Innovation Methods

Methods in the Product Innovation
Process
Hans Peter Dormann
Institute of Industrial Management and Innovation Research

Graz University of Technology
Director of the Institute: o.Univ.-Prof. Dipl.-Ing. Dr.techn. Josef W. Wohinz

Supervisor: Wiss. Ass. Dipl.-Ing. Hannes Oberschmid
Graz, November 2007

Abstract
The main discussion of this paper is about methods which can support the product
innovation process. First some general terms and definition about innovation
management, like the difference between innovation and invention, will be discussed.
Furthermore the innovation process of Thom and Cooper’s Stage Gate Process will
be described. This gives also an idea about differences and similarities in innovation
processes.
In the following main chapter Cooper’s process will be taken to describe methods
which can support the product innovation process. Therefore each stage and gate
will be shortly introduced and to every one of them methods will be explained in
detail. It should be always considered that these methods can be also applied to
other innovation processes and might be also needed to be modified depending on
the new product. Methods described here are for example the SWOT – Analysis,
Ansoff Matrix, Portfolio Management, Target Costing and many more.
In the final part of the main chapter tools will be introduced how to evaluate the
process done and take new insights with you so the next innovation can be done
even better. These methods are already more in the area of quality management.
ii
Content
1 Introduction.......................................................................................................... 5
2 Basics of Innovation Management ...................................................................... 6
2.1 Definitions .................................................................................................... 6
2.2 Innovation Types .......................................................................................... 7
3 Innovation Processes ........................................................................................ 10
3.1 Thom’s Innovation Process ........................................................................ 10
3.2 Cooper’s Stage-Gate Process.................................................................... 12
4 Methods in the Stage-Gate Process.................................................................. 14
4.1 Methods for idea generation (Discovery Stage) ......................................... 14
4.1.1 Open Innovation vs. Closed Innovation............................................... 15
4.1.2 Lead Users and Innovative Customers ............................................... 18
4.2 Methods for Idea Screening (Gate 1) ......................................................... 19
4.2.1 Scoring Model ..................................................................................... 19
4.3 Methods in the Scoping Stage (Stage 1).................................................... 20
4.3.1 GAP Analysis ...................................................................................... 21
4.3.2 Scenario Techniques .......................................................................... 22
4.3.3 Ansoff Matrix ....................................................................................... 24
4.3.4 SWOT Analysis ................................................................................... 26
4.4 Methods for the Second Screen (Gate 2)................................................... 27
4.4.1 Portfolio Management ......................................................................... 27
4.5 Methods for Building the business case (Stage 2) ..................................... 29
4.5.1 The Business Case ............................................................................. 30
4.5.2 Quality Function Deployment (QFD) – House of Quality..................... 33
4.6 Methods before go to Development (Gate 3) ............................................. 35
4.7 Methods in the Development Stage (Stage 3)............................................ 35
4.7.1 Rapid Prototyping................................................................................ 36
4.8 Methods before go to Testing (Gate 4)....................................................... 38
4.9 Methods for Testing and Validation (Stage 4) ............................................ 38
4.9.1 FMEA – Failure Mode and Effect Analysis .......................................... 39
4.9.2 Poka Yoke........................................................................................... 40
iii
4.10 Methods before go to Launch (Gate 5)....................................................... 41
4.11 Methods for the Launch of the New Product (Stage 5)............................... 41
4.11.1 Price Calculation ................................................................................. 42
4.11.2 Target Costing..................................................................................... 44
4.12 Post Launch Preview.................................................................................. 45
4.12.1 Kaizen ................................................................................................. 46
4.12.2 CIP – Continuous Improvement Process ............................................ 46
5 Synopsis............................................................................................................ 48
6 Bibliography....................................................................................................... 50
7 Tables and Figures Index .................................................................................. 51
iv
Methods in the Product Innovation Process 5
1 Introduction
This study aims at discussing several methods which are suitable to support the
different levels of the product innovation process (PIP). It is very important for
companies of all kind and branches to be aware of appropriate tools and methods to
support innovation. Quoting Paul Trott from his book: “Innovation Management and
New Product Development” following motivating lines:
“Corporations must be able to adopt and evolve if they wish to survive. Businesses
operate with the knowledge that their competitors will inevitably come to the market
with a product that changes the basis of competition. The ability to change and adept
is essential to survival.”1
Furthermore the economist Schumpeter realised how important new products are to
influence and stimulate economic growth. His main idea was that changes in prices
of existing products will not have such an impact on economic growth like the
innovations of new products have.2
All this considerations should be reason enough to read and learn more about
innovation and innovation methods. In the following chapters some basic topics of
the innovation management will be discussed and explained first. After that possible
PIP representations will be introduced and one specific, on which supporting
methods will be shown, will be chosen for further discussion. Whereas this paper
focuses on methods in the process, the process itself will be only brief, but
sufficiently described, in order to present the connection between methods and
process.
The two main processes in this work are the Stage Gate Process from Robert G.
Cooper and the Innovation Process from Norbert Thom. Although they are structured
in a different way, the main parts of creation, acceptance and execution of ideas are
in both processes the same.
Many different methods can be applied to these two processes, but, in different
steps. Therefore the methods can be seen as general valid tools to organise
innovation.
1
Trott Paul: Innovation Management and New Product Development, 2005, p. 5
2
6 Methods in the Product Innovation Process
2 Basics of Innovation Management
In the introduction was already mentioned that innovation is a significant point for the
corporation, its survival and the economic growth. Therefore it is important to be
aware of the depreciating stereotype of the clumsy professor who accidentally
develops an amazing invention shown by the media. This is a rather simple view of a
complex process which depends on many factors that need to be taken in account.
The innovation should be seen as a valuable management tool with great potentials.3
Furthermore, many famous economists like Shumpeter, Marx and Kondratieff have
formed the innovation management and introduced different theories like the
Kondratieff-Waves4. So many different types and aspects of innovation have been
created since then and therefore some relevant terms will be explained in detail.
2.1 Definitions
Innovation and Invention
The meaning of Innovation can be represented as a formula:
Innovation = theoretical conception + technical invention + commercial exploitation

This formula already shows that innovation and invention are related to each other,
but they are still two different things and have to be clearly distinguished.
Furthermore the formula shows us that the conception of ideas is a part of
innovation. This is also the starting point for an innovation.
A new idea itself is only a thought or a vague concept. Therefore it is neither an
invention nor an innovation. Creating out of this idea a real tangible new artefact, like
a process or a product, makes it an invention. This is then the point where hard
work takes place, so that the invention becomes a product which brings the company
an advantage in competition. These later activities are the last part of the formula: the
commercial exploitation. 5
The innovation itself can be seen as the complete process, starting from the idea
until the commercial benefits this idea might give the corporation after a successful
3
4
5
implementation. As we will see later on, this process has to be managed and can be
supported by different methods.
Modification
The modification in contrary to the innovation is not the creation of a new product, but
the alteration or extension of an existing one. This can contain the improvement of
quality, change of configuration or appearance.6
Sony, for example, has introduced a new version of the Playstation Portable (PSP).
The new version is called “PSP - Slim and Light” and is smaller, has less weight and
more computing power. This is a clear example of modification.
Imitation
In this case, the innovation was made by somebody else and a replica which is often
lower in quality is created. But these replications are normally based on successful
products. But, if you manage to adapt these products on own products and
processes and maybe even improve them, then it is possible to have an economic
success even without making any innovation. 7
Entrepreneurship
Entrepreneurship is a subject taught in many high schools and colleges in the United
States and is actually defined as “the state of being an entrepreneur”. An
entrepreneur is an individual who owns, organizes, and manages a business,
assuming high risks.
The basic difference between the study of entrepreneurship and the one of
innovation management is the focus on the role of the individual. Moreover it deals
with how to grow a small business into a large and successful one. In other words
this means to live the “American Dream”.8
2.2 Innovation Types
All kinds of innovation have the application of knowledge in common and often
different kinds of innovation are linked to each other.
6
Wohinz J.W.: Industriebetriebslehre; lecture notes, 2006, p. 1-4
7
8
Studies have shown that, for example, product innovations are soon followed by
process innovations and a so called innovation cycle can be identified. Innovations
can be also seen on the one hand as major or radical innovations or on the other
hand as minor technological advances. The so called incremental innovations.9
Henry Chesbrough even wrote about disruptive innovation. These are innovations
like the mobile phone, the internet or the PC and are drastically changing our social
life and are therefore even one step further then radical innovations, which replaces
existing technologies, but does not have such a major impact on society.10
An overview of the most common types of innovation can be seen in Table 1.
Type of innovation Example
Product innovation The development of a new or improved product

Process innovation The development of a new manufacturing process
Organisational innovation A new venture division; a new internal communication
system; introduction of a new accounting procedure
Management innovation TQM (total quality management) systems; BPR
(business process re-engineering); introduction of
SAP/R3 (SAP is a German software firm and R3 is an
Enterprise Resource Planning product)
Production innovation Quality circles; just-in-time (JIT) manufacturing system;
new production planning software, e.g. MRP II; new
inspection system
Commercial/marketing New financing arrangements; new sales approach, e.g.
innovation direct marketing
Service innovation Internet-based financial services
Table 1: A typology of innovations11
The types of innovation shown in this table are already indicating that innovation is
more than just the development of new products. We also see that the range and
fields of innovations can be very different.
9
10
Chesbrough Henry: Open Innovation, 2006, p. 9
11
The processes and methods in the chapters below will mainly focus on product
innovation, but this does not necessarily mean that they are not also applicable on
other innovation types.
3 Innovation Processes
In this work, two major innovation processes will be introduced as already mentioned
in chapter 1. These processes will be the innovation process from Thom and the
“Stage-Gate process“ from Cooper. The decision to present these two processes
was made because Thom represents a very common approach in the German
literature on innovation management and likewise important for the English literature
is the process from Cooper.
Nevertheless there are three main parts which all innovation processes have in
common:
• Generation and production of ideas;

• Acceptance of ideas;
• Implementation of Ideas.
Some processes emphasize these steps very clearly, like the process from Thom,
and some, like the process from Cooper, have a more detailed division.
3.1 Thom’s Innovation Process
The Figure 1 presents the process introduced by Thom in the 80’s. Here the main
phases of an innovation process can be seen very clearly and are divided in more
specific steps. Also the role of the influence from the environment and the corporate
planning is considered. Environmental influences can be:
• Society;
• Politics;
• Ecology/Economy;
• Technology.
That means that changes in these fields can have influence on the corporate
planning and therefore on the development and innovation of new products in
general. It is the job of the corporation to satisfy needs which are arising in the
environment.12
12
Another important issue in this process is the innovation impulse which is also a
common part of all innovation processes. Impulses or sources for ideas can come
from different directions which we will discuss later on.
Figure 1: Innovation process from Thom13

In many processes in German literature, the role of two documents is very important.
These documents are the so called “Lastenheft” and “Pflichtenheft”, which in English
would mean respectively “requirement specification” and “functional specification”.
In the requirement specification the needs and wishes of the customer are written
down. Out of these requirements, technical specifications are derived and a
functional specification document is written.14
13
14
Verworn B., Herstatt C.: The innovation process: an introduction to process models; Working Paper;
p.11
3.2 Cooper’s Stage-Gate Process
Cooper defined several versions of the “Stage-Gate process” and in Figure 2 the
second generation process is shown. The first generation focuses more on technical
needs and the third generation is used by corporations who already have
successfully implemented the second generation. So the second generation is
referred to be the typical “Stage-Gate process” and therefore this version is
described here.
Figure 2: The Typical Stage Gate Model - From Discovery to Launch15
Stage-Gate breaks the innovation process into a predetermined set of stages, each
stage consisting of a set of prescribed, cross-functional, and parallel activities. The
entrance to each stage is a gate. These gates control the process and serve as
quality control and go/kill checkpoints. This stage-and-gate format leads to the name
“Stage-Gate process”. 16
15
Cooper R.G.: Winning at New Products, 2001, p. 130
16
Cooper R.G.: Winning at New Products, 2001, p. 129f.
This means stages are used to gather information and to reduce uncertainties,
whereas the stages are cross-functional, i.e. that different people from not only one
department of the company are involved. Furthermore each stage costs more than its
predecessor and before you go to the next stage you have to pass a gate where the
collected information is evaluated and a “go” or “no-go” decision takes place.
In the “Stage-Gate process” the three main parts of an innovation process are not so
clearly visible like in the innovation process of Thom. Nevertheless they can be also
identified here. A mapping of the three main phases and stages and gates is shown
in Table 2.
Main innovation phases Stages/Gates

Idea generation Discovery – Gate 1- Stage 1
Gate 2 – transition to second main phase
Idea acceptance Stage 2
Gate 3 – transition to third main phase
Idea realisation Stage 3 – Gate 4 – Stage 4 – Gate 5 – Stage 5 - Launch
Table 2: Assigning Stages/Gates to main innovation phases

The Gates and Stages will be described more detailed in the next chapter where the
methods are described as well.
Due to the fact that this “Stage-Gate process” is often used and cited in English
literature and in regard to the emphasis of this paper on English sources, this
process will be used to explain supporting methods in the following chapter.
But through the mapping in Table 2 of the different Stages and Gates to the three
main phases - which can be found in every innovation process - it is also possible
and easy to apply the described methods on other innovation processes.
4 Methods in the Stage-Gate Process
In this chapter the methods for each stage and gate in the process will be discussed.
Note that often a clear mapping of a method to one specific gate or process is not
possible. Often the methods are valid for more then one stage and some might be
used even in every stage and refined from stage to stage. Furthermore this paper
only covers the most popular methods, but much more can be found in the specific
literature (see the bibliography in chapter 6).
4.1 Methods for idea generation (Discovery Stage)

Before you really start with the process the question is how to get ideas. Thom
considered this point as innovation impulse in his project and Cooper included it as
the begin stage “Discovery” in the “Stage-Gate process”. This is a very important
step because without a good idea the whole process is worthless.
Modern approaches include more and more the user in the generation of ideas and
work with so called lead users to identify unarticulated needs. But also other
elements can be sources for ideas and they can be divided in internal and external
sources of ideas. Internal sources can be:
• Research and Engineering;

• Sales, Marketing and Planning;
• Production;
• Other company executives.
External sources are:
• Customers and prospects;

• Contract research organizations and consultants;
• Technical Publications;
• Competitors;
• Universities;
• Inventors;
• Unsolicited sources.
Identifying possible sources of ideas helps also a lot in finding good ideas and
although you will look first on internal sources, most of good new product ideas are
coming from external sources like the customer.17
4.1.1 Open Innovation vs. Closed Innovation
Due to the changing in the knowledge landscape (see Figure 3) Open Innovation has
become more and more important in the modern time. If you would have founded a
company in the beginning of the 1900’s, it would have been difficult to get information
from outside your company. Scientists like Edison who used their knowledge for
commercial purposes were considered as scientists of lower value. Many scientists
made a good work in understanding the world of physics, but did less to make their
ideas into successful businesses. Neither universities nor the government were
included in the economy research like nowadays. This leads the companies to the
decision to enforce their own research and development facilities to get new ideas.18
Figure 3: Knowledge Landscapes in Closed and Open Innovation19
But if you would start a company nowadays the situation is different and many factors
have made the closed innovation become obsolete. These factors are:20
17
18
Chesbrough Henry: Open Innovation, 2006, p. 21ff.
19
Chesbrough Henry: Open Innovation, 2006, p. 31,44
20
• Increasing availability and mobility of skilled workers: Skilled workers

change more often their workplace and bring new insights from their old
companies to their new working place. Moreover student exchanges have
increased intercultural exchange. For example, a study of 1998 showed that
more then 50% of the postdoctoral students at the MIT and Stanford
University were not US citizens.
• The Venture Capital market: The Venture Capital increased enormous in the
end of the 90s. So many companies who focused on their internal research
and development were confronted with the risk that skilled workers leave their
companies with critical knowledge of their core competencies and start up new
businesses.
• External options for ideas sitting on the shelf: Due to the shortening of the
product life cycles, it gets important to process knowledge quickly within the
research and development of a company. That means that if a company
cannot process the knowledge quickly enough, it will not always remain ready
on the shelf. The previous points have shown us that this knowledge can
leave the company through external start ups or employers can be hired by
other companies.
• The increasing capability of external suppliers: External suppliers have
also become more due to the increasing venture capital and expansion of
universities. Often these suppliers can offer even a better quality then the own
company can. So large companies can focus on their core competencies and
do not have to produce all artefacts of the value chain by themselves. But on
the other hand, these external suppliers are available to everybody and
enforce the competition as well.
These considerations have made it necessary and vital for companies to reconsider
there “Closed Innovation” concepts and move on to an open view. As seen in Figure
3, there are many knowledge sources outside the company and even within other
companies from which new great ideas can be derived. Moreover the access to
these sources has become much easier thanks to low cost high speed internet
access and online knowledge databases. Also universities are getting more and
more involved in the access of external knowledge (e.g., the Frank Stronach Institute
at the TU Graz) and are willing to apply their know-how on business cases.21
21
Chesbrough Henry: Open Innovation, 2006, p. 44f.
But “Open Innovation” does not mean to completely neglect the own research and
development and just rely on external sources. It means that good ideas can come
from inside and outside the company. In Table 3, the main differences between
“Open and Closed Innovation” paradigms are shown.
Open Innovation Principles Closed Innovation Principles

The smart people in our field work for us. Not all smart people work for us. We
need to work with smart people inside
and outside our company.
To profit from R&D, we must discover it, External R&D can create significant
develop it, and ship it ourselves. value; internal R&D is needed to claim
some portion of that value.
If we discover it ourselves, we will get it We don’t have to originate the research
to market first. to profit from it.
The company that gets an innovation to Building a better business model is
market first will win. better than getting to market first.
If we create the most and the best ideas If we make best use of internal and
in industry, we will win. external ideas, we will win.
We should control our intellectual We should profit from other’s use of our
property (IP), so that our competitors IP, and we should buy other’s IP
don’t profit from our ideas. whenever it advances our own business
model.
Table 3: Contrasting Principles of Closed and Open Innovation22

People who are more familiar with the approach of “Closed Innovation” will argue that
it might be problematic if ideas leak out of the own company and that you invest in
R&D and see the results leaking out to other companies. If you see it only from the
“Closed innovation” view this might be serious problems, but if you are aware that
there are many and strong forces, who diffuse knowledge, you can adept your
strategy toward these new conditions. “Open Innovation” companies should therefore
access, digest and utilize knowledge. For example, improving your own products has
nothing to do with cannibalizing your business. On the contrary, you might loose
possible profit with neglecting modification or innovation of products.23
22
Chesbrough Henry: Open Innovation, 2006, Introduction p. 26
23
4.1.2 Lead Users and Innovative Customers
The customer is another important part in finding new ideas. The idea of integrating
users in the innovation process also comes along with the concept of “Open
Innovation”. Furthermore it is the task of the company to identify the needs of users
and according to these needs to make new products. So who else could be more
suited to identify the needs of the user than the user itself? But if you work with
average users the results will also be just average. Hence Eric von Hippel introduced
the idea of Lead Users to identify new product ideas.24
“In the relatively slow-moving world of steels and autos, for example, new models often do
not differ radically from their immediate predecessors. Therefore, even the "new" is
reasonably familiar and the typical user can thus play a valuable role in the development of
new products.
In contrast, in high technology industries, the world moves so rapidly that the related real-
world experience of ordinary users is often rendered obsolete by the time a product is
developed or during the time of its projected commercial lifetime.”25
Knowing that, it is important to consider users who have more experience with the
new product and are confronted with it every day at work or in research. Furthermore
Hippel identified two characteristics for Lead Users:
• “Lead users face needs that will be general in a marketplace, but they face
them months or years before the bulk of that marketplace encounters them,
and
•Lead users are positioned to benefit significantly by obtaining a solution to
those needs.”26
The Lead User approach can be also seen as a process of 4 steps:27
• Laying the foundation: In the first step the target market and company goals
are identified.
• Determining the trends: Get in contact with people who are dealing with
emerging technologies and new applications in this field.
• Identifying Lead Users: Here you should find users who match the
description from above and that have relevant knowledge about the topic.
24
25
von Hippel E.: The Sources of Innovation, 1988, p. 106f.
26
von Hippel E.: The Sources of Innovation, 1988, p. 107
27
• Developing the breakthroughs: Lead users together with marketing and

technical personal come together in a workshop and in small groups on the
final product definition.
Some companies like Hilti, for example, have already successful implemented such a
“Lead User” process in their innovation management. Hilti looks for potential lead
users in the construction and demolition area and invites them for a weekend to join
the management team of Hilti. The managers of Hilti listen and try to understand the
problems of the lead users. Based on these insights, Hilti creates new product
concepts.28
4.2 Methods for Idea Screening (Gate 1)

After successful identification of potential good ideas for new products these ideas
have to pass the 1st gate of the “Stage-Gate process”. The “must-meet criteria” in this
gate can be strategic alignment, project feasibility, magnitude of opportunity and
market attractiveness, product advantage, ability to leverage the resources of the
company and fit with company attractiveness. To support the decision in this gate a
checklist for the criteria and a scoring model can be used. 29
A checklist can be seen as a general tool in all gates to identify if the must meet
criteria are met. But a checklist alone is often too little to make a clear decision and
tools, like scoring models can provide here additional help. Furthermore it can be
useful to categorize the type and kind of innovations at this point. That means
analyzing if it is a modification or imitation and defining the type (see chapter 2.1).
4.2.1 Scoring Model
The scoring model is an extension of the checklist. Here the criteria is not simply
listed, here rating scales are given to them. These rating scales can be differently
weighted and then summed up, so that an overall project score is the result. This
score is calculated through multiplication of the average score with the weighting
factor defined for the criteria. The results of the multiplications are summed up and
the outcome of this is the final project score.
The main advantages of a scoring model compared to a simple checklist are:
28
29
Chesbrough Henry: Open Innovation, 2006, p. 133
• A checklist just allows yes or no evaluations of criteria and no gradual

evaluation scheme like a scoring model.
• Furthermore a scoring model identifies through weighting of criteria that some
are more important then others. At a checklist this option is not given.
• With a scoring model different projects or ideas can be compared to each
other with the overall calculated score. In the following, ideas can be also
prioritised and weak ones can be abandoned.
A possible approach can also be that the must meet criteria for an idea are tested
with a checklist and the remaining should meet criteria are rated with a scoring
model. In this way ideas that are not feasible anyway can be separated at the
beginning and from the remaining the relative project attractiveness can be
calculated. 30
This method can be used in later gates as well but we will see that also other
methods are important. Here at a first idea screening this should be sufficient.
4.3 Methods in the Scoping Stage (Stage 1)

The ideas that have passed the 1st gate are now further investigated to gather more
information for a better evaluation in gate 2. The concept of this stage is to make
quick and inexpensive assessments concerning the market possibilities, technical
merits and financial aspects of the project. Possible sources for information at this
stage can be internet researches, internal reports, and contact with key users and so
on.31
The main activities in this stage can be summarised as following32:
• Preliminary market assessment: This is a quick market research mainly

using existing and available resources. With minimum costs as much
information as possible about market potential, attractiveness and growth as
well as customer needs and competition should be gathered.
• Preliminary technical assessment: The actions here are a technical
feasibility study, to determine if the company has the capability to produce the
new product itself or if it needs external suppliers and to identify technical risks
and think about how to handle them.
30
31
Cooper R.G.: Winning at New Products, 2001, p. 178ff.
32
• Preliminary financial/business assessment: At this early stage a financial

estimation is very speculative but nevertheless a first check if the company
has also the financial potential to develop the new product should be made
here.
• Recommendation and plans for Stage 2: Based on the results of the three
investigations a recommendation can be given to go on or to stop the
development. Furthermore a plan can be provided with information about
timeline, resources, deliverables and dates for the next gate.
Possible methods supporting this stage and the investigations made here can be:
• Gap Analysis
• Scenario Techniques
• Ansoff matrix
• SWOT analysis
4.3.1 GAP Analysis
The GAP analysis is an important tool for companies which are introducing frequently
new products. With this method a future gap can be calculated between the growth
objective of the company and predictions made on the basis of the production of
current products and the introduction of possible new products under the assumption
that you keep the current business strategies. A requirement to make these
estimations is a very detailed knowledge of the current internal and external situation
of the company. Helpful can be a SWOT analysis as described in chapter 4.3.4.
First of all a growth objective has to be determined. This can be for example the
annual turnover, market share, cash flow or profitability. Then influences of the
business cycle like inflation and deflation should be considered and the growth
objective should be adjusted in respect of these factors. Now a forecast for current
and new products based on historical data and future trends can be made and
represented in a graphical diagram as pictured in Figure 4.33
The gap between the forecast and the goal can be divided into two parts, the
efficiency or performance gap and the strategic gap. As seen in Figure 4 both gaps
are getting bigger with progression of time if no measurements are taken to prevent
this. To close the performance gap measurements are taken to reduce the costs
through rationalisation. These measurements are the easiest way to reduce the gap
33
Holt K.: Product Innovation Management, 1988, p. 244f.
and mainly existing products and strategies are affected but also through process
improvements and process innovations this gap can be reduced. On the other hand
the strategic gap can only be closed with the introduction of new processes and
products. It has also to be tested if there is a need of new technologies for the
production of the new products.34
Figure 4: GAP analysis35

To reach the goal it is necessary to close both gaps and hence it is essential to
consider the development of new products and new markets in the conception of new
strategies. The considerations to close the strategic gap are similar to the ones
discussed in the Ansoff matrix in chapter 4.3.3.
4.3.2 Scenario Techniques
Investments into new products are normally very risky investments and only a small
number of new ideas are really getting successful. But the greater the risk the greater
the possible benefit you can get out of it. Due to the high risk it is important to think
about future developments concerning new products. The scenario technique can be
used to inspect such developments and also financial impacts can be pointed out
with this method.
Initially a set of variables is chosen which are relevant to the description of the
situation like number of produced products, investment in marketing or political and
34
Gelbmann U. et al.: Innovital – Innovationsleitfaden, 2003, p. 16f.
35
cp. Haberfellner R.: General Management and Organisation, lecture notes, 2007
social factors. Modifications of these parameters should have a significant effect on

the future development. A potential approach is to assume a best and a worst case
and adjust the selected variables over the whole scenario according to this
assumptions. Both cases should be within reasonable boundaries. This describes a
range of variations and forms the so called planning cone (see Figure 5).
Further calculated scenarios should be within this cone. Moreover every variable can
be changed one after the other by the same amount and the impact on profitability
factors like return on investment, rate of return or payback period can be measured.
So important factors on which you should concentrate more carefully can be
identified.36
Figure 5: Scenario technique and planning cone37
Besides you should consider the further you go in the future the more the cone opens
and therewith the complexity and uncertainty increases as well. Moreover the chosen
parameters to describe the scenario can also affect each other and by changing one
parameter, like mentioned before, the others have to be adapted as well. These
dependences can be mapped for example in a matrix where on the axes the
parameters are listed and in the fields the kind of influence is noted down.
Indicators for the parameters and disturbing events as shown in Figure 5 should be
considered as well. An indicator for new customers could be for example the birth
36
Holt K.: Product Innovation Management, 1988, p. 244f.
37
cp. Gelbmann U. et al.: Innovital – Innovationsleitfaden, 2003, p. 21
rate if you produce baby food and disturbing events are unpredictable and can be
political or financial crises, earthquakes and other catastrophes etc. Finally it is
important to derive from the scenarios chances and risks for the company to react
better on future situations and to take the right measurements. The strategies derived
from the scenario technique are usually based on the most likely scenario but they
should also prevail in the other cases.38
4.3.3 Ansoff Matrix
The Ansoff matrix contrasts two major variables responsible for a business to grow:
markets and products. The results of this confrontation are four different strategy
options which are referring to the possible product-market combinations (see Figure
6).39
Figure 6: Ansoff Matrix40
The advantage of the Ansoff matrix is that it is extremely future oriented and if you
note down the current situation of the company in the matrix then only one of the four
fields will be filled out which creates a positive psychological effect to take further
steps. But it is also criticised that it shows an environment which assumes that there
is a lot of potential for growth but this might not be the reality. Therefore it is also
important to take possibilities like retrenchments in considerations. Moreover the
38
Gelbmann U. et al.: Innovital – Innovationsleitfaden, 2003, p. 20ff.
39
Trott Paul: Innovation Management and New Product Development, 2005, p. 387ff.
40
cp. Trott Paul: Innovation Management and New Product Development, 2005, p. 387
results should not be seen as panacea but as strategy suggestions and you should
not make the mistake to think only in products but also in strategies in this case.41
In the following the four strategies will be explained shortly42:
Market penetration strategy: This focuses on the increasing of sales of existing
markets with existing products. By extensive usage of the possibilities given by the
marketing-mix the market share of the product is tried to increase. An example for
such a strategy is the company Kellogs which increased the consummation of
cornflakes by promoting it as a snack which is not only eaten for breakfast.
Market development strategy: This strategy makes the products available for new
markets. So the company can count on the existing products but tries to enter new
market and open new segments. For example Mercedes who concentrated a long
time only on the luxury market segment for cars decided to enter the small car
market. Also the opening of new geographical areas through exports might be a
possible option here.
Product development strategy: This part is getting more important in the meaning
of innovation management because it deals with the creation of new or improved
products although to existing markets. For almost all companies this is a permanently
ongoing activity and it is important to keep on developing new products to remain
competitive.
Diversification strategy: Not only considering new products as chances for
business growth, this strategy also considers new markets. Some companies try to
utilize their existing knowledge base and technical skills for diversifications and other
combine it with acquisition. In the UK privatised electricity companies have also
bought privatised water companies and they could even use their experience in
provision of utility service, just to give an example for diversification through
acquisition. Furthermore different kinds of diversification are distinguished.
• The forward diversification means to infiltrate areas of the previous customers.

A manufacturer who opens a retail outlet would be an example for that.
• Backward diversification is for example a manufacturer who starts to produce
components which he previously purchased from an external provider.
• Horizontal diversification extends the existing production program with new
products which are somehow connected to the existing ones. Buying up
competitors is a horizontal diversification.
41
42
Trott Paul: Innovation Management and New Product Development, 2005, p. 388f.
Of course the newer the market and the product the bigger the risk and effort is and
less synergy effects can be used. That’s why diversification always bears the
greatest risk and market penetration the least. Nevertheless it is a good tool to
identify possible strategies for new products.
4.3.4 SWOT Analysis
The SWOT analysis is a very basic tool and should be already done in the early
stages of the innovation process but can be also useful to redo it later on. Results of
the SWOT analysis can be also used as input to other methods like the GAP analysis
and Ansoff matrix where you should have a good overview of the current internal and
external conditions. This information is provided by the SWOT analysis whereby the
strengths and weaknesses refer to the internal analysis and the opportunities and
threats to external.
Figure 7: SWOT Analysis43

The strengths/weaknesses and opportunity/threats can be collected in a list and as
shown in Figure 7 contrasted. Through this combination different strategies can be
derived. The best situation is when strengths meet opportunities. Strategies in this
field should be enforced because there you have the greatest potential to gain
advantages in competition. When weaknesses encounter opportunities you need to
catch up. That means that there are opportunities you can not profit from yet because
you do not have the internal abilities for it. The worst case would be the field of
Threats and Weaknesses. Activities in this area should be avoided. Finally the
strategies in the combination of strengths and threats should be assured so that you
can hold your current position in competition.
43
cp. Gelbmann U. et al.: Innovital – Innovationsleitfaden, 2003, p. 13
A very detailed approach of a SWOT analysis would be to list all strengths/

weaknesses and opportunities/threats and confront all of them one by one with each
other. This will cost some time but the result will also have a higher quality. Finally as
a result the SWOT analysis delivers strategy suggestions which can be further
discussed and have to be evaluated if they fit with the business goals and
philosophies. 44
4.4 Methods for the Second Screen (Gate 2)

Again the selected information from the previous state is reviewed in the gate. The
second gate does not differ very much from the first one and therefore more or less
the same must-meet and should-meet criteria can be evaluated again with check lists
and scoring models. Some additional criteria might be added as a result of the
investigations from stage 1. A quick financial calculation, for example of the payback
period, should be also done here. Furthermore portfolio techniques can be used here
as an additional method to choose the right project and investment strategies.
4.4.1 Portfolio Management
The portfolio management is a powerful but also complex tool for the selection and
prioritisation of new products. It also helps with the allocation of resources to projects
in order to achieve the business goals and it gives a good overview of the whole set
of projects, products or business units in general. In the book “Portfolio Management
for New Products” following explanation for portfolio management is given:
“Portfolio management for new products is a dynamic decision process wherein the
list of active new products and R&D projects is constantly revised. In this process,
new products are evaluated, selected, and prioritized. Existing projects may be
accelerated, killed or deprioritized and resources are allocated and reallocated to the
active projects.”45
A very common and often used representation in portfolio management is the bubble
diagram. There appropriate parameters to categorize the projects are chosen and
these parameters are then represented in a two dimensional X-Y plot. Possible
parameters can be:
44
45
Cooper R.G, Edgett S.J..: Portfolio Management for New Products, 2001, p. 3
• Fit with business or corporate strategy

• Inventive merit
• Strategic importance to the business
• Durability of the competitive advantage
• R&D costs to completion
• Time to completion
• …
In the plot the projects are placed as bubbles and the size, shape, colour and
shading of the bubble can be used to provide additional information about the project.
The size for example can give information about the needed resources and the
colour can categorize the project to a certain product line. Moreover the summarized
size of all bubbles in a chart must be a constant. That means by adding a new one
the existing ones must be reduced accordingly.46
Figure 8: Risk-Reward Diagram47

Moreover according to the quadrant the projects are placed they can be further
categorized (see Figure 8). The Boston Consulting Group uses for this the
expressions Stars, Problem Child (or Question Marks), Cash Cows and Dogs. The
newer literature refers to them as Pearls, Oysters, Bread and Butter and White
Elephant projects. The original portfolio uses business strength and market
attractiveness as description for the axes whereas newer risk-reward diagrams use
reward or the NPV (net present value) and the probability of technological success.
This NPV is the future stream of earnings (cash flow) from the project, less all
46
Cooper R.G, Edgett S.J..: Portfolio Management for New Products, 2001, p. 74ff.
47
cp. Cooper R.G, Edgett S.J..: Portfolio Management for New Products, 2001, p. 77
remaining development, capital and launch costs. However these two approaches
are pretty similar and also the product categorisations are showing some similarities.
Pearls: These are products with a great potential of success. Therefore they should
be enforced so a possible high reward can be collected from them. These are often
very new products which should become the future stars and also need some cash to
develop.
Bread and Butter: Projects including updating, modification or extension of existing
products are falling in this category. They have a very high probability of success but
the achievable reward is relative low.
Oysters: These projects have a high expected payoff like the pearls but here the
technological basis is missing. Only through new technology breakthroughs can
these products become successful and turn to pearls.
White Elephants: They might have begun as promising new projects but over the
time got constantly less attractive. They have low chance of success and also a low
chance of reward. If possible these projects should be killed as quickly as possible.
Recapitulatory you can say that there are various methods and types of portfolios
and there is no model which will fit all requirements and therefore every company
uses their own specific and adapted version of portfolio management.
4.5 Methods for Building the business case (Stage 2)

This is the last stage in the process before the real development phase starts which
the stage with the highest expenses is. Therefore this second stage should be
treated very carefully. It is the most important and difficult stage so far but often it is
not appropriately handled. But neglecting this stage can lead to big financial losses
through false investments later on. Detailed product definitions and the attractiveness
of the product should be made and decided here. The main part is building a
business case which contains the following three main parts:48
• Product and project definition

• Project justification
• Project plan – the path forward
48
Furthermore the creation of a business plan can be supported by tools already

mentioned like portfolio management, SWOT analysis, Ansoff matrix and lead user
methods. New methods supporting the activities in this stage are for example:
• QFD: Quality function deployment or also called house of quality

• Conjoint analysis
• Product clinic
• Positioning studies
• Benchmarking
In the following the business case will be discussed in more detail and then it will
become obvious where these methods can be integrated in the business plan.
4.5.1 The Business Case49
User Needs and Wants Study

First step is to identify the user needs and wants. With the help of the customer,
requirements for the new product are defined and future customer benefits are
designed. The lead user concept from chapter 4.1.2 can be very helpful here again.
But also a conjoint analysis which helps to prioritise the requirements based on the
customer view might be useful. This method is more effective then conventional
customer researches because here the customer must decide between two or more
product criteria and so critical requirements can be found.50 Another method
suggested by Cooper is the positioning study which positions the own product
relative to the competitor products by the view of the customer. All in all the customer
is crucial in this step because nobody can tell you better what your new product
should feature than the customer.
Competitive Analysis
Nevertheless you should also take a look at the competitors. Identify possible
strengths and weaknesses of their products and look at the pricing of comparable
products. A SWOT analysis (see chapter 4.3.4) can be helpful here to compare own
strengths and weaknesses with the one of the competitor and derive from this
opportunities and threats for the own product. A benchmark to compare your own
future products with competitor products might be also helpful in this phase.
49
50
Friesenbichler M. et. al.: Innovationsleitfaden – Ideen systematisch umsetzen, 2004, p. 37ff.
Moreover the competitor products can be arranged in a portfolio (see chapter 4.4.1)
to provide clues about the future development of these products and to calculate the
expected competition in this product segment. To get the needed information for
these researches fairs, trade shows, suppliers, sales and service people, business
journals, consulting firms, etc. might help.
Market Analysis
In a next step in the business case a market analysis takes place similar to the one
from stage 1 but in much more detail. Nevertheless tools from the first stage might be
re-used here, although in a more specific way. An Ansoff matrix (see chapter 4.3.3)
could provide some basic information but this might not be enough because the
analysis here should contain following points:
• Market size, growth and trends

• Market segments: their size, growth and trends
• Buyer behaviour: the who, what, when, where and how of the purchase
situation
• The competitive situation
When it comes to the finalisation of the project this information will be from
importance again to build the marketing plan.
Detailed Technical Assessment

The gathered information from the market and the customer needs now to be
translated into technical specifications. Critical here is that the product remains
technical and economical feasible on the one hand and on the other hand not to
disappoint the customer by cancelling important features. Here the quality function
deployment method can help (see chapter 4.5.2) and also a product clinic can
provide helpful insights to decide this dilemma. The product clinic can help to identify
possible gaps on the level of components and functions through comparison with
competitor products and market researches. So the own product can be enhanced
and possible irrelevant components for the customer needs removed or vice versa.51
Furthermore important topics at this level are issues concerning partner and sourcing
strategies and the manufacturability. Also some modelling, lab work and other
technical activities might take place here but only in a limited way. The real technical
work should be done in stage 3.
51
Concept Testing
Following the technical assessment a concept testing takes place which tests the
designed product with the customer. The idea is to assure that the designed product
really meats the customer needs and wants. It is important to be sure that the
customer has understood what he or she wants and needs and is also able to
verbalize these wishes. Also important is that you interpret these wishes correctly
and integrate it in the new product. But at this stage you still do not have a developed
product. So you should have some drawings, a model or maybe even a virtual
prototype to present the customer and also a list of the features, performance
characteristics and the estimated price should be provided to the test customer. The
showing of a concrete product concept is what this stage differs from a simple user
needs and wants study. Although this concept testing gives great information about
the project you should treat the results with care. That means if for example 30
percent of the questioned people have said they will buy the product this does not
necessarily mean that you have a market share of 30 percent. Because when real
money and commitment get involved the situation is different than in the conception
phase. Furthermore a common error is to include promising features in the concept
which will not be possible to include in the real one. Nevertheless this part should not
be underestimated because it is the last opportunity to change the concept before
you spend a lot of money in the actual development.
Financial/Business Analysis
After all these tests and analysis the product and the strategy is already defined and
also the target market is decided. Now the financial part will be investigated. The
already defined market share and estimated price should provide some basic
information to calculate the revenues. The technical features and design of the
product will help to guess the production costs and show you if you need to hire new
personal or buy new equipment for the production. Furthermore partnering or
outsourcing may be considered here. Also the costs for launch and marketing of the
product can be already guessed at this point. The calculation of payback period,
break-even time and the net present value might be required here as well.
Furthermore different scenarios can be calculated. For example assuming the
manufacturing costs are 25 percent higher then expected or the revenue is lower
then estimated. Under these assumptions the financial calculations can be repeated
and best and worst case scenarios can be calculated like described in chapter 4.3.2.
Furthermore the so called ECV (expected commercial value) of the project can be
calculated (see Figure 9). This value includes the probability of technical and
commercial success in the calculation.
Figure 9: Expected Commercial Value52
Plans of Action
The last action in the business case is to create an action plan which contains
tentative information how to handle the following stages and consists of:
• A recommendation on the future of the project

• The detailed development plan
• Tentative plans for testing and validation
• Tentative manufacturing, operations or supply plans
• A tentative marketing plan
This concludes the business plan and should provide all necessary information to
decide whether going on with the development, change the product or stop the whole
process before you waste your money in developing a useless product.
4.5.2 Quality Function Deployment (QFD) – House of Quality
This method comes originally from the Japanese ship building industry and was later
adopted by the automotive industry whereby it came also to the western world. Due
to its graphical representation in matrix format (see Figure 10) it allows to describe
52
complicated coherences in an easy and understandable way. Furthermore it allows

translating customer requirements into technical concepts and designs which makes
it interesting for the business case. The customer requirements are added in the
chart of Figure 10 where the “WHAT” is written. Then the “HOWs” are added in the
appropriate field by the technical personal, describing how they want to satisfy the
requirements previously defined by the customers. In a next step the resulting
relationships of “HOWs” and “WHATs” are rated in the relationship matrix (e.g.
strong, medium or weak). Now we jump to the “HOW MUCH” field where it is decided
how much of the “HOWs” are needed. That means that the technical solutions are
more clearly specified through the “HOW MUCHs”. For example if the “HOW” is
quality program management, the “HOW MUCH” can be applying ISO 9001.
Figure 10: QFD - House of Quality53

The roof of the QFD builds the correlation matrix. There the relations between the
design requirements are checked and possible conflicts might be revealed.
Additionally data on competitor products might be added if available. This data is
entered in the customer competitive assessment and engineering competitive
assessment fields.
53
Zandin K.B.: Maynard’s Industrial Engineering Handbook, 2001, p. 13.75
With the data entered in the QFD diagram further plans for the product and the
design of the product can be discussed and in a following step product engineering
activities can be analysed.
In this second phase of QFD, design requirements and part characteristics are
introduced as the new “WHATs” and “HOWs”. The characteristics of the parts
needed to fulfil the requirements are entered in the matrix (respectively only the most
important ones are entered to maintain the readability of the diagram).
In a third phase key process operations are used as “HOWs” and the part
characteristics as “WHATs” and in the last one the key process operations are
changing to the “WHATs” and the production requirements become the “HOWs”.
This concludes in the four phases of the QFD. After each phase engineers and
management personal are coming together to work as a team on the analysis of the
collected material and try to optimise the results. This ensures that as much as
possible of the existing knowledge in the company is used to define a high quality
product.54
4.6 Methods before go to Development (Gate 3)

Here no real new methods are introduced but nevertheless it is maybe the most
important gate in the process. Again must and should meet criteria can be evaluated
with checklists and scoring models. Furthermore the business case created in the
previous stage must be checked very carefully and is the key deliverable in this gate.
Moreover this is the last gate before you will actually develop your product and with
that enter the area of heavy spendings. That is why decisions must be elaborated
and reasoned carefully. All available information gathered in previous stages must be
reviewed again.
The market is researched, the product is defined, the financial matters have been
evaluated and the technical feasibility and manufacturability have been analysed. All
this should be sufficient to decide if you go on to development or not.55
4.7 Methods in the Development Stage (Stage 3)

When decided to go on in Gate 3 the real development starts. In this stage the
emphasis is on technical work and the outcome should be a prototype which will be
then the main decision basis for Gate 4. Beside the technical work the customer,
54
Zandin K.B.: Maynard’s Industrial Engineering Handbook, 2001, p. 13.75ff.
55
market and competition should not be neglected. Again lead user methods are very
important in creating the prototype.56 Further methods important here are:
• Rapid prototyping
• Quick and dirty
• Using Project Management Software (including project charts and milestones)
The Quick and dirty approach originally comes from the software development and
means to create a quick solution to a problem which serves more as a temporary
workaround. Here it can be used to implement a prototype or at least as a
compromise of some features which would involve cost intensive development work
which does not need to be done at this stage.
Another approach the rapid prototyping will be explained more detailed in the
following chapter.
4.7.1 Rapid Prototyping
It might be useful to develop several prototypes with different specifications which

can be compared by lead users. The more prototypes developed the better the
possibilities of comparison and in order that the whole process does not take too long
the idea of rapid prototyping was invented. Issues concerning manufacturing
possibilities should be also considered at this point.
Ten years ago the development time was taking some years but today it is already
reduced to months. Sometimes it might be even better to go with a not 100 percent
correct product to the market and take advantage of the business opportunity than
waiting until you have achieved a perfect product and somebody else was faster on
the market than you. Later on possible mistakes can be fixed with updates and
upgrades.
To be that quickly in development new technologies for creating prototypes must be
used. 3-D printing is one of them and Stereolitography is the most common approach
of the 3-D printing used in the context of rapid prototyping. At this method a laser
solidifies a liquid polymer and by doing so layer by layer of a 3-D model is created.
The process of Stereolitography works as following:
• Design a 3-D model with a CAD (computer aided design) program.

• Special software cuts the model into layers.
56
• The 3-D printer draws the layer on the liquid polymer and hardens it.
• The platform on which the prototype is created is lowered by the height of one
layer and the next layer is drawn on the surface of the polymer.
There are also other methods for 3-D printing like SLS – Selective Laser Sintering or
Fused Deposition Modelling but Stereolitography is known to deliver the best and
most accurate results. Although it is not such a fast process because it might take
one to two minutes per layer which results in an overall time of about 6 to 12 hours.57
Of course not in every business a 3-D model might be adequate but the creation of a
virtual prototype or interactive model might help a lot to evaluate the new product
with the help of the customer. The chosen method for prototyping depends highly on
the kind of product. Some other more general measurements to reduce cycle time
are:58
• Do it right at the first time: If you avoid going back in the process and repeat
doing same things again a lot of time can be saved.
• Homework and definition: The clearer the project is defined and background
research is done the easier and faster the project will be to handle later on.
• Organise around a multifunctional team with empowerment: Teams consisting
of members from different areas help to keep the time schedule of the project
and promotes parallel processing.
• Parallel processing: Through parallel processing more things are getting done
at the same time and the process becomes multifunctional.
• Prioritise and focus: By concentrating on the important points and focusing the
resources on them the work will be done better and faster.
With project management tools like MS-Project the activities in this stage which are
critical in terms of time can be organized and dependencies between the tasks can
be identified. Milestones are normally also integrated in these tools and work as
checkpoints to measure if you are within schedule and budget. For the representation
of the chronological list of activities Gantt charts for simple and critical path plans of
more complex projects can be used.59
57
58
Cooper R.G.: Winning at New Products, 2001, p. 258ff..
59
4.8 Methods before go to Testing (Gate 4)

The output of the development phase which is mainly the prototype but also the
development work itself is checked. The developed product should be compared with
the specifications and potential discrepancies must be explained and discussed. Also
the project timeline can be checked if all milestones have been reached and
completed as planned. Again the methods explained in the previous gates, like
checklists, can support the decisions here.
Based on the new gained information, economic matters are checked again and the
budget is reviewed too at this gate. Furthermore the plans for the next stage are
approved and potentially released for future execution. The plans validated here are
the marketing and operation plan.60
4.9 Methods for Testing and Validation (Stage 4)

At this stage the product is tested concerning its usability and viability but also the
production process and customer acceptance should be validated. Common actions
at this point are:61
• In house product tests

• User or field trials of the product
• Trial, limited or pilot production
• Pre-test market, test market or trial sell
• Revised business and financial analysis
Sometimes it can happen that due to the test runs in this stage the product or some
processes concerning the product are found not to be ok and then it is necessary to
go back to stage 3 again. Methods helping to make the appropriate analysis and
might also help to prevent critical errors which can later on cause great damage can
be:
• FMEA
• Ishikawa diagram (fishbone diagram)
• Poka Yoke
60
61
4.9.1 FMEA – Failure Mode and Effect Analysis
This method does not only find failures in products, it can be also used for process
and system analysis. Originally implemented in the 50ies by the U.S. aerospace
industry it became now a common method in many industries.
The analysis should be done in a group to unfold its full potential and for every part in
the product (or system) all potential failure modes should be listed. To reduce the
complexity of the method only the parts which are identified to be critical to failures
can be analysed. For this investigation the whole team should work together and use
its experience to make the list of failures as complete as possible. For each part an
entry in a database like shown in Table 4 has to be made.
Part: Alternator Controller

Function: Regulating charge
Seriousness
probability
probability
Detection
Failure
Potential
Failure Failure Counter Detection
failure
mode effect measure measure
risk
100%
Transistor Battery Parallel
10 2 function 4 80
breakdown discharged circuit
check
Table 4: FMEA62
After successful identification of the failure the possible effect has to be entered in
the appropriate column and a counter measure must be found to eliminate the failure.
Furthermore the way how the failure can be detected when it happens must be
entered in the detection measure field. After these steps have been done an
evaluation is made of the probabilities of each event from which a total potential
failure risk can be calculated.
The seriousness is rated on a scale from 1 to 10, where 10 is very serious and 1 not
serious at all. Failure and detection probability are also rated on a scale from 1 to 10,
where 10 is a very high probability. Finally the potential failure risk can be calculated
by multiplying the three values and therefore it can be between 1 and 1000.63
To support this calculations a simple visualisation of cause and effect as provided by
an Ishikawa diagram can help here. In this diagram all possible causes which are
62
63
Zandin K.B.: Maynard’s Industrial Engineering Handbook, 2001, p. 13.77ff.
leading to a distinct effect are broken down to main and auxiliary effects and are
visualised in a clear arranged diagram which has the shape of a fishbone. 64
The results of this analysis can be used to redesign the product or some parts of it to
reduce possible failure sources.
4.9.2 Poka Yoke
In addition to FMEA an error proofing or poka yoke method can be used as it is

called in Japanese. It deals with the prevention of special causes which are leading
to errors or the inspection of every produced item to decide if it is defective or
acceptable. So to say poka yoke avoids errors from happening or makes the mistake
visible at a glance.
Furthermore poka yoke identifies two stages where defects can appear. Either the
defect is about to happen or it has already happened. Poka yoke methods have three
main functions to prevent such defects: Shutdown, Control and Warning. Whereby
the shutdown function in combination with the control function the most effective is
because the production process is stopped until the defect is repaired. The warning
function still allows continuing if the worker ignores the warning.
Depending on the process and situation different functions will be installed. Typical
methods for control functions are:
• Contact methods: The physical or energy contact from the product with a
sensing device is measured at this method and appropriate actions are
executed.
• Fixed value methods: If a fixed number of parts are needed to add to a
product this method is employed. The device counts the number of parts
needed and when this number is reached a signal is given to the worker.
• Motion step methods: This method is used to determine if a certain motion has
happened within a defined period of time.
For these methods different switches and sensing devices are available but in the
end it is the important part of poka yoke to find the appropriate methods for each
specific situation.65
64
65
Oberschmid H.. et. al.: Industrial Engineering, lecture notes, 2007, p. 6.12ff.
4.10 Methods before go to Launch (Gate 5)

This is now the final gate before the new product will be launched on the market. It is
therefore the last possible point where the product can be still cancelled if it is
considered as not suitable for the market. Therefore the results of the tests and
validations of stage 4 are reviewed and evaluated. The expected financial return and
start up plans are critical criteria for passing this stage. Maybe methods and tools
introduced in the previous stages and gates are redone with possible new
information available at this gate to be sure to make the right decision. 66
Especially the financial analysis should be reviewed and calculated again at this
gate. The net present value and expected commercial value as explained in the
business case in chapter 4.5.1 are important to be checked again. Now it should be
also possible to make a very exact guess of marketing and production costs, sales
volumes, final prices and profit margins.67
4.11 Methods for the Launch of the New Product (Stage 5)

At this final stage the actual innovation is already at the end. Now it is about to
develop a good marketing launch plan to promote the new product. The marketing
plan specifies three main points:
• Marketing objectives
• Marketing strategies
• Marketing programs
These aspects should not be just considered at this stage; already at the discovery
stage you should start thinking about these things. In stage 2 when it is about
building the business plan a tentative marketing plan must be already made (see
chapter 4.5.1). Therefore the marketing plan is an iterative plan which has to be
reviewed at important steps in the product development process. Moreover
marketing objectives must be set, whereby objectives or goals should be always
“SMART – Specific, Measurable, Ambitious, Realistic and Terminated”.
The situation size-up is core aspect of every market analysis. This is the point where
all collected information is evaluated and the question is asked what this information
means for the action plans and what further actions have to be made. Information
66
67
about the market segments, buyer behaviour, competition and a general market
overview should be part of such a detailed market analysis.
Finally a product strategy is developed which goes hand in hand with the selection of
the target market. Having already a complete product and product definition the
target market and product strategy is more or less given. After these matters are set
it is about to concentrate on distributing channels and pricing strategies. A very
important distributing channel nowadays is e-commerce. This gives the opportunity of
direct-sell the product and to address a very large group of customers worldwide.
Moreover the increasing usage of e-commerce in today’s business almost forces the
usage of it in your own company.68
Considering pricing strategies respectively calculations target costing, price- , break-
even- and profit margin calculation can be used.
4.11.1 Price Calculation
A very popular method in German literature to calculate the retail price is the so
called overhead calculation. The schema of this calculation is shown in Table 5.
Based on the manufacturing costs, which consists of the material costs, production
costs and special charges of the production, the retail price is calculated step by
step. But this method should be just seen as an orientation and can be used to
determine following information:69
• The expected product costs (pre calculation): The expected costs are
calculated based on parts lists, work plans and construction documents.
Furthermore the overhead calculation divides the costs in overhead costs and
direct costs. The direct costs can be assigned directly to the cost object but
the overhead costs are allocated via percentage rates. This is a bit of a
problem because the overhead costs can not be calculated exactly.
• Price justification (post calculation): After the production is already in process
the real values of the costs are known and can be compared with the
estimated values.
68
69
Friesenbichler M. et. al.: Innovationsleitfaden – Ideen systematisch umsetzen, 2004, p. 57
Another approach is the so called contribution margin which is the difference

between the sales and the variable costs. This value can help to make decisions
concerning make or buy and determine lower price limits.70
cost of goods manufactured

+ administrativ overhead
(in % from manufacturing costs)
= primary costs 1
+ selling expense
(in % from manufacturing costs)
+ special charges of the sales
= primary costs 2
+ profit
= net target price
+ discount
+ price reduction
= gross target price
+ sales tax
= retail price
Table 5: Overhead calculation71
Further methods to set the price mentioned by Robert G. Cooper are:72
• Perceived value to the customer: If the product is new to the company but
not new to the market, then the price is given by the competitive situation.
• Value-in-use pricing: The overall costs and the benefits of using the new
product instead of a competitor product determine the price.
• Lifetime cost or value: Customers might not be so interested in the initial
price of a technological product then in the lifetime costs. Also availability of
spare parts, service contracts and other costs after the initial purchase must
be considered.
• Outside-in vs. inside-out pricing: Outside-in pricing determines the price
based on the customer needs and what he is willing to pay for the product.
Inside-out pricing considers the internal costs of production and the desired
profit margins.
70
71
72
Cooper R.G, Edgett S.J..: Portfolio Management for New Products, 2001, p. 225f.
4.11.2 Target Costing
The idea behind target costing is that for every product just one market price exists
which will prevail. This market price can be seen as the price that the majority of the
customers are willing to pay and therefore the firm must be able to offer the new
product at this price. Due to the fact that 80% of the costs are already created in the
early stages of the product development, the target cost must be already considered
at this time. Therefore target costing considers the needs of the customers in the
price and cost management and furthermore it is based on the fundamental idea that
not the individual costs but the prices offered by the competitors are determining the
level of enforceable prices on the market. Moreover employees from both areas,
technical and business management, should come together in the development
phase of the new product to define the target costs.73
Figure 11: Target Cost approach74
73
74
Cp. Friesenbichler M. et. al.: Innovationsleitfaden – Ideen systematisch umsetzen, 2004, p. 64
The accomplishment of the target costing can be divided in the three components of
determination-, partitioning- and control of target costs (see Figure 11).
For the determination of the target costs the target price has to be determined first.
This is the price the customer would be willing to pay for the product. In a second
step the target profit is determined which is the desired profit the firm wants to
achieve with the new product. From these two values the allowable costs can be
calculated by subtracting the target profit from the target price. The allowable costs
should not be exceeded in the manufacturing of the product in order to guarantee
market success. Beside the allowable costs also the forecasted costs, which would
be necessary to produce the product based on the existing technology and
processes, have to be considered. Theses costs are referred as drifting costs.
Between the drifting costs and allowable costs the target costs are defined. To close
the gap between the drifting- and allowable costs the target costs are portioned
according to the parts and components of the product. Finally the results of the
portioning are checked in the target cost controlling step. The results are therefore
represented in a graph which visualises parts of the product which are clear over the
desired target costs. So potential targets for cost reduction are identified easily and
the best relation between customer value and product costs can be derived.75
4.12 Post Launch Preview

Now the product is already (hopefully) successful introduced to the market and after
some time, which is normally about 9 to 19 months, the new product becomes a
normal one in the companies product line. This is the point where the innovation
process is over and some evaluations about the process can be done. The latest
data on revenues, costs, expenditures, profits and timing are checked and compared
with the expectations. A final post-audit marks the end of the project. There strengths
and weaknesses of the project are discussed and what was learned from the project
and how it could be done better next time is assessed.76
Furthermore to guarantee to keep a good level of quality and to get better with every
new project, following methods can be used:
• Kaizen
• CIP – Continuous Improvement Process
• 5S Framework
75
76
4.12.1 Kaizen
These three methods listed above are more philosophies which should be lived by
every employee and manger in the firm. Kaizen means translated “change for the
better” or “improvement”. It has its origin in the Zen-Buddhism and is an umbrella
term for all improvement activities in all areas of the company. Unlike innovation
Kaizen happens continuous and incremental. It involves the whole company and not
just a little innovation team. Moreover it is better suited for slow growing economy but
nevertheless Kaizen can help to improve the overall quality of the firm and the
innovation processes as well.77
4.12.2 CIP – Continuous Improvement Process
The continuous improvement process is a task within Kaizen and considers all
workers as an important part because each of them knows his or hers work best and
can therefore improve it more quickly than anybody else. Within this philosophy the
reaction on problems should not be just punishment, on the contrary mistakes should
be considered as opportunities to learn from them and to improve the process in the
future. The basic principles CIP define it as a:78
• Customer orientated strategy: That means that all activities will have a
positive affect on the customer satisfaction in the areas of costs, quality and
services.
• Process oriented thinking: Not only the result is important but also how it
was created.
• Problem solving medium: Everybody in the company should work together
on the solution of problems and therefore an appropriate environment must be
created.
The problem solving strategy applied here is the “PDCA” strategy. This stands for:
• Plan: This means to describe the problem, search for possible causes as well
as to determine the target criteria and work on a possible solution approach
and choose one approach. Finally establish the action plan and conduct it.
• Do: Try out the new work process and record data.
• Check: Evaluate the results.
• Act: Agree on a new standard and describe it.
77
Oberschmid H. et. al.: Industrial Engineering, lecture notes, 2007, p. 6.2f.
78
Oberschmid H. et. al.: Industrial Engineering, lecture notes, 2007, p. 6.5
Moreover the CIP philosophy tries to avoid wastage, which can be over-production,
inefficient processes, unnecessary processes, large stock or work faults. These
activities should be removed from the actual process and replaced with value
producing activities. This does not mean to work faster but more efficiently. 79
These philosophies might help to learn from mistakes made in the innovation process
and to learn from these mistakes to improve it next time. Furthermore they will help to
maintain the new gained standard through an innovation and not to make steps back
and invent the same things again.
79
Oberschmid H. et. al.: Industrial Engineering, lecture notes, 2007, p. 6.7ff.
5 Synopsis
The Stage Gate process from Cooper is just one of many possible ways how to
organise innovation in your firm. But more difficult than the structures of the different
processes is to implement it successfully in the own organisation. This requires often
changes and changes are not always accepted easily.
The methods described in this paper should help to fulfil the tasks in the stages and
gates of the process. These methods can be also applied to other innovation
processes because the main structure of generation, acceptance and implementation
of Ideas is always the same. But you can not say that a certain method is just valid
for one step or stage in the process. Often methods have to be reviewed every level
and new gained information must be added. For example the lead user approach is
important in almost every stage of the process. Also the gates have more or less the
same methods for making the go or kill decision. There do exist of course more
methods than described here and some might be more useful than others depending
on the type of the new product. However it is important that you are aware of them
and use them in an appropriate way. Especially in the early stages of the process it is
important to make detailed investigations because the earlier you realise that your
new product is not going to be successful the less money you are wasting with it.
Figure 12: Relation between life cycle and costs80
80
Figure 12 shows that the influence you have on the project in the early stages is very
high. So if you start producing an unprofitable product you will have little influence on
correcting the mistakes and waste a lot of money. But the innovation process and the
methods are not only helping to find out if your new product will be successful or not,
they also help to develop sales strategies and place your product on the market.
Competitive advantages by analysing the market and the competitors can be created
as well.
This should be already reason enough to think about these concepts and apply them
in the real business. Nevertheless every project is different and you should still
remain flexible and adopt your process on the current conditions. Knowing that the
stage gate process is an iterative process and insights from every execution of it
should be recorded and incorporated in the next one.
6 Bibliography
Chesbrough H.: Open Innovation – The New Imperative for Creating and Profiting
from Technology, Harvard Business School Press, Boston/Massachusetts, 2006
Cooper R.G.: Winning at New Products - Accelerating the Process from idea to
Launch; Third Edition, Basic Books, New York, 2001
Cooper R.G, Edgett S.J.: Portfolio Management for New Products, Second Edition,
Basic Books, New York, 2001
Oberschmid H., Embst S., Stugger A.: Industrial Engineering, lecture notes, Fourth
Edition, TU Graz, 2007, p. 6.12ff.
Friesenbichler M. et. al.: Innovators - Innovationsleitfaden – Ideen systematisch
umsetzen, private publishing house, Graz, 2004
Gelbmann U. et al.: Innovital – Innovationsleitfaden – „Der Weg zu neuen
Produkten“, private publishing house, Graz, 2003
Haberfellner R.: General Management and Organisation, lecture notes, TU Graz,
2007
Holt K.: Product Innovation Management, Third Edition, Butterworths, Cambridge,
1988
Trott, P.: Innovation Management and New Product Development; Third Edition,
Prentice Hall, Pearson Education, 2005
Verwon B., Herstatt C.: The innovation process: an introduction to process models,
TU Hamburg, 2002
von Hippel E.: The Sources of Innovation, Oxford University Press, New York, 1988
Wohinz, J.W.: Industriebetriebslehre; lecture notes, TU Graz, 2006
Zandin K.B.: Maynard’s Industrial Engineering Handbook, Fifth Edition, McGraw-Hill,
2001
7 Tables and Figures Index
Table 1: A typology of innovations.............................................................................. 8

Table 2: Assigning Stages/Gates to main innovation phases ................................... 13
Table 3: Contrasting Principles of Closed and Open Innovation............................... 17
Table 4: FMEA.......................................................................................................... 39
Table 5: Overhead calculation .................................................................................. 43
Figure 1: Innovation process from Thom .................................................................. 11

Figure 2: The Typical Stage Gate Model - From Discovery to Launch ..................... 12
Figure 3: Knowledge Landscapes in Closed and Open Innovation .......................... 15
Figure 4: GAP analysis ............................................................................................. 22
Figure 5: Scenario technique and planning cone...................................................... 23
Figure 6: Ansoff Matrix ............................................................................................. 24
Figure 7: SWOT Analysis ......................................................................................... 26
Figure 8: Risk-Reward Diagram ............................................................................... 28
Figure 9: Expected Commercial Value ..................................................................... 33
Figure 10: QFD - House of Quality ........................................................................... 34
Figure 11: Target Cost approach.............................................................................. 44
Figure 12: Relation between life cycle and costs...................................................... 48

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Methods in the Product Innovation

Hans Peter Dormann

Institute of Industrial Management and Innovation Research

Director of the Institute: o.Univ.-Prof. Dipl.-Ing. Dr.techn. Josef W. Wohinz

Graz, November 2007

2 Basics of Innovation Management

Innovation = theoretical conception + technical invention + commercial exploitation

2.2 Innovation Types

Type of innovation Example

Product innovation The development of a new or improved product

Table 1: A typology of innovations11

• Generation and production of ideas;

3.1 Thom’s Innovation Process

Figure 1: Innovation process from Thom13

3.2 Cooper’s Stage-Gate Process

Figure 2: The Typical Stage Gate Model - From Discovery to Launch15

Main innovation phases Stages/Gates

Table 2: Assigning Stages/Gates to main innovation phases

4 Methods in the Stage-Gate Process

4.1 Methods for idea generation (Discovery Stage)

• Research and Engineering;

External sources are:

• Customers and prospects;

4.1.1 Open Innovation vs. Closed Innovation

Figure 3: Knowledge Landscapes in Closed and Open Innovation19

• Increasing availability and mobility of skilled workers: Skilled workers

Open Innovation Principles Closed Innovation Principles

Table 3: Contrasting Principles of Closed and Open Innovation22

4.1.2 Lead Users and Innovative Customers

• Developing the breakthroughs: Lead users together with marketing and

4.2 Methods for Idea Screening (Gate 1)

4.2.1 Scoring Model

• A checklist just allows yes or no evaluations of criteria and no gradual

4.3 Methods in the Scoping Stage (Stage 1)

• Preliminary market assessment: This is a quick market research mainly

• Preliminary financial/business assessment: At this early stage a financial

4.3.1 GAP Analysis

Figure 4: GAP analysis35

4.3.2 Scenario Techniques

social factors. Modifications of these parameters should have a significant effect on

Figure 5: Scenario technique and planning cone37

4.3.3 Ansoff Matrix

Figure 6: Ansoff Matrix40

• The forward diversification means to infiltrate areas of the previous customers.

4.3.4 SWOT Analysis

Figure 7: SWOT Analysis43

A very detailed approach of a SWOT analysis would be to list all strengths/

4.4 Methods for the Second Screen (Gate 2)

4.4.1 Portfolio Management

• Fit with business or corporate strategy

Figure 8: Risk-Reward Diagram47

4.5 Methods for Building the business case (Stage 2)

• Product and project definition

Furthermore the creation of a business plan can be supported by tools already

• QFD: Quality function deployment or also called house of quality

4.5.1 The Business Case49

User Needs and Wants Study

• Market size, growth and trends

Detailed Technical Assessment

Figure 9: Expected Commercial Value52

• A recommendation on the future of the project

4.5.2 Quality Function Deployment (QFD) – House of Quality