe to eat. Tetra Pak technology has made it possible to create a paper-based packaging material rugged enough to withstand the high temperatures of retorting. This has led to the development of the Tetra Recart package--the world�s first retortable carton. It can package virtually any foods currently found in food cans or jars with the added logistical benefits of a stackable, rectangular shape, light weight, and easy tear-off top that eliminates the need for a can opener. Further, it won�t break or shatter if dropped and, like other Tetra Pak cartons, is recyclable.The Tetra Recart package was first launched for beans and other legumes by Bonduelle, a leading French producer, for the Italian market. )Initially it�s disruptive innovation. The Tetra Pak retortable carton shows the potential of replacing metal cans and glass jars � both on a cost and performance basis. A system is provided for filling and sterilizing the new package at speeds comparable to cans and jars. The invention is awarded the DuPont Diamond Award for Packaging in 2002. (Tetra Recart� Retorting is a food processing method normally used for metal and glass packaging where the food is packaged first, then heated for 20 minutes or longer at high temperature in a large retort oven to sterilize it and make it safe to eat. Tetra Pak technology has made it possible to create a paper-based packaging material rugged enough to withstand the high temperatures of retorting. This has led to the development of the Tetra Recart package--the world�s first retortable carton. It can package virtually any foods currently found in food cans or jars with the added logistical benefits of a stackable, rectangular shape, light weight, and easy tear-off top that eliminates the need for a can opener. Further, it won�t break or shatter if dropped and, like other Tetra Pak cartons, is recyclable.The Tetra Recart package was first launched for beans and other legumes by Bonduelle, a leading French producer, for the Italian market. )

18. Different types of Innovation Application Innovation: Takes existing technologies into new markets to serve new purposes Next � the system is tailored to many different food products � from dog food, to chili � exploring the limits of the technologyNext � the system is tailored to many different food products � from dog food, to chili � exploring the limits of the technology

19. Different types of Innovation Product Innovation: Takes an established product to the next level � reduced cost, improved quality, greater functionality Product Innovation: Then there is the constant product improvement as the suppliers of cans, bottles, and jars seek to show limitations in the technology. Tetra Pak looks for ways to reduce manufacturing costs, improve product quality, and find ways to improve the ways in which the product functions � both in its barrier properties and in the way the food processor fills and sterilizes the retortable carton.Product Innovation: Then there is the constant product improvement as the suppliers of cans, bottles, and jars seek to show limitations in the technology. Tetra Pak looks for ways to reduce manufacturing costs, improve product quality, and find ways to improve the ways in which the product functions � both in its barrier properties and in the way the food processor fills and sterilizes the retortable carton.

20. Different types of Innovation Process Innovation: Makes processes for established products in established markets more effective and more efficient Process Innovation: From the beginning Tetra Pak has developed a process for manufacturing the cartons and for the food processors to use the cartons. Tetra Pak will be seeking ways to speed up the processes, to simplify in any way the process and lower manufacturing costs. Introduction of a recycling process has begun. Tetra Pak researchers will be learning from customers ways in which to improve all these processes � and where the opportunities exist.Process Innovation: From the beginning Tetra Pak has developed a process for manufacturing the cartons and for the food processors to use the cartons. Tetra Pak will be seeking ways to speed up the processes, to simplify in any way the process and lower manufacturing costs. Introduction of a recycling process has begun. Tetra Pak researchers will be learning from customers ways in which to improve all these processes � and where the opportunities exist.

21. Different types of Innovation Experiential Innovation: Makes some superficial changes in the product that improve the customer�s experience with the product � adding delight, greater satisfaction, or reassurance Experiential Innovation: As diminishing returns are reached in product and process improvements, marketing will seek ways to improve the experience that the food processors and the end consumers have with the product. Often this is a type of innovation that falls between the cracks between R&D and Marketing. What can be done to give the food processors and the chili consumers more delight, more satisfaction, or reassurance of the safety and freshness of the packaged food. A brainstorming session involving R&D, manufacturing, and marketing could come up with a myriad of ideas from product dating, to a website contact on the package, to a game played with empty packages.Experiential Innovation: As diminishing returns are reached in product and process improvements, marketing will seek ways to improve the experience that the food processors and the end consumers have with the product. Often this is a type of innovation that falls between the cracks between R&D and Marketing. What can be done to give the food processors and the chili consumers more delight, more satisfaction, or reassurance of the safety and freshness of the packaged food. A brainstorming session involving R&D, manufacturing, and marketing could come up with a myriad of ideas from product dating, to a website contact on the package, to a game played with empty packages.

22. Different types of Innovation Marketing Innovation: Improves the interaction with customers Marketing Innovation: Beyond this-- marketing now needs to seek innovative ways to interact with the customers, seeking ways to meet unappreciated needs, better ways to get the product into their hands, and ways to please and �delight� both for the food processor and the food consumer. Opportunities abound for some join efforts between Tetra Pak and the food processor.Marketing Innovation: Beyond this-- marketing now needs to seek innovative ways to interact with the customers, seeking ways to meet unappreciated needs, better ways to get the product into their hands, and ways to please and �delight� both for the food processor and the food consumer. Opportunities abound for some join efforts between Tetra Pak and the food processor.

23. Different types of Innovation Business Model Innovation: Reframes the role of the company in the value chain or the way in which the company meets customer needs Business Model Innovation Further in the future is innovation on the operation of the business and the way it provides value to customers--Business Model Innovation Further in the future is innovation on the operation of the business and the way it provides value to customers--

24. Different types of Innovation Structural Innovation: Capitalizes on disruption and changes in the industry to restructure industry relationships Structural Innovation: And even opportunities to restructure the relationships Tetra Pak has with customers � maybe even going so far as providing some recarts to the food consumers for home canning.Structural Innovation: And even opportunities to restructure the relationships Tetra Pak has with customers � maybe even going so far as providing some recarts to the food consumers for home canning.

25. It all starts with New Product DevelopmentButNew types of innovation need to be introduced with new innovation skills to sustain profitability What we have said is that new product development has started a long string of innovations � each of which can help the firm maintain its competitive edge as the metal cans and glass bottles or super plastic containers seek to take back the market. Tetra Pak will need to continue to innovate � in a variety of ways including the development of more new products� with skills across the company to maintain profitability from this product family.The Tetra Pak Recart we see today is a marvelous start for a prosperous tomorrow. But Tetra Pak cannot rest on its laurels!What we have said is that new product development has started a long string of innovations � each of which can help the firm maintain its competitive edge as the metal cans and glass bottles or super plastic containers seek to take back the market. Tetra Pak will need to continue to innovate � in a variety of ways including the development of more new products� with skills across the company to maintain profitability from this product family.The Tetra Pak Recart we see today is a marvelous start for a prosperous tomorrow. But Tetra Pak cannot rest on its laurels!

26. A company cannot rest on its laurels, only doing what it has been able to do quite well � failing to continue to innovate. Here are some companies � that while still around� lost their leadership in certain product lines � others were able to beat them in the innovation game. They were unable to develop the new products in the markets that were theirs.A company cannot rest on its laurels, only doing what it has been able to do quite well � failing to continue to innovate. Here are some companies � that while still around� lost their leadership in certain product lines � others were able to beat them in the innovation game. They were unable to develop the new products in the markets that were theirs.

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28. Collins and Porras point out that companies with resilient cultures grew in value from 1926 to 1990 16 times more than the market average and six times more than comparison companies of similar sizes in similar industries. The resilient companies delivered continuous innovation� they reduced costs, developed new products, new processes and created wealth � all the time instilling trust from customers, stakeholders, and employees.Collins and Porras point out that companies with resilient cultures grew in value from 1926 to 1990 16 times more than the market average and six times more than comparison companies of similar sizes in similar industries. The resilient companies delivered continuous innovation� they reduced costs, developed new products, new processes and created wealth � all the time instilling trust from customers, stakeholders, and employees.

29. The Laggards: Took few risks Relied on mature products Continued to do things in the ways that brought success in the past (core rigidities) Maintained an inward focus Felt safe near term Eventually lost out Those companies which were not resilient, stagnated, took few risks, tried to rely on a mature product line, focused inwardly and didn�t see the challenges facing them, continued doing business in the way they have been doing it for years holding on to what they had � often only to lose, go out of business, or be acquired. Those companies which were not resilient, stagnated, took few risks, tried to rely on a mature product line, focused inwardly and didn�t see the challenges facing them, continued doing business in the way they have been doing it for years holding on to what they had � often only to lose, go out of business, or be acquired.

30. A Lesson for the Paper Industry? Tetra Pak and the inventors we honor today have shown that a company in the paper industry can indeed be resilient and can create wealth from significant new products.Tetra Pak and the inventors we honor today have shown that a company in the paper industry can indeed be resilient and can create wealth from significant new products.

31. The Messages New Product Development is risky. Odds of success can be understood & improved New Product Development is only the first step toward sustained profitability Tetra Pak took risks, has taken the early steps in innovative efforts and is A demonstration of a resilient company in the paper industry Thus we have seen that � Thank you!!Thus we have seen that � Thank you!!

32. Additional slides for discussion

34. Familiarity Matrix: Optimum Strategies forTechnological Innovation: Finding others who know more about the markets or the technology Berry and Roberts have placed on the Familiarity matrix � the suggested partnership arrangements for each of the boxes � For example in suicide square you may need to get venture capital for a new business, make an educational acquisition, or fund basic research in a university � or possibly all three. If the technology is familiar to you but the market is new a joint venture may be called for. Berry and Roberts have placed on the Familiarity matrix � the suggested partnership arrangements for each of the boxes � For example in suicide square you may need to get venture capital for a new business, make an educational acquisition, or fund basic research in a university � or possibly all three. If the technology is familiar to you but the market is new a joint venture may be called for.

36. Innovation : Not a Linear Process The R&D process is part of the greater innovation process. Here is one representation where ideas are developed, opportunities developed for new products, processes or services, where lab work leads to development and commercialization of innovations that are accepted in the marketplace. This is not a linear one -- there are many recycle loops, often the idea must be reworked, or put on the shelf for a year or two. The R&D process is part of the greater innovation process. Here is one representation where ideas are developed, opportunities developed for new products, processes or services, where lab work leads to development and commercialization of innovations that are accepted in the marketplace. This is not a linear one -- there are many recycle loops, often the idea must be reworked, or put on the shelf for a year or two.

37. The inventors of the Tetra Pak Recart must have shown a number of these characteristicsThe inventors of the Tetra Pak Recart must have shown a number of these characteristics

38. Some thoughts on Creativity and Innovation �It is the duty of private men to obey, and not make innovation of states after their own will� 1597

39. Some thoughts on Creativity and Innovation �It is a revolt of innovation; and thereby the very elements of society have been confounded and dissipated� 1844 To them antiquity is synonymous with wisdom and every improvement is a dangerous innovation� 1862 And more recently --And more recently --