Innovation

Even the best-intentioned senior managers may find it difficult to translate aspirations into action, when molding a more market-driven company. Although the underlying principles and prescription of generic change programs offer valuable guidance, a firm must tailor its own change program to the particular challenges it faces in understanding, attracting, and keeping its valuable customers. In this article, Day discusses six conditions that ensure change-process success. He uses the experiences of four corporate change programs (Fidelity Investments; Sears, Roebuck and Co.; Eurotunnel; and Owens Corning) and post-audits of some failed change initiatives to illustrate this change model and explain the necessary conditions for a firm's durable shift to a market orientation. Two pressures initiate a firm's change process: (1) its inclination to focus inwardly and become remote from its customers and unresponsive to competitive challenges; and (2) external market, technology, and competitive forces that pull the business out of alignment with its present market. The interplay of these forces leads to one or more of the following triggers for change: market disruptions that threaten a firm's business model, continuing erosion of market alignment that results in a market disadvantage, strategic necessity, or intolerable opportunity costs. Successful change programs have six overlapping stages: 1. Demonstrating leadership commitment. A leader owns and champions the change, invests time and resources, and creates a sense of urgency. 2. Understanding the need for change. Key implementers understand market responsiveness, know the changes needed, and see the benefits of the initiative. 3. Shaping the vision. All employees know what they are trying to accomplish and understand how to create superior value. 4. Mobilizing commitment at all levels. Those responsible have credibility and know how to form a coalition of supporters to overcome resistance. 5. Aligning structures, systems, and incentives. Key implementers have the resources they need to create a credible plan for alignment. 6. Reinforcing the change. Those responsible know how to start the program and keep attention focused on the change and benchmark measures. Any program to create a market-driven organization must begin quickly but be sustained over many years. Fidelity's approach, which took five years to reach 60 percent completion, resulted in increased customer-retention rates and a doubling of "share of wallet" -- two results that would justify and sustain any firm's change efforts.

To survive today, firms must become adept at developing products that deliver the quality and functionality that customers demand while generating the desired profits. To ensure that products are sufficiently profitable when launched, many firms subject them to target costing, a profit management technique. The authors studied the mature, highly effective target costing systems of seven Japanese companies and documented their costing procedures. Although practices differ among these firms, the authors identified an underlying generic approach for implementing target costing systems. A highly disciplined process, effective target costing comprises the following facets that the authors discuss in detail: -- Market-driven costing consists of three companywide tasks -- setting the company's long-term sales and profit objectives, structuring product lines to achieve maximum profitability, and establishing a product's target selling price -- and two steps applicable to new products -- setting a target profit margin consistent with the company's long-term profit objectives and computing the product's allowable cost (by subtracting the target profit margin from the target selling price). -- Product-level target costing comprises setting a reasonably achievable product-level target cost, imposing discipline upon the development process to attain the target cost (whenever feasible), and achieving the cost goal without sacrificing functionality and quality (primarily through value engineering and other engineering-based cost reduction techniques). -- Component-level target costing includes decomposing the product-level target cost to the major functions or subassemblies (e.g., in a car, the engine, transmission, cooling system, air conditioning system, and audio system), setting component-level target costs, and managing suppliers (clearly conveying to them the competitive cost pressures facing the lean enterprise). The cardinal rule of the companies studied is: "Never exceed the target cost." They enforce this rule in three ways -- by offsetting design improvements that result in increased costs with savings elsewhere in the design, by not launching products that exceed the target cost, and by carefully managing the transition to manufacturing in order to achieve the target cost.

High-performing companies employ dual strategies: they maximize today's capabilities and simultaneously develop new capabilities for the future. In the past, most organizations could run and change their businesses using a single strategy; even today, most companies do not clearly discriminate between present and future. A single-strategy approach, however, cannot meet the challenges created by accelerating competition and change. Strategies for today ensure that functional and supply-chain partner activities are aligned with company strategy and harmonized with organizational structures, processes, culture, incentives, and people. They clarify segment, positioning, and resource deployment choices. Strategies for tomorrow involve decisions about how to define and position the future business. They start with visions of the future -- for example, market territory and forces that might reshape it; competitive moves; strategy options and choices; needed competencies and resources; and knowledge of how to get "there" from "here." Achieving the right balance between a present and a future orientation depends on the situation. During times of rapid or extreme change, the future component claims more attention; during more stable times, the present component predominates. In any situation, however, both components must always be addressed in parallel. Institutionalizing dual strategies requires that companies clearly define leadership responsibilities, balance organizational structures and processes, develop systems for managing duality, and redesign control mechanisms. Implementation must begin at the top. Leaders at all levels of the enterprise must promote the need for dual thinking and communicate the two agendas and their significance to people in every organizational nook and cranny. Dual strategies succeed only if those who need to implement today and change for tomorrow understand the reasons behind each.

Companies' financial strength and market position depend on successful new product introductions, which, in turn, depend on successful product rollovers. Given the low success rate of product rollovers, companies need a formal process to plan and coordinate product rollovers and to reduce risk. This article presents a framework to help companies manage product rollovers, choose the best rollover strategy, and improve product rollovers. Companies need to plan their rollovers early, when they are planning the new product's introduction. First, they choose a primary rollover strategy, based in part on assessment of the uncertainties associated with the product's manufacturing, delivery, and market potential. Then they monitor product and market conditions. Finally, as product and market conditions change, they adopt a contingency strategy if necessary. Companies can consider two primary strategies for product rollovers. Solo-product roll, a high-risk, high-return strategy, aims to have all the old products sold out worldwide at the planned new product introduction date. The less risky dual-product roll plans to sell both old and new products simultaneously for a period of time and can be implemented in a variety of ways. If changed product and market conditions increase the product's risk, companies can choose from among four contingency strategies: making significant price markdowns, postponing the new product's introduction, introducing the new product earlier than planned, or combining two or more dual-product-roll strategies. Finally, while contingency strategies enable companies to modify their primary strategies if appropriate, companies can improve their product rollovers significantly by exploiting opportunities to reduce the product and market risks of each new product in the first place.

Companies can successfully challenge industry leaders even without radical technological innovation.

Why are new products frequently canceled in midstream or introduced later than planned? Why do product developers often have no time to devote to “top priority” projects? Companies may not be integrating strategic, conceptual, and planning functions at the front end with the detailed design and development that follows. Khurana and Rosenthal isolated seven activities critical to product and project success. The foundation elements, those that require cross-functional effort and senior management support, include developing a clear product strategy, formulating a product portfolio, establishing a structure that facilitates product development, and sharing responsibilities throughout the organization. Project-specific elements, which focus on the individual project, include clarifying the product concept, defining the product and market requirements, and planning and estimating the project’s resource requirements. The authors point out that the interrelationships between the elements are as important as the elements themselves. Khurana and Rosenthal examine in detail how the eleven companies in their study implemented the seven activities. While the authors rated two companies as outstanding and two as satisfactory, they considered seven to have serious deficiencies in their development of product strategies. Some had product development teams and managers but no one in charge of formulating product strategy. Others made decisions on new product development based on project criteria rather than strategic fit. And others had an isolated R&;D department that funded projects based on technology rather than on their potential to satisfy product requirements. How can a company improve its front-end process? Khurana and Rosenthal offer a checklist and map for diagnosing a company’s integration of front-end activities. And they discuss how a company can make the transition to a better managed product development process.

Are traditional reengineering approaches appropriate for improving knowledge work processes? In a study of thirty organizations, the authors found that improvement methods for knowledge work ranged from the classical top-down approach to a more laissez-faire philosophy that allowed professionals to design and execute their own work. Companies should probably choose an intermediate approach that reflects the type of knowledge work, the organizational culture, and the project's business requirements. They must recognize that the nature of knowledge work is different from administrative and operational work and that the people who perform it resist structured approaches.

Managers need to recognize the potentials of software in their development processes and change their approaches to utilize the full potentials of software-based innovation. By doing so, they can improve innovation quality, shorten cycle times, cut costs, lower risks, enhance the results of innovation, and increase its diffusion to customers. The authors explain the powerful possibilities of software-based innovation and provide many examples of how companies develop and manage software most successfully.

Analog Devices is a case study in how management innovation is a key to competitiveness.

The fact that Japanese manufacturers made tremendous inroads on the global automobile market during the 1970s will surprise nobody. What may surprise many is that Toyota's productivity rates exceeded U.S. manufacturers' as long ago as the 1960s. Business historian Michael A. Cusumano details the spectacular developments in Japanese productivity, quality, and process flexibility that have occurred over the past thirty years.