Insights to Improve Product Innovation Practice in SMEs

 – by Hamsa Thota –

In this article Dr. Hamsa Thota defines product innovation and reviews evolution of new product development best practices for over 20 years. He introduces SMEs to a systematic framework for innovation so SMEs can aspire to achieve NPD performance comparable to the best practice companies as recognized by the PDMA.

Introduction

Product innovation is an innovation in the offering of a product or service to the market, in which customers exchange their money to acquire the new product or service offered by an enterprise.

Customers continue to purchase a product or service from the small and medium enterprise (SME) as long as it continues to do the job for them. Repeated purchase of a product or service is the basis upon which money flows from customers into the SME and the SME profits from innovation. performance

Product innovation performance is the market reward for new products measured in products’ contributions to sales or profits.

The definition of new products includes radical innovations (i.e. totally new products), more innovative projects (i.e. new product lines), and incremental innovations (i.e. modifications to existing products and derivative products).

PDMA best practices studies

The Product Development Management Association (PDMA) has conducted new product development (NPD) best practices studies since 1982 to discern which practices contribute to higher degrees of NPD success.

PDMA labeled its 1990 research as Comparative Performance Assessment Study (CPAS). Since the 1990 study was published, PDMA’s CPAS results guided managers to improve product development methods and practices and achieve NPD results comparable to the best practice enterprises.

There is definite value to learn from the best practice companies to determine what can be improved; but there is a danger for SMEs in implementing one-size-fits-all solutions.

The NPD best practices such as the use of formal NPD process to support specific enterprise innovation strategy, use of multiple market research tools to gather the voice of the customer, and use of engineering and design tools to build form and function into new products must be tailored to ones own enterprise and the ecosystem in which the SME operates.

Key findings from PDMA CPAS, 1990 – 2012

In the 1990 CPAS study PDMA found that it took, on average, 3 years to bring new product to the market, and that only 54.5% of enterprises that participated in the study had a well‐defined NPD process, and 56.4% had a specific new product strategy. In 1990 it took, on average, 11 NPD projects to achieve one commercial success.

The PDMA conducted its second study in 1995. In the 1995 study, PDMA differentiated between the “best” and the “rest” enterprises based on their NPD performance.

The companies were rated the best if they were the most successful or in the top third in their industry for NPD success and above the mean in NPD program and sales-profits success. The 1995 study identified seven NPD practices that separated the best from the rest. The 1995 NPD best practices were:

  1. The use of formal NPD processes.
  2. Having a specific NPD strategy.
  3. Measuring NPD outcomes and expecting more out of NPD efforts.
  4. Using cross-functional development teams.
  5. Using different types of qualitative market research, including voice of the customer, customer visit, and beta-testing techniques.
  6. Using engineering design tools such as computer aided design (CAD) and computer simulations.
  7. Closing NPD projects with completion dinners.

In 1995 the NPD success rate improved to 6.6 NPD projects to achieve one commercial success and the “best” enterprises killed bad ideas early in the NPD process. This meant that the best were spending less money on developing products that ultimately would fail in the marketplace.

By 2004 computer programs enabled use of simulations in new product design and development. Designers could visualize products before they have been developed and even produced three-dimensional holographic images of concepts so that designers, managers, and potential customers can walk around and view them from different angles.

In the 2004 CPAS, 416 business units participated. 32% of these respondents followed a prospector innovation strategy, being first to market with new products and technologies, whereas 37% pursued a fast follower strategy. In 2004, use of formal NPD process and cross-functional NPD teams to execute it became the norm.

The NPD outcomes in 2004 were generally consistent with the 1995 results. Between 1995 and 2004 the average cycle time for radical innovation projects decreased from 181 weeks to 101 weeks and for more innovative projects it decreased from 78 weeks to 62 weeks. Decline in cycle time for incremental projects was modest, with a decrease from 33 weeks to 29 weeks during the same period. NPD success outcomes such as the percent success of new products commercialized and success rates as measured by profitability of new products remained stable at 59% and 54% respectively.

The 2004 study also found that successful enterprises were more sophisticated in implementing various types of NPD projects. They used “process owners” such as the general managers of strategic business units (SBU) in radical and more innovative projects to help their cross-functional NPD teams navigate the NPD process better.

For incremental projects, they used overlapping gates or skipped entire stages in the NPD process more frequently. Also About one half of all the projects moved forward with conditional decisions made at the gates, where the conditions for continuance were specifically stated. The 2004 results suggested that a significant number of enterprises had moved from second-generation to third-generation types of new product development processes. Management was found to be more actively engaged in the NPD process in the 2004 study.

Nearly three out of four respondents reported that they had a specific new product strategy to guide development and more than half of them had put in place a well defined structured portfolio management process. Senior management made resource allocation decisions across the portfolio of NPD projects.

The top three techniques used in portfolio management were rank ordering of projects, discounted cash flow and payback periods. The 2004 study also revealed a weakness in the fuzzy front end, especially in idea management. Initial idea selection still seemed to be a very political and champion-based activity rather than guided by new product strategy. Similar to the 1995 study, the top three market research tools used in 2004 were beta testing, customer site visits and the voice of the customer.

Top three engineering tools used in 2004 were design for manufacturability (DFM), concurrent engineering (CE) and failure mode and effect analysis (FEMA). Top three team support tools used were face-to-face meetings, teleconferences, and PERT/GANTT charts. Key trends in NPD practices in 2004 were:

  1. NPD success rates and efficiencies (number of projects started per one commercial success) remained stable.
  2. NPD portfolios became more incremental.
  3. Cycle times dropped dramatically, especially for more radical projects.
  4. Having a formal NPD process was no longer a differentiator. Many enterprises used third-generation NPD processes.
  5. Enterprise emphasis shifted from managing individual NPD projects to managing a portfolio of NPD projects.
  6. Use of multiple customer needs gathering market research tools became a common practice.
  7. Use of a wide variety of software tools for engineering design and project management and support became a norm. Team online support tools were coming of age.

The 2012 CPAS contained a global sample of enterprises from North America, Europe and Asia. In addition to baseline questions from previous studies, the 2012 CPAS also included new questions on culture, social media, services, sustainability, open innovation, and global product development practices.

The 2102 CPAS found that over 2/3rds of enterprises in the study changed their market and user research process to emphasize the front-end of innovation. It also revealed increasing use of social media to gather customer inputs into the front end.

The “best” firms used discussion forums, ratings and reviews, blogs, branded social network, and innovation hubs significantly more than the rest. In 2012 NPD success rates inched up to 62% as compared to 59% in 2004.  Success rate for North American enterprises was higher at 68% than for European and Asian enterprises at 50% success rate.

As expected, the best practice enterprises outpaced the “rest” with a much higher NPD success rate of 82.5% vs. 53.8% for the “rest”. In 2012, gap in new product profitability also widened between the best at 78.2% and the “rest” at 49%. The best practice enterprises continued to build more efficient NPD process as indicated by, on average, 4.5 ideas needed to generate one commercial new product success versus 11.3 for the “rest”.

Key lesson for European and Asian SMEs

The 2012 CPAS revealed that North American enterprises are more proficient in NPD than their counterparts in Europe and Asia. For example, the US enterprises need, on average, 6.6 ideas for one success while the European and Asian enterprises needed 10 ideas and 14.5 ideas, respectively for one success.

The 2012 CPAS also found that in Asia, small enterprises were not very proficient in NPD. Where as large Asian enterprises needed 7 ideas for one commercial success in line with the proficiency of North American enterprises, small Asian enterprises needed 18 ideas for one commercial success.

Analysis of contribution to profits from various types of innovation projects for the entire sample revealed that incremental innovation projects contributed more to profits than radical or more innovative projects. However, the best practice enterprises derived more profits from radical and more innovative projects than from incremental projects.

A key lesson for small Asian enterprises from 2012 CPAS is that it is more important to strive to become the “best” than endeavoring to introduce a large number of new products each year.

A framework to improve innovation practice in SMEs

A fundamental issue facing Asian and other SMEs is how to systematically organize NPD to achieve success rates comparable to those of the “best” performers. The PDMA CPAS best practices are self-reported NPD practices.Do the “best” performers actually do what they say they do? PDMA has been recognizing the Outstanding Corporate Innovator (OCI) award winning enterprises since 1988.

In his 2011 paper titled “Systematic implementation of innovation best practices: Thota Framework for Innovation” published in the Tsinghua University Entrepreneurship and Innovation Journal, Dr. Thota verified that NPD best practices reported in CPAS research, and the NPD practices of OCI award winning enterprises are essentially the same.

What the “best” enterprises said they did to achieve superior NPD results is essentially the same as what the OCI award winning enterprises did in actual practice. However, the OCI differed widely in how they implemented best practices in their enterprises. Implementation practices are unique to each business.

Each enterprise customized them to suit its own operating environment, specific to the industry in which it competed. SMEs can utilize the Thota framework for innovation to customize implementation of NPD best pratices in their own organizations.

Thota framework for innovation

The Thota framework for innovation supports systematic implementation of innovation in SMES aspiring to improve NPD performance. It is rooted in three organizing principles, and eight actions. SMEs can begin their innovation performance improvement effort by asking three fundamental questions:

  1. How might we enable our people to innovate?
  2. Are our organizational processes supporting our people to innovate?
  3. Are the tools and methods used in our organization efficiently supporting the NPD and innovation processes?

The three organizing principles are:

1.    People innovate: How can SME leaders encourage people to embrace innovation supportive behaviors? Leaders must recognize that innovation behaviors require changes, and changes trigger “personal fears” in some people. Adopting innovation supportive behaviors comes at high personal cost to other people. A compelling enterprise purpose motivates people to overcome “personal fears”, take risks, and strive to achieve “stretch” goals.
2.    Process supports people. The primary purpose of an innovation process is to support people who innovate. An inflexible NPD processes such as the basic Stage-Gate™ NPD process, especially in the front end of innovation, is harmful to creativity and innovation. The modified NPD Stage-Gate™ process remedies the shortcomings of the traditional Stage-Gate™ process by the addition of discovery step, a critical step to find market needs in the front end and post-launch step, a step to enable continuous innovation in the back end. Also, one size fits all approach to implement NPD process leads to failure.  Best performing enterprises deploy a variety of approaches to manage different types of innovation projects. Also, they customize their process, specific to own operating environments.
3.    Tools and methods support people and processes. The tools and methods selected for use in NPD projects must support efficient execution of innovation processes by cross-functional NPD teams. CPAS tells us that the top performing companies utilize more research, design and engineering tools and methods than the underperforming enterprises.

Recommendations to improve SME NPD performance

SMEs are encouraged to make a self-assessment of strengths and weaknesses in how they support their people to innovate, how they customize and renew NPD processes to support their people to innovate and assess if they are utilizing the state of the art tools and methods most suited to meet the needs of their cross-functional NPD teams.

Outcomes from self-assessment can be grouped into eight actions. The Thota framework specifies following eight actions:

Action 1: Develop, train, and engage management in NPD.
Action 2: Develop the best project teams.
Action 3: Use strategy to drive innovation.
Action 4: Customize the innovation process to your enterprise and use it consistently.
Action 5: Use portfolio management as a tool to implement new product strategy.
Action 6: Learn when to use what market research tools.
Action 7: Learn when to use what engineering, design and R&D tools.
Action 8: Learn when to use what innovation team support tools.

In summary SMEs aspiring to improve NPD performance can learn much from the PDMA CPAS results and implement a systematic approach with eight action steps to improve NPD performance in their enterprises.

Note: A full copy of the PDMA 2012 CPAS report can be purchased from Steve Uban, Director 2012 CPAS. Use source code: IBD and contact Steve at this email address



Dr. Hams ThotaDr. Hamsa Thota is the president of Innovation Business Development, Inc., an innovation performance training and consulting company in the USA. He was past president and chairman of the Product Development and Management Association (PDMA) and most recently served as the secretary of PDMA Research Foundation (2006-2012). He is advisor to the “Art of Science Learning” project (2012-2016), a US National Science Foundation (NSF) funded project to spark creativity in Science, Technology, Engineering and Mathematics (STEM) education and the development of an innovative 21st century STEM workforce. He was a visiting professor at the Management School of the Zhejiang Univeristy and an honorary professor at the Geely Automotive Engineering Institute in China.

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