2.1.2 Evaluating the innovation possibilities for the company


The innovation possibilities may be market related, e.g. a new market niche, a growing market area; technology related, e.g. a new process, increased automation; resource related, e.g. a new crop, a new ingredient; society related, e.g. increased income, poorer health; consumer related, e.g. single complete meals, children-friendly meals. These innovation possibilities need to be analysed against the company's capabilities and the company's objectives. The company evaluates from 'might do' to 'can do' to 'should do'.

The company's climate and capabilities are a major evaluation factor in studying innovation possibilities. One company may be very conservative, and not want change, so it chooses a low level of innovation as the company climate and therefore in its business strategy. Another company may want to be at the forefront of change, so it has a company climate of innovation, and includes innovation as a major part of its business strategy. This incorporation of innovation into the company philosophy sets the basis for the product development. If the company has low-level innovation, product development consists of cost cutting and minor product improvements; at high-level innovation, product development is searching for a unique product that will cause a major change to industry, market and consumers. Many companies have a mixture of innovation and conservatism.





The company may think of change as technical, but it is the commercial change, particularly as related to the consumer, that is the important change. This spectrum is also related to risk-taking: companies can vary from aversion to risk to seeking risk. It is important to recognise the present level of innovation in the business strategy and also the philosophy for risk-taking in the company.

Companies cannot quickly change from one level of innovation to another. Before viewing the innovation possibilities for the company, it is often interesting for the company to take a look at itself:

     Is it blinded by the glare of the oncoming future, trying to muddle along in
        its present markets and technology?

     Is it searching fearlessly and widely for new opportunities?

     Is it moving in a focused direction with a strong sense of purpose?

There are basic company qualities that affect evaluation of possibilities such as size of the company, financial status, type of product mix, place in the market, standard of production and marketing. But when judging the innovation possibilities, it is more important to study the company's experience, expertise and knowledge in innovation. It is important to make a quantitative analysis of the company's rating in innovation, and it is helpful to use a set of innovation indices and compare these, if possible, with the ratings of other companies or the industry in general. Various suggestions have been made for innovation indices, including the success of new products, new product development effectiveness and the innovation level of the company as shown by Kuczmarski (1996). He suggested that the following indices should be determined over a three-year period.

1. Success rate of new products:

    (a) survival rate: new products still on market/total number of
        products commercialised,
    (b) success rate: new products exceeding revenue forecasts/total number
        of products commercialised,
    (c) innovation sales ratio: cumulative annual revenues from new products/
        total annual revenues.

2. New product development effectiveness:

    (a) R&D innovation effectiveness ratio: gross profits from commercialised
        new products/R&D expenditures to new products,
    (b) return on innovation: cumulative net profits from new products/
        cumulative new product total expenditures for all commercialised, killed
        and failed new products,
    (c) process pipeline flow: number of new product concepts in each stage of
        the development process at year-end,
    (d) innovation revenues per employee: total revenue from new products/
        number of employees devoted to innovation initiatives.

3. Innovation level:

    (a) R&D innovation emphasis ratio: R&D expenditure to new products/ total
        R&D expenditure,
    (b) newness investment ratio: expenditure to new-to-world products/new
        products total expenditures,
    (c) innovation portfolio mix: percentage of products new-to-the-world,
        line extension, repositioning, new-to-company, product line improvements.

These are quantitative measures (metrics) of new product development success and effectiveness, and of the innovation level of the company, and these can be used to compare the company's performance with that of other companies. Campbell (1999) studied innovation in manufacturing companies in New Zealand over a five-year period using a simple comparison of product success:

     number of new products;
     number of improved products;
     new and improved products as percentage of total sales;

and asked the companies to state their level of success in new products and their level of change in technology as shown in Table 2.2.


Table 2.2 Company innovation indices in New Zealand manufacturing over five years

Innovation indices Highly innovative Moderately innovative Least innovative Number of new products 26 9 8 Number of improved products 48 22 5         New products, % of total sales 42 19 18 Improved products, % of total sales 32 25 15         Success of new products*               Change production processest 2.6 2.5 1.9 Change management, marketing, support systemst 3.5 2.7 2.4 Comparative status of plant equipment+ 2.9 2.9 2.1

* Scores, 1 (most failed) to 5 (highly successful).
^t Scores, 1 (not at all) to 4 (completely).
⁺ Scores, 1 (more than 10 years behind) to 4 (fully up to date).

Source: From Campbell, 1999.


These are mean scores for New Zealand manufacturing companies in a variety of industries so are not typical scores for the food industry. But they show the differences that can be found between the most innovative and the least innovative companies. The innovative companies tended to be innovative in all parts of their business, as can be seen from their much higher scores, than least innovative companies, for change in production, plant equipment, marketing and support systems. It is interesting to note that the highly innovative companies launched more products but had a slightly lower success score than the moderately innovative companies. It was found that these highly innovative companies tended to have a truncated product development process and missed some of the evaluation steps, while the moderately innovative tended to have more stages and more analysis.

Think Break Compare the innovation scores either between your company and other companies in the industry, or if this is not possible between different product areas in your company. For the last five years, collect the following information: Sales growth over last 5 years ______________ Number of new products ______________ Number of improved products ______________ New products – proportion of sales ______________ Improved products – proportion of sales ______________ Number of new products: All failed _________________________________________100% success Changed production processes: Not at all _________________________________________ Completely Changed marketing methods: Not at all _________________________________________ Completely Changed company organisation: Not at all _________________________________________ Completely Age of technology:    More    than    10 Years    behind _________________________________________ Fully    up to date    From these results, how do you rate your company – highly innovative, moderately innovative, not innovative? 2. In what areas do you think your company has the knowledge and skills    for innovation in the future – raw materials, processing, products,    distribution, marketing, communications, consumer experience? 3. In what areas do you think your company has the financial resources    for innovation in the future – raw materials, processing, products,    distribution, marketing, communications, consumer experience? 4. What do you see as your company’s barriers to innovation?

The company objectives and goals are also important in studying innovation possibilities. What is the company wishing to achieve, where and when? The innovation possibilities need to be ranked against these objectives - in particular innovation possibilities need to fit into the general direction of the company and not involve technologies, markets and finances, which are well outside the objectives of the company.

The innovation possibilities are screened to choose the most suitable for further study. In selecting the innovation paths, it is important to retain contact with the twin areas of business and society, as shown in Fig. 2.6.

Fig. 2.6 The business and societal decisions for innovations.

The factors used for screening vary with the company and the types of innovations, but important factors are related to the company, market, technology, society, predicted outcomes, project needs and company resources. Some important evaluation factors for innovation possibilities (Kuczmarski, 1996) are shown in Table 2.3.


Table 2.3 Evaluation factors for innovation possibilities

Major factors Critical factors Company Fit with strategic objectives Impact on existing business Exploits internal strengths     Market Consumer need intensity Source of competitive advantage Product/service uniqueness/differentiation     Technology Company competence in technology Relation to present technologies in company     Society Impact on ethical constraints Impact on political constraints Agreement with religious rules Agreement with government regulations     Predicted outcomes Sales and profits potentials Degree of risk Return on investments     Needs and resources Financial needs Knowledge needs Financial resources Knowledge resources

Source: After Kuczmarski, 1996.


Major factors are those that are important in evaluation while critical factors are those that are directly related to product success and must be evaluated. The remaining innovation possibilities after screening are incorporated into the building of the business strategy.