Innovation Flash – July 2011, no. 5
As of January 1 of this year our team of innovation consultants has become part of Philips Innovation Services. This new organization – combining the innovation services and facilities of the Philips MiPlaza and former Philips Applied Technologies organizations – draws upon a huge range of resources and know-how that for decades benefited Philips and countless outside companies. Our support covers the entire innovation process, from front-end innovation to mass production, across Philips and many external companies.
With this new start I would like to offer you the Innovation Flash, our regular way to share new thoughts on innovation management with you, which enters its third year.
This edition of the Innovation Flash focuses on two key aspects of innovation: creating ideas and decision making. While getting the right insight and bringing innovations to market are crucial, developing the right solutions and deciding what to take further are just as important.
- First we look into when to use which idea generation technique. Christoph Dobrusskin analyzed numerous projects we did and provides some intriguing answers.
- In the second article Paul Hissel introduces a practical approach to improve valuation for breakthrough innovations, which was developed in cooperation with Giang Bui. This approach allows the right decisions to be taken, where NPV falls short and Real Options are too complex.
- Finally Jan-Edzard Talsma discusses a case study on how a new business line was set-up to offer ‘customized TVs’ to consumers.
- Evaluation of “classic” creativity tools and TRIZ tools in ideation workshops
For a number of years we have consistently used TRIZ in our innovation process for Philips as well as for external clients, and particularly in workshop settings. To better be able to determine which creative technique is best suited to solve a given problem, we have started to systematically investigate how the workshop participants experience the various creative techniques that we employ. Based on this investigation first conclusions will be shown on how selected TRIZ tools are experienced in comparison to other creative techniques.
Click here to download the paper
- Valuation approach for practitioners
Innovation effectiveness depends very much on making smart choices, for instance regarding which R&D projects to choose during Roadmapping or Portfolio Management, which scenario to select for a Venture or New Business, how to include the high uncertainties usually involved in strategic and front-end innovation decisions, etc.
As such choices have a strong impact on the performance and sustainability of the business involved, choosing the appropriate valuation technique is crucial in capital investments, especially in R&D valuation. Because of the uncertainties involved in investment projects, traditional valuation methods are no longer suitable. In addition, in projects in which managers can react to incoming information about a project‘s progress and market conditions, and adjust their investment decisions accordingly, managerial flexibility further complicates the valuation process. The Net Present Value (NPV) method, a tool widely used by corporations to evaluate investments, does not capture the value of managerial flexibility underlying an R&D investment and also ignores uncertainty. Traditional Decision Tree Analysis (DTA), using discounted cash flows, overcomes this drawback but fails to adjust the discount rate in order to account for changes in the risk pattern of a project’s cash flows.
In this Innovation Flash we introduce a valuation approach for practitioners that is complex enough to improve (R&D) project valuation, so that uncertainties are appropriately handled, and to capture the value of managerial flexibility involved in investment projects, and at the same time simple enough for users to understand and implement it. A new DTA model incorporating the Real Options Approach has been developed to correct for these flaws and to handle both market and private uncertainties in such investment projects.
Market risks relate to uncertainties regarding fluctuation (volatility) of a product’s price and demand, projected growth of sales quantities or product life cycles, etc. Market risks are modeled with the aid of a binomial tree using market volatility combined with a risk-neutral valuation:Private risks relate to a project’s unique uncertainties (like the chance of successful technical development, the quality of the outcomes at the end of a development phase) and are not affected by the market’s conditions. Private risks are modeled by using subjective probabilities and predicted outcomes:
Both risks are combined for the valuation in each period:
So the presented approach corrects the main flaws in the traditional NPV and DTA valuations.
The model and tool that we have available have been kept “as simple as possible” and are based on academic work and literature. The approach can be applied to value projects or business cases with embedded options (flexibility) and high levels of uncertainty. Our new approach enables us to help you improve your business / project / portfolio valuation.
Innovation Consulting offers consulting in the field of financial valuation for strategic decisions: business case / scenario modeling & valuation, sensitivity and Monte Carlo analysis, Decision Tree Analysis, multi-party business modeling, architectural and strategic make or buy decisions, etc.
- Design your own LED TV
Philips’ TV business line launches a new product line every year. This time it came up with the idea of offering a ‘personalized’ TV with various options like 8 different frame colors (ranging from satin champagne to velvet purple), different back panel colors, a stand or a wall mount and a choice of 3 remote controls (all in all initially 96 different options). This concept is new to the world, and is sold via Philips’ online shop.How did Industry Consulting get involved in this project?
Shortly after the project was launched, the business managers realized that it would involve quite a bit more than simply creating a new product line. The product would moreover have to be launched at the right time (before the Christmas selling season). That’s when they came to us for help.
Over many years we have built up a solid relationship with Philips Consumer Lifestyle (CL). They know what we are capable of, and we have proved that many times. That’s why they asked for our support in this project.
The tasks for the project team were to define, set up and bring to life a whole new business line to offer ‘customized TVs’ to consumers.Why was this a complicated project?
It would be going too far to explain in detail what we have done together with the CL project team, IT Applications, and 2 supply chain experts from Industry Consulting, but we can say that the project differed from setting up a new product line in four important respects:
• offering customized TV means a change for the supply chain in the factory from make-to-stock to make-to-order: the TVs are built individually upon receipt of actual orders; they are not kept in stock in a warehouse;
• the fact that consumers would be ordering ‘customized’ TVs via the online shop meant that we had to build a customer environment in which consumers would be able to ‘compose’ their own TVs;
• the fact that the products would not be shipped from stock but per order meant that we had to look for a different form of distribution and consider such aspects as transport management, selection of a transport partner and control of the transport costs per TV;
• receiving orders from customers instead of shops/retail channels also implies a different approach to service and the return of products.This should give you some idea of the things we had to consider. An important factor in this project is that the frame is a TV’s physical carrier. Without a frame you cannot handle a TV. But with different frame colors you do not know in advance how many of each color will be ordered. This meant that part of the project involved testing whether we would be able to assemble the frame and color it afterwards. We did not find a suitable process to tackle this in time. A configuration center was not an option because of the technical limitations in the product design. Therefore we decided to change from ‘make-to-stock’ to ‘make-to-order’. That implied a change in approach from filling warehouses with end products to creating assembly lines in which one TV is assembled at a time as requested by a specific order from a specific customer. Because of the substantial variation in configurations (of which there will be even more in future) in a Make-to-Order concept, we also had to tackle the problem of product identification throughout the chain. To ensure business success in IT, we needed to secure an end-to-end solution across 7 different IT platforms. And in order to arrive at a business case that would be acceptable with respect to transport, too, we had to dramatically reduce the logistics costs; we ultimately succeeded in realizing a reduction of approximately 65%, well above any expectations.
All in all it was a challenging project, but we managed to complete the Customized TV line according to plan for launching on the UK market and via the Dutch employees shop in October. The Design-your-TV concept is now available in all Philips online shops. Philips is the first TV company offering customized TVs on the market. This is important as TVs are perceived to be the third most desirable products for consumers after a house and a car.
In the meantime a new option has become available: consumers can now order a set of color samples to get a better idea of what the different frame colors will look like in reality. Quite a lot of customers have already made use of this option, so it is evidently a success.
Some retailers have asked whether it would be possible for consumers to order their TV at their shops instead of via the online shop.
Ronald van Harten: “I am extremely pleased with the work done by the CL and Industry Consulting project team. They have done a tremendous job, which nobody in BG-TV could have done.