Making innovation profitable

Innovation equates to survival in today’s marketplace. Customers want better, faster, smarter products with increased capabilities. They also want innovative products continuously coming through, with no delays.

The immediate reaction of many businesses to this market pressure is increasing R&D spending, in the hope that the more they spend, the more they will innovate.

 Cartoon about R&D budgets always being exceeded.

It’s no surprise that – with such an immature approach – the Innovation Success Rate (ISR) for most companies is disappointing, as highlighted by our latest Design for Profitability 2015 survey. Defined as “the percentage of new products introduced to the market that meet commercial objectives”, the ISR is lower than 50% for more than a third of businesses across multiple industries. Not a really great performance! It looks like the strategy here is to try and launch on the market whatever product possible, while hoping that – perhaps – it may become a success.

 Chart visualizing the innovation success rate.

If only less than 20% of the companies considered have an ISR higher than 80%, how can the remaining 80% of businesses improve their own? What is the real cost of innovation for them and how can they make this sustainable on the longer run? How can they spend better, rather than just more, in R&D?

Our latest Design for Profitability survey can help answer these questions. Digging into the reasons why products fail, “products being late to market and missing demand” makes the top five, with nearly 34% of respondents having selected it. Another similarly popular reason is “poor go/kill decisions during product development”. Going further into the scorecards used to make “go/kill” decisions during a stage-gated New Product Development & Launch (NPDL) process, respondents candidly admit that the least important of them are manufacturability (37%) and supply chain feasibility (28%).

Table listing the key reasons why new products fail.

Quoting the film Apollo 13, “Houston, we have a problem” is what comes to mind. Companies spend an incredible amount of money in R&D, but the key reasons why their products fail lie somewhere else: the poor collaboration between product development and supply chain. In fact, still today, more than 70% of companies don’t see the supply chain function as essential and equal partner to R&D/product development in the NPDL process.

This is certainly something that the Boeing CEO must have realised, with the launch of its 787 Dreamliner being plagued by development delays. The company recognised that the origin of these delays essentially lied in a number of decisions taken at an early stage in the product development, including complex supply chain architecture, poor suppliers orchestration and unclear who-does-what along the new product development and launch process. To get back on track, Boeing gathered all decisions makers around a table – from R&D to supply chain – to redesign the process based on a clear “decision matrix” approach which shows who the decision makers are and what the cross-functional implications are. As simple as this!

Results from our Design for Profitability 2015 survey confirm that there is a neat correlation between businesses having an Innovation Success Rate higher than 80% and companies adopting an integrated organisation where supply chain is considered an equal partner to product development, in an orchestrated, fully open and collaborative NPDL process.

A company that has made this theory into a practice for a long time now is Cisco. The early involvement of supply chain in the NPDL process is made possible thanks to the extended boundaries of Cisco’s supply chain function. This is divided in two parts: one is the so called “fulfilment supply chain”, takes care of the usual source-market-deliver tasks. The other one is the “development supply chain”, which links the development of new products and technologies with end-to-end supply chain constraints and opportunities, thus accelerating innovation and reducing future supply chain risks. Cross-functional teams work closely together to ensure that potential risks and constraints are taken into consideration early in the innovation process and it is this organisational alignment that can be identified as the key factor to Cisco’s success.

Our Design for Profitability 2015 survey confirms what we already knew: early involvement of the supply chain in product development can substantially improve key metrics of innovation success, including cost, speed and the ultimate profitability of newly introduced products. Supply chain can make the difference. It can make innovation profitable.

Author Pierfrancesco Manenti

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