SEcuRITy In THE nExTGEnERATIon DATA cEnTER

Today’s data center architectures are in the crosshairs of several significant technology trends, with each presenting
fundamental security implications:
• Large-scale consolidation. To maximize economies of scale and cost efficiencies, enterprises continue to consolidate
data centers. consequently, extremely large data centers are increasingly the norm. This concentration of computing,
storage, and networking is creating unprecedented scale requirements for network security.
• Virtualization. The nature of computing inside the data center has fundamentally changed, with workloads increasingly
moving from dedicated physical servers to multiple virtual machines. As a result, a typical application workload is now
completely mobile—it can be instantiated anywhere in the data center, and it can even be moved from one physical server
to another while running. Furthermore, the increasing trend of desktop virtualization means that any number of clients can
access a virtual desktop hosted on a server located in the data center. And, most importantly, virtual machines running
on a single server communicate via an internal virtual switch (vSwitch). This has fundamental implications for traditional
network security architectures, which were not designed with a focus on intra-server traffic.
• Service-oriented architectures and application mashups. Application architectures are evolving from being relatively
monolithic to being highly componentized. The componentized application architectures emerging today allow for more
reuse and, given that each component can be scaled separately, provide better scalability. one result of this emerging
trend is that there is starting to be more “east-west” traffic (between components in the data center) than “north-south”
traffic (between servers inside the data center and points outside the data center). This application evolution effectively
acts as a traffic multiplier and can expose additional areas of vulnerability—further pushing the scale requirements of
security mechanisms in the data center.
• Fabric architectures. Both in reaction to the above trends, and in an ongoing effort to realize improvements in
administrative efficiency, network scalability and availability, and infrastructure agility, enterprises are increasingly looking
to adopt fabric architectures, which enable many physical networking devices to be interconnected so that they are
managed and behave as one logical device. network security infrastructures will correspondingly need to adapt to the
management and integration implications of these architectures.
These trends represent the characteristics of the next-generation data center, which will require a fundamental re-imagining
of how security gets implemented. consequently, traditional security approaches—which were characterized by a focus on
relatively static patterns of communication, the network perimeter, and the north-south axis—will no longer suffice


The Strategic Security Imperatives of the Next-Generation Data Center
Given the technology trends at play in the next-generation data center, effective network security approaches will need to
address the following requirements:
• Scale. network security will need to scale to accommodate increasing traffic, more processing-intensive intelligence to
combat increasingly sophisticated threats, and more deployment options and scenarios.
• Visibility. To be effective, network security solutions will need to have more contextual visibility into relevant traffic.
• Intelligent enforcement. Security teams will need capabilities for efficiently enforcing policies on both physical and
These core requirements are detailed in the sections below.


Scale
The next-generation data center presents fundamental implications for the scalability of network security. Following is an
overview of the areas in which this need for scale will be most evident.
More Intra-Server Traffic
In the wake of increased virtualization, industry experts estimate that network traffic will increasingly be comprised of traffic
between two servers, as opposed to traffic between clients and servers. The decomposition of data center applications
into a mashup of reusable components will also hasten this increase in server-to-server communications inside the nextgeneration data center. In fact, analysts estimate between 2010 and 2013, server-to-server traffic will grow from 5% to
75% of network traffic. Another implication of these trends is that enterprise security teams can expect that every gigabit
of capacity entering the next-generation data center via the north-south axis will typically require 10 gigabits of network
capacity on the east-west axis, and could scale up significantly from there. The increasing volumes and increasing dynamism
of this server-to-server traffic will create a corresponding increase in the criticality of network security mechanisms, and their
need to scale.
Support for Increased Bandwidth Usage
The traditional demands of perimeter protection will not go away in the next-generation data center. Plus, given the
concentration of services provided by a large next-generation data center, the aggregate bandwidth connecting the data
center to the Internet will commonly be measured in gigabits per second. These trends will only be exacerbated by the
increased prevalence of rich media applications and their associated network bandwidth requirements.
More Deployments
Emerging trends will increase the usage of network security devices. For example, given extensive server virtualization
within the next-generation data center, physical isolation can no longer be relied upon to ensure the separation of groups
of applications or users, which is a requirement of many compliance mandates and security policies. consequently, more
network security mechanisms will be required to supply this isolation.
Given the addition of virtual desktops to the next-generation data center, campus and branch perimeter security
mechanisms such as Web security now need to be delivered inside the data center—and with high levels of scalability.
Increased Processing and Intelligence
The increased sophistication of attacks means that the computing power and memory needed to secure each session
entering the next-generation data center will expand substantially. Further, these sophisticated threats will also make it too
difficult for perimeter security alone to determine all of the potential downstream effects of every transaction encountered at
the perimeter. As a result, security teams will need to deploy additional, specialized network security services—for example,
security specifically for Web services, xML, and SQL—closer to the enterprise’s most valuable assets or “crown jewels.

Visibility and Context
Broadly speaking, there are three kinds of network security products deployed in the next-generation data center:
• Proactive—including security risk management, vulnerability scanning, compliance checking, and more
• Real time—featuring firewalls, intrusion prevention systems (IPS), Web application firewalls (WAFs), anti-malware,
and so on
• Reactive—including logging, forensics, and security information and event management (SIEM)
Across the board, rather than operating solely based on IP addresses and ports, these solutions need to be informed by a
richer set of contextual elements to enhance security visibility.

Application-Level Visibility
Visibility into applications is particularly vital—and challenging. Without visibility into what applications are actually present
on a network, it is difficult to envision an effective security policy, let alone implement one. While in theory, data centers may
be viewed as highly controlled environments to which no application can be added without explicit approval of the security
team, operational realities often mean that the security team has limited visibility into all of the applications and protocols
present on the data center network at any given time. Following are a few common scenarios that organizations contend
with on a day-to-day basis:
• Application teams build virtual machine images with a particular application in mind, but the virtual machine templates
they work with include extraneous daemons that send and receive packets on the network.
• The process for green lighting new applications is insufficiently policed and enforced, so the security team often finds out
about applications well after they have been deployed.
• In virtual desktop environments, employees use their virtual desktops to access applications outside the data center, with
the applications in use evolving on a continuous basis.
Given these realities, the next-generation data center security architecture will need to possess the capability to see and
factor in the actual application being used (in lieu of TcP port 80).
Real-Time Context
Acquiring context in real time presents significant challenges. For example, for a firewall to be effective in the next-generation
data center, it needs to determine the following contextual aspects:
• The identity of the user whose machine initiated the connection
• Whether the user is connecting with a smartphone, laptop, tablet Pc, or other device
• The software—including oS, patch level, and the presence or absence of security software—on the user’s device
• Whether the user is connecting from a wireless or wired network, from within corporate facilities, or from a coffee shop,
airport, or some other public location
• The geographic location from which the user is connecting
• The application with which the user is trying to connect
• The transaction the user is requesting from the application
• The target virtual machine image to which the user’s request is going
• The software—including the oS, patch level, and more—installed on the target virtual machine
Some of this context may be derived purely from the processing of packets that make up a session. For example, a WAF may
be able to map the uRL being requested to a specific application, or a hypervisor may be able to provide specific context
about communications between virtual machines. However, other contextual information, such as information about the
type of oS on the source and destination hosts, will need to be acquired out of band.

Business Visibility
Many aspects of business context might also affect security policy decisions. For example, policies may be contingent upon
whether a service request is being made in relation to an end of quarter sale or a disaster recovery response. clearly, stitching
together the sequence of events required to identify this business context may prove very complex, but certain shortcuts may
be possible to reduce some attack surfaces. For example, IT teams could use a global indicator in the data center that signals
when disaster recovery is in progress and only permit certain actions—such as wholesale dumping or restoring of database
tables—during those times.

Visibility and Contextual Capabilities—Near Term Requirements
The contextual visibility outlined above provides security teams with an overall view of what’s going on in their network and
allows them to set policies that mitigate risk and align the data center’s risk profile with business requirements.
While acquiring some of these forms of context may not be possible immediately, there are some near term, must-have
requirements. For example, to simply return to traditional levels of control, security administrators must be able to map
virtual machine instances to IP addresses in virtualized environments. Any network security solution that cannot bridge this
gap risks irrelevance in the next-generation data center.

Policy Enforcement in Virtualized Environments
Traditionally, policy selection has been associated with the source and destination of traffic. For example, in the case of nonvirtualized workloads, the switch port can authoritatively identify the source of a given traffic flow.
For virtualized workloads, however, the identification of the workload source presents a more dynamic challenge.
communication within a group of virtual machines on the same physical host can occur freely, though having visibility into
this traffic may be required according to some security requirements. Within these virtualized environments, identifying the
source and destination of traffic, mapping that traffic to specific policies, and ensuring that enforcement points execute the
policies required can pose significant challenges.
To be effective, network security mechanisms need to be able to associate policies with groups of virtual machines, and
consistently and accurately execute on those policies. To do so, security teams will need capabilities for supporting the
virtualization technologies employed within the next-generation data center. In VMware environments, this requires integration
with vcenter, which is used to create and manage groups of virtual machines. This integration is essential to enabling
security teams to manage and monitor policies through a central console. Further, given the scalability demands of the nextgeneration data center, this central management infrastructure needs to have capabilities for aggregating information from
multiple vcenter instances and from the physical security infrastructure, in order to maximize administrative efficiency.
Granular Policy Enforcement
To be effective, a security enforcement point needs to have the required visibility into the traffic to which policies need to be
applied. Techniques such as VLAn partitioning can be used to ensure that a physical security appliance inspects all traffic
crossing a security trust boundary, even in the case of virtual machine to virtual machine traffic that is occurring on the same
physical host. However, this approach is suboptimal for two reasons:
1. In order to institute the requisite policy enforcement points, IT teams need to change the networking architecture, which
requires tight collaboration between networking and security teams.
2.  It represents a coarse-grained approach in which all traffic between VLAns has to be routed to a separate physical
appliance before being routed to the destination VLAn. This approach doesn’t enable finer grained filtering, so that only a
subset of traffic gets routed to the physical security appliance. Further, even if such a capability were available, there would
be no way for the physical security appliance to avoid having to process all of the packets in a given flow when it wants to
implement a simple “permit” firewall rule.

Levi goes local

Case study 05 - Levi Strauss Goes Local

Case Discussion Questions

1.    What marketing strategy was Levi Strauss using until the early 2000s? Why did this strategy appear to work for decades? Why was it not working by the 2000s?

Answer

The marketing strategy that Levi had used until early 2000s was to sell the products worldwide without customization and localization. To achieve this, the company sold the products by doing the mass production or economics of scale. At that time, Levi achieved high sale rate due to the fact that people liked to wear jeans without consideration of its style. However, this strategy seems not to be working by 2000s because there were more competitors and people want different styles of jean to fit with their lifestyles and culture.

2.    How would you characterize Levi Strauss’s current strategy? What elements of the marketing mix are now changed from nation to nation?

Answer

How would you characterize Levi Strauss’s current strategy?

Levi’s business strategy is described as follows.

We have changed virtually every aspect of the business, including the entire process of how we develop, deliver and market products. The initiatives include (Sourcewatch, 2011):

Revamping our core Levi's® and Dockers® product lines to make our products more innovative, market-relevant and appealing to consumers.

Improving our speed to market and responsiveness to changing consumer preferences.

Launching the Levi Strauss Signature® brand for value-conscious consumers in North America and Asia.

Expanding our licensing programs to offer more products that complement our core brand product ranges.

Improving the economics of our Levi's® and Dockers® brands for retail customers.

Strengthening our management team and attracting top talent to key positions around the world.

Enhancing our global sourcing and product innovation capabilities.

Reducing our cost of goods and operating expenses.

Implementing a new business planning and performance model that clarifies roles, responsibilities and accountabilities and improves our operational effectiveness.

Therefore, it can be concluded that Levi learnt a lot about their failures in the past so they agreed to focus more on the trend changes in fashion and the adaptation to the local culture and norms in the selling countries. Levi also wanted to renew its branding to fit with new fashion trends and the customer preferences. Levi especially focuses on the new product development so they specially setup the dependant team to take care of new brand called Dockers which is the brand that they want to make products more innovative, market-relevant and appealing to consumers. In addition, Levi launched Denizen brand to target on the young generations (Sourcewatch, 2011).

What elements of the marketing mix are now changed from nation to nation?

According to the market mix knowledge, the marketing mix is the set of choices the firm offers to its targeted markets. Many firms vary their marketing mix from country to country, depending on differences in national culture, economic development, product standards, distribution channels, and so on(Global Business Today, 2009).

Marketing mix is consisted of choices about product attributes, distribution strategies, communication strategies, and pricing strategies that the firm offers to its targeted market.

Product attributes

Cultural difference, countries differ along whole range of dimensions, including social structure, language, religion, and education. These differences have important implications for marketing strategy (Global Business Today, 2009).

3.    What does the Levi Strauss story tell you about the “globalization of markets”?

Answer

There are some lessons learned from the Levi Strauss story as follows.

Find a competitive advantage

If there is no rule for choosing a strategy, then what is a retailer to do?  The answer is to figure out what the retailer might bring to the market that would enable it to beat the competition.  This can vary greatly and depends on the nature of the competitive environment.  In an emerging market that lacks much modern retailing, simply bringing modern supply chain management and merchandising as well as large financial resources might be sufficient.  In a more sophisticated market, competitive advantage can come about by offering a well known global brand, a unique format, a higher level of customer service, a more entertaining and informative customer experience, or a more efficient supply chain that enables low pricing (Deloitte, 2010). 

Learn much about local tastes and customs

The best global retailers spend substantial resources and time in learning about the local market.  This entails understanding supply chains, regulation, sources of merchandise, and, most importantly, consumer tastes and habits.  The latter is the most challenging.  There are examples of retailers which, even after years of research, fail to develop the right merchandising.  Understanding an alien culture is enormously difficult under the best of circumstances.  Hence, using a mix of local and expatriate managers can help to get it right.  Some of Europe’s largest food retailers, in developing new markets, have sent teams of managers to other markets.  Often, they spend months and sometimes years learning about consumer tastes, shopping and living behavior, cultural attitudes, and sensitivity to branding and pricing.  The end result is a compromise between using the strengths of their core business at home and adjusting to differences in the foreign market.  Sometimes it takes a period of tinkering before a foreign retailer finds the appropriate such compromise (Deloitte, 2010).

Be prepared to operate in a niche

Although scale is important, it is not always necessary to saturate a market, nor is it essential to appeal to a wide range of consumers.  In many locations, existing local and foreign retailers have already grabbed a considerable share of the market.  For a new retailer entering such a market, it is not helpful to simply replicate what others have done especially if the market is relatively saturated.  Instead, a new player might be able to fi nd a niche in which to operate.  In some emerging markets where global hypermarkets have invested heavily, other food retailers have found that simply investing in the hypermarket format will not suffice.  Instead, they have sought to connect with consumers through smaller, niche formats such as small supermarkets, discount stores, and convenience stores.  In the case of electronics retailers, rather than invest in a superstore format, a smaller neighborhood format might be appropriate given competitive and regulatory constraints (Deloitte, 2010). 

Use mostly local managerial talent

The best global retailers tend to rely on the fewest number of expatriate managers.  The ideal situation is for most stores to have local managers.  There are several reasons for this.  Local managers often possess connections to the local business community and government.  They usually have a better understanding of local consumer culture.   Finally, they often engender greater loyalty within the organization than foreigners.  The problem with expatriates is that, although they understand the company culture and processes, they don’t necessarily understand the local market very well — especially when there is a language barrier.  In addition, they may not be able to exert the same degree of authority on local employees as a local manager.  Finally, expats often are uninterested in staying in a foreign market for very long as it can represent a burden on their families.  One British company, operating in Hungary, found that the British employees in Budapest intentionally failed to learn Hungarian lest they be asked to stay longer (Deloitte, 2010). 

References

Deloitte. (2010). Revisiting retail Globalization. Retrieved 2011, from http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_retail_globalization.pdf

Sourcewatch. (2011). Retrieved 2011, from Sourcewatch: http://www.sourcewatch.org/index.php?title=Levi_Strauss#Business_Strategy

Global Business Today, Charles W.L. Hill, 6e / 2009

IKEA the global retailer

IKEA- The Global Retailer

1.       How is IKEA profiting from global expansion? What is the essence of its strategy for creating value by expanding internationally?

How is IKEA profiting from global expansion?

According to the Determinants of Enterprise Value, enterprise valuation can be derived from 2 methods, Profitability and Profit Growth. According to the IKEA case, the company expands to other markets in order to get new customers and sales, which is fallen under the Profit Growth method as in figure 1.

Figure 1 Determinants of Enterprise Value (Hill, 2010)

In addition, expanding globally allows firms to increase profits. Firms that operate internationally must be able to (Hill, 2010):

1.       Expand the market for their domestic product offerings by selling those products in international markets.

2.       Realize location economies by dispersing individual value creation activities to those locations around the globe where they can be performed most efficiently and effectively.

3.       Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation.

4.       Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations.

According to the IKEA’s global expansion, the company sells products in 280 stores in 26 countries. In addition, the company leverages the globalization sourcing materials from low-cost location suppliers and sold to high-cost locations’. Therefore, IKEA could increase its profits from expanding the market internationally.

Figure 2 IKEA stores (Ikea, 2003 - 2010)

What is the essence of its strategy for creating value by expanding internationally?

IKEA applies the following strategy in expanding internationally

a.        IKEA Franchising. When expanding globally, IKEA has some evaluation criteria based on the market study for selecting franchisees which leads to the its long-term strategic expansion plan which sets priorities of future growth.

Figure 3 IKEA Franchising (Ikea, 2003 - 2010)

b.       Finding the right place of manufacturing for each item by leveraging the low-cost suppliers and proper sourcing strategy.

c.        Focus on the some core suppliers to enable the long-term co-development.

IKEA has The Swedwood Group, an industrial group within the IKEA Group of companies, as key supplier. The Swedwood’s primary task is to ensure enough production capacity for IKEA since 1991 (Ikea, 2003 - 2010). Due to the long-term co-development between Swedwood and IKEA, the company came up with many innovations. For example, in 1997, Swedwood has invented a way to produce board on frame products with veneer finish. Birch veneer on KUBIST and LACK is an immediate success. (Ikea, 2003 - 2010).

d.       Localization- adaptation of its offerings to the tastes and preferences of consumers in different nations

The recent example of IKEA adoption of localization can be found here. “Home decor and furniture company IKEA is no longer stocking or selling incandescent light bulbs in its U.S. stores, instead offering longer-lasting and energy-efficient bulbs. The retailer began phasing out the sale of the light bulbs in August. IKEA's action comes ahead of federal legislation that would mandate more efficient light bulbs starting in 2012. The pullout also applies to IKEA stores in Canada. Stores in France and Australia started phasing out the incandescent bulbs last year.” (CONSHOHOCKEN, 2011) .

2.       How would you characterize IKEA’s original strategic posture in foreign markets? What were the strengths of this posture? What were its weaknesses?

How would you characterize IKEA’s original strategic posture in foreign markets?

Decrease production cost and mass production

To standardize the Swedish designed furniture to international market. Specifically, IKEA has strategy in order to decrease its production costs since IKEA planned to reduce the price of their products by 2 to 3 percent every year.  It can be seen from China news in 2003 here.

"Prices decreased by about 12 per cent in the past financial year," said IKEA China manager Ian Duffy. "Low prices will remain in the coming year to make our products more affordable for IKEA's 8 million customers." (IKEA's low-price strategy remains, 2003)

One design fits all

For several decades, IKEA had looked for international markets, which were culturally as close as possible to the Scandinavian market. The basic assumption behind IKEA's global strategy was 'one-design-suits-all.' Anders Dahlvig, the CEO of IKEA, had once said, "Whether we are in China, Russia, Manhattan, or London, people buy the same things. We don't adapt to local markets." (George, 2001)

What were the strengths of this posture?

 IKEA achieved this by focusing on the core suppliers which later resulted in the long-term development and innovations. In addition, IKEA applied the sourcing strategy to source the right manufacturing locations instead of Sweden such as Poland. Therefore, standardization of the design manufacturing processes and ensures the economics of scale or mass production and learning effects results in the affordable products with designed quality.

What were its weaknesses?

IKEA encountered problems while entering to U.S. market where the measurement units, product sizes are different. Even with the store location in China, IKEA learnt a lot on how to place the shops in accordance with customers’ preferences. Therefore, the standardization was no longer applicable in some markets. IKEA needs some customizations on to the customer tastes and preferences, infrastructure and Traditional Practices, Distribution channels and host government demands (Hill, 2010).

3.       How has its strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy? How would you characterize the strategy of IKEA today?

How has its strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy?

IKEA had redesigned the products especially for U.S. customers. Specifically, IKEA changed its products measurement units, sizes in order to meet with the customers’ preferences.  Some of IKEA’s problems in U.S. market can be addressed here (Bradley Chen, 2003).

First is with Durability. IKEA’s company slogan is “Low price with meaning”. In order to reach this goal, IKEA has to compromise on its quality of the furniture. IKEA products usually apart after a few years; therefore no one in this company would claim that IKEA furniture was built for longevity. Although IKEA provides lots of choices on style and color, some customers may not want to see the item they bought break down so quickly.

Second is the design for Americans’ Daily Lives. At the beginning of IKEA business in the United States, they discovered that Americans did not like their products. Apparently, its beds and kitchen cabinets did not fit American sheets and appliances, its sofas were too hard for American comfort, its product dimensions were in centimeters rather than inches, and its kitchen wares were too small for American serving-size preferences.

Last, the limitation of style selection from the “Matrix”. IKEA furniture style selection was limited according to the “matrix” which is shown in below chart.

Figure 4 IKEA design Matrix (Bradley Chen, 2003)

There were four styles with three price levels which could not meet with a wider customer ranges in the U.S.

Later IKEA issued the Franchising approach or we can call it as Strategic Alliance strategy. There are several reasons why IKEA changed here.

 First, strategic alliances help facilitating the entry into the foreign markets. For example, Siam Future Development Plc together with IKEA recently hold a signing ceremony for a joint venture “Mega Bangna”, a Baht 10,000 million project featuring lifestyle home furnishing center, “IKEA Store” first launched in Thailand (Anansitichok, 2009).

Second, strategic alliance allows firms to share fixed costs and associate risks of developing new products and processes.

Third, an alliance is a way to bring together complementary skills and assets neither company could easily develop or owns it.

Last, it can make sense to form an alliance that will help firm establish technological standards for the industry that will benefit the firm.

How would you characterize the strategy of IKEA today?

The Franchising strategy, a specialized form of licensing, in which the franchiser not only sells intangible property (normally trademark) to the franchisee, is now an IKEA strategy. IKEA has its own partner selection system called Inter IKEA System B.V.

Works Cited

Anansitichok, K. (2009, May 11). Siam Future and IKEA launch new joint venture to develop MEGA BANGNA. Retrieved Feb 2011, from ryt9.com: http://www.ryt9.com/es/prg/79003

Bradley Chen, G. C. (2003). http://www.slideshare.net. Retrieved 2011, from IKEA INVADES AMERICA: http://www.slideshare.net/geechuang/ikea-invades-america-presentation

CONSHOHOCKEN, P. (2011, January 4). IKEA stops selling incandescent light bulbs in US. Retrieved February 6, 2011, from Bloomberg Businessweek: http://www.businessweek.com/ap/financialnews/D9KHI1M80.htm

George, N. (2001, Feb). One Furniture Store Fits All . Retrieved from Financial Times: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/IKEA%20Globalization%20Strategies-Foray%20in%20China.htm

Hill, C. W. (2010). Global Business Today. Mc Graw Hill.

Ikea. (2003 - 2010). IKEA.COM. Retrieved February 6, 2011, from Inter IKEA Systems B.V.: http://franchisor.ikea.com/showContent.asp?swfId=facts1

IKEA's low-price strategy remains. (2003, Sept 27). Retrieved Feb 2011, from CHINA DAILY.COM: http://www.chinadaily.com.cn/en/doc/2003-08/27/content_258713.htm

Romanian IKEA Franchise was sold to Swedish group. (2010, March 17). Retrieved Feb 06, 2011, from http://www.actmedia.eu: http://www.actmedia.eu/2010/03/17/top+story/romanian+ikea+franchise+was+sold+to+swedish+group+/26240

The meaning of the metrics NPV and IRR for an NPD project

Net Present Value (NPV)

Net Present Value has several meanings on the NPD project as follows. First, NPV is used because the time-value of money. Specifically, the $40,000 net cash flow earned in Year 2 is less valuable than it would be in Year 1 because if it were earned earlier we could invest it and earn income at the rate of return during the year. Conversely, an expense paid out in the future is less costly than one paid now because we could invest the money and earns return until it was time to pay the expense.

Net Present value analysis presents the various predicted cash flows of the project as a single number, called the NPV. All the projected expenditures and income, all the projected sales quantities, cost of units sold, etc. are wrapped up and distilled into one number. NPV is calculated by this formula.

Where i is the number of time periods from the start, r is the expected rate of return, and value is the cash flow for time period i.

Internal rate of return (IRR)

IRR is a close cousin of NPV. In fact, the definitions are such that NPV of a series of cash flows, evaluated with an r equal to the IRR of the same series of cash flows, is zero. The IRR of a series of cash flows gives the rate of return that would result in an NPV of zero, hence it is the rate of return of the project itself, with no comparison to any other investment’s rate of return.

The importance of the metrics to the attractiveness of an NPD project proposal

Companies face many challenges in new product development, not the least of which is choosing the best projects. Many factors must be considered. Thus, NPV and IRR are used as measures to capture a product’s financial goodness. For example, to understand how to evaluate the results, the first is the project NPV, $91,812, This tells us that, compared to some other investment opportunity with a rate of return of 10%, this project will return $91,812 over and above the 10% return. The IRR, 16%, shows us the rate of return of this project, a rate that we can compare to other investment opportunities. Looking at IRR as well as NPV will get a feeling for profitability of the project in relative terms.

Comparing projects and alternative investments

Comparison is at the heart of this kind of financial analysis. Even when modeling one project, we are comparing it to an alternative investment via the rate of return used in the NPV analysis, while the IRR gives us a rate of return which we compare to that of other opportunities

While it is useful to look at each project individually, an analysis like this is most useful when we are trying to choose which of several proposed projects to develop. It is important to compare projects of similar risk and to use a rate of return that corresponds to the project risk. A variant or line extension project (perhaps tested against a 10 to 20% rate of return) usually has lower risk than a new platform project (which might be compared with a rate of return of 20 to 30%).

Lessons learned from case studies on the effect (or lack thereof) of innovation in at least five corporations.

Lessons learned from case studies on the effect (or lack thereof) of innovation in at least five corporations.

Abstract

Lesson learned from case studies on the effect of innovation in General Electric

Reverse Innovation background

GE aimed to develop the new processes of producing products. The new process is called reversed innovation.

Big picture perspective

What is the total system? What does reverse innovation do?

Reverse innovation is a term referring to an innovation seen first or likely to be used first in the developing world before spreading to the industrialized world  (Wikipedia Foundation, 2010). The term was introduced by Dartmouth professors Vijay Govindarajan and Chris Trimble.

Figure 1 shows the American multinational approach to emerging markets (Govindarajan, 2010)

What are reverse innovation subsystems?

1.       Original Product
The industrialized company serves the emerging economic markets with the products developed in their countries. However, the expensive, bulky products are poorly sold in the emerging economic countries.

2.       The emerging market disruption

The local team in emerging economic countries works with global team to develop the cheap products with a probe and sophisticated software. The sales in emerging economic countries took off.

3.       The new global market

The technology advances, the alternative products developed which can perform the same functions that once required the conventional machines.

What are the drivers of reverse innovation?

1.       The income gap that exists between emerging markets and the developed countries. There is no way to design a product for the American mass market and then simply adapt it for the Chinese or Indian mass market. Buyers in poor countries demand solutions on an entirely different price-performance curve. They demand new, high-tech solutions that deliver ultra-low costs and “good enough” quality.

2.       The emerging economics will largely evolve in the same way that wealthy economies did.

3.       Products that address developing countries’ special needs can’t be sold in developed countries because they’re not good enough to compete there

Operational perspective (Jeffrey R. Immelt, 2009)

The emerging economic countries need technology related knowledge from the global companies in order to develop the low-cost products. In General Electric, the major business functions- including R&D, manufacturing, and marketing-were centralized at headquarters. While some R&D centers and manufacturing operations were moved aboard to tap overseas talent and reduce costs, they focused mainly on products for wealthy countries.

1.       Reverse innovation requires a decentralized, local-market focus.

2.       Most if not all the people and resources dedicated to reverse innovation efforts must be based and managed in the local market

3.       Local Growth Teams (LGTs) must have P&L responsibility (this is a key hurdle for American multinationals)

4.       LGTs must have the decision-making authority to choose which products to develop, how to make, sell, and service them

5.       LGTs must have the right (and support) to draw from the company’s global resources

6.       Once tested and proven locally, products developed using reverse innovation must be taken global which may involve pioneering radically new applications, establishing lower price points, and even cannibalizing higher-margin products.

Functional perspective

Reverse innovation involves with the shifting from Glocalization which all research and development centers are located in the industrialized countries to the reverse innovation where they are located in the emerging economic countries. Therefore, the reverse innovation performs in all functions like Productions, Sales, Services, Marketing, Research, etc.

Structural perspective

The organizational structure will be described as follows:

1.       Improve the cross regions management issues where the management team Europe and America do not really understand the local market requirements

2.       The shift of management power to where the growth is. The reverse innovation enables the shift of management power to the emerging economic countries which bring the full management authorities to the local market. Consequently, business will be able to be more focus on the local opportunities and problems. Specifically, the emerging economic countries need power to develop their own strategies.

3.       The whole organization changes from the ground up, like new companies. The whole previous organizational “software” – its recruitment practices, reporting structures, working cultures, etc are required to be rewrite due to the reverse innovation system.

4.       The measurement metrics like objectives, targets  are rewrite in order to meet the local requirements

Generic perspective

The reverse innovation is analogy to the open innovation. Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology” (Chesbrough, 2003). The reverse innovation system leads to the exploring of new marketplace by the use of the local know-how of its own market. At the same time, open innovation obtains new innovative ideas from outside company and later lead to the creation of new marketplaces.

Continuum perspective

What are some alternative organizational structures?

The reverse innovation may not be fully implemented since some locations might not have enough capabilities to implement the system. Therefore, the company can either choose the full implementation or partly implementation. In fact, partly implementation requires the executives in industrialized countries to oversee and manage the conflicts between the local team and global business, connecting the team and the global business, connecting the team to the resources such as global R&D centers and helping deploy the innovations that were successfully rolled out in the industrialized countries.

Problem statement

The reverse innovation was against with many parties before it is adopted by General Electric. Trimble and Govindarajan (Govindarajan, 2010) show the oppositions against reverse innovation as follows:

1.       Your formal responsibilities included neither general management nor production development.

2.       Your responsibility was to sell, distribute, and service GE’s global products locally and provide insights into customers’ needs to help the company adapt its offerings.

3.       You were expected to grow revenues by 15% to 20% a year and make sure that costs increased at much lower rate, so that margin rose.

4.       You were help rigidly accountable for delivering on plan. Just finding the time for an extracurricular activity like creating a proposal for a product tailored to the local marketing was challenging.

5.       Head of marketing fears that a lower-price product would weaken the GE brand and cannibalize existing sales.

6.       Head of finance concerns that lower-priced products would drag down overall margins.

7.       The global R&D will need the explanation of why the energies of GE’s scientists and engineers- including those in technology centers in emerging markets- should be diverted from projects directed at its most sophisticated customers, who paid top dollar.

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Figure 2: the temporal workflow of company portfolio management

However General Electric needs to create the future rather than maintaining the past. I map the Figure 2 which shows the temporal workflow of the thinking processes of company portfolio management. There are fundamental challenges between two types of project which leads to strategic challenges.

Box 1

There is linear change in industries so the responses from the organization would be linear. In other words, there are the incremental improvements like six-sigma, operational excellence.

Box 2 and 3

The change is non-linear so the organization responses are non-linear shifts.  To create future is to change the way General Electric behaves currently so all the problems and opposes against the reverse innovation are required to be forgotten.

Figure 3: The logic of the subject (Elder, 2006)

The applying the logic of subject (Elder, 2006) to General Electric reverse innovation

1. Purpose, Goal, or End in View. Whenever we reason, we reason to some end,

The General Electric reverse innovation has been designed to produce products that the developing countries can afford.

2. Question at Issue or Problem to be solved.

How to implement the reverse innovation against the oppositions from production, marketing and finance managers?

4.       (Information) The Empirical Dimension of Reasoning.

Reverse innovation is recommended to be the strategic portfolio management of the General Electric.

Reverse innovation can be implemented in two types which are fully and partly implementations.

Blue Ocean strategy is fit for use for the reverse innovation.

5.       Inferences.

Because the reverse innovation is the potential strategic of General Electric to explore the developing country marketplaces, it is vital that General Electric study on the reverse innovation and deploy it in order to gain market shares in the competitive markets.

6.       The Conceptual Dimension of Reasoning.

Discover the capabilities in developing countries, explore the tacit needs of people in developing countries, and create the innovations from the capabilities of people in developing countries and sell in the industrialized countries.

7.       Assumptions.

The applications of previous General Electric reverse innovation in China will lead to other developing countries’ successfulness.

Customer discontinuities lead to new business model. Specifically, the shift of market to people in developing countries leads to the occurrence of reverse innovation as illustrated in figure 4.

8.       Implications and Consequences.

Implications and Consequences are described in the lesson learned section below.

9.       Point of View or Frame of Reference.

Exploring market requirements in developing countries and setup the Research and Development centers there will lead to the successful of reverse innovation implementation.

Figure 4 Innovation loop

                                               

Lesson learned from case studies on the lack thereof innovation in General Motors

Introduction (Charles, 2010)
            General Motors, an American-based automotive manufacturer with a large global presence, has long held a large share of the worldwide automotive market.  Despite its market position and reputation for quality, the company has recently begun to struggle with new competitors in the Asian Pacific region, which has pushed their needs to develop new manufacturing technologies, as well as to better control costs and quality in its American manufacturing facilities.

Beginning in the 1970s, several nations of the Asian Pacific region, most notably Japan and South Korea, emerged as economic powerhouses. As their manufacturing bases matured, they entered the automotive industry and began to present new challenges as well as new opportunities for General Motors. GM would need to find a successful formula for doing business in this region, as well as develop and adopt innovations that would help it improve its manufacturing operations elsewhere.

Applying active brainstorming (Kasser and Mackley, 2008) to GM’s situation resulted in the questions and answers shown in Table 1.

Table 1 Active brainstorming on the GM case

STP	Question	Answer
Big Picture and Operational	What was the GM’s innovation cycle plan?	GM model of implementation was not managed as a learning process so the innovation cycle plan was left behind the other brands.
Generic	How was the GM’s innovation cycle plan compared to HONDA?	Much longer cycle time for design of new cars e.g. Honda takes 4 year cycles and GM takes 7 years cycles. Therefore, GM’s development cycle was three years longer than Honda because of spending three years of management decision making in the development process.
Structural	What were the GM’s organization structures problems?	There are several problems as follows. First, structure of GM organization focuses on cost reduction so there is direct conflict with the intended integrated differentiation and cost leadership strategy. Second, brand management is almost inexistent at SBU level which results in lack of differentiation. Third, regional GBU do not have enough control over their regions.
Operational	How did GM interact with its suppliers and contractors?	General Motors held seventy percent vertical integration with its global network of partnerships, alliances, and joint ventures. First, high quality audit standard made GM unable to supply from local suppliers. Second, GM supplied some automobile parts from Japanese parts and component makers so Japanese had an access to production schedules and GM-proprietary technology. This results in the advance of Japanese cars manufacturing. Last, GM failed to demand a proper return on its investments and partnerships, loyalty from its partners.
Big picture	What was the GM’s company vision?	GM’s vision is to be the world leader in transportation products and related services with the following strategic: 1.       Reduce labor expenses 2.       Cut legacy costs 3.       Decrease production capacity 4.       New designs and marketing strategies
Operational	What must GM do?	GM has to develop and change the organization structure and the way the innovation cycle is planned. In addition, GM has to manage the trust relationship with suppliers.
Operational	What can improve the car production?	There several improvements that GM can adopt. First, General Motors should develop stronger relationship with suppliers and partners. Second, General Motors should increase more control on its investments. Third, General Motors should have protected its knowledge and technologies. Last, General Motors should improve its product development.
Functional	What are the customer demands?	Customers right now prefer to get the better value of products. Like other markets, the car industries need more innovative products produced to the market. General Motors may need to focus on the 4rd generation of R&D and pay attention more on the customers’ tacit knowledge and needs.
Temporal	When does the improvement plan need to operate?	General Motors’ improvement plan needs to be operated on a regular basis. First, the cycle time of designing new cars must be shorter in order to grow fast enough to support the market changes. Next, the joint business plan between General Motors and its suppliers, contractors need to be updated on a regular basis in order to ensure the consistency and loyalty. Last, the R&D strategy must be reviewed on a regular basis to ensure the new deliverables.
Temporal	When does it have to be implemented?	The improvement plan can be implemented wisely after getting bailout from U.S. government.
Quantitative	How was the GM’s financial return on investment?	In the early 80s, General Motors tried to catch up with Toyota which could assemble comparable cars with half the person hours. As Toyota assembly lines were significantly robotized, GM invested $77 billion to automate its factories. But, by the end of 80s, GM’s market share continued to decline.
Continuum	What are the alternative solutions?	Alternative one: Keep all brands but differentiate effectively. There are some results of doing this as follows. First, it will decrease model portfolios of each brand. Second, Doing engineer organization change to make company more flexible and be able to select the right brand for the right market. Third, each brand will have a more specific market to address thus will be more competent in predicting demand which leads to lower inventory costs. Alternative two: Divest some brands but keep rich model portfolios for remaining brands and reform the company’s structure to provide each brand division with more autonomy.

Scientific System Thinking Perspective

Why did General Motor unable to compete with the other car manufacturers?

Hypothesis 1:

The lack of innovation, continuous improvement and long term business plan makes the company less competitive in the market.

From the generic perspective, the shorter cycle time for design new cars made General Motors unable to come up with new model of cars.

From the structural perspective, the long lead time of management decision making made General Motors delay the decision making on applying new technologies into cars.

The different between organizational culture of Japanese and American companies

Table 2 the different between organizational culture of Japanese and American companies (Culture, 2006)

Culture Matrix (low, medium, high)	Japanese companies	American companies
Social position	High	Low
Group Orientation	High	Very low
People relationship	Low	High
Business focus	Low	Very high
Communication style	Not direct	Direct
Time management	High	Medium
Business Planning	Very high	Very low

The implications from the American organizational culture

Table 2 shows the different between American and Japanese organizational culture. As can be seen, American organizational culture focuses on getting the high profits in short period of time. Therefore, there is no business plan in the long run in order to come up with sustain corporate plan and product development. On the other hand, Japanese firms tend to focus on the long term business plan so the Japanese firms are more likely to continuously grow their business when the economic crisis happened.

In General Motors, car models were developed just for gaining the profits in short time but lack of the continuous assessment of customers’ requirements. In contrast, TOYOTA and HONDA have strong and long term business plan so they would be able to gain automobile market share in the long run.

Hypothesis 2:

Trust relationship with suppliers and contractors contribute greatly in the continuous improvement of products.

From the operation perspective, General Motors did the vertical disintegration of many auto parts. However, General Motors set the quality standard too high so that the suppliers could not maintain the long term relationship. In addition, General Motors lack of insight in Japanese automobile part suppliers. Therefore, the innovation confidentialities were easily exposed to the others.

Hypothesis 3:

There was no fully adopted of the open innovation in 4rd generation R&D as illustrated in Figure 6 which results in the misapprehension of the company strategies.

From the big picture perspective, General Motor was more on the cost savings on to the production plan and employee benefits. On the other hand, General Motor overlooked the customers’ tacit needs about the small and economic and hybrid car like Japanese cars due to the increase of oil price. However, in moving to the 4rd generation R&D, General Motors has to be aware of some risks as follows.

First, without the proper control over the contracts and agreements made with the 3rd party research and development, General Motors possibly lose its know-how and core-technology competency again after moving to the 4rd generation Research and Development approach like the case of Philips. Second, the change of organization structure requires the alignment and co-operation from all parties. Therefore, organization must have well-prepared change plan. Third, the development of the innovation cycle time requires the insight of technologies and applications. Consequently, General Motors may have to pay attention to the work process improvement in long run and may not only apply what the other successful done without the properly proofs since the conditions and environments may be different.

Figure 5: the open innovation in 4th generation R&D (Chesbrough H. W., 2006)

Lesson learned from case studies on the effect of innovation in Google

Company background (MOON, 2007)

Internet search had not always been this popular or profitable. When Larry Page met Sergey Brin during a tour for incoming Stanford Ph.D. students in the summer of 1995, the search options for would-be web surfers were limited. Most search engines returned results based on the number of times the search term occurred in a particular webpage; although search algorithms of this kind had an obvious logic, they nonetheless tended to yield dozens of meaningless results. Even AltaVista, generally considered the best search engine at the time, had a reputation for spotty performance.

At Stanford, Page became convinced that links held the answer to divining the relevance of a given webpage. Specifically, the more links that led to a webpage, the more popular and relevant that webpage was likely to be. Much like academic papers gained credibility when they were cited in other academic papers, WebPages could be ranked according to the extent to which other websites, particularly prominent or reputable websites, linked to them.

By 1997, Page had developed a “PageRank” system that determined the relevance of a webpage using this methodology and, in partnership with Brin, had incorporated the system into a search engine called BackRub. Page explained:

In a sense, the Web is this: anyone can annotate anything very easily just by linking to it.

But the early versions had a tragic flaw—you couldn’t follow links in the other directions.

BackRub was about reversing that. It seemed kind of cool to gather all the links of the Web and reverse them (Battelle, 2005).

The logic of the original idea of the Google founders

Page and Brin started the idea of searching algorithm by comparing with the academic papers. Specifically, they thought that if there are more links to the websites particularly prominent or reputable websites linked to them, the websites will be more popular and gain high ranking. This idea is analogy to the academic papers. In other words, the academic papers will be more popular and gain credibility if they are cited by other academic papers. This logic of thinking is illustrated in the figure 7.

                                  

Figure 6: The logic of thinking of the Google founders

Google advertising

Application of Active brainstorming to the successful of Google Advertising

STPs	Questions	Answers
Operational	What initiate the web advertising idea?	The increase of broadband services and the features of internet applications.
Functional	What functions is the web advertising performing?	Real-time text and links to the commercial websites.
Big Picture	What was the web advertising market situation?	Even though there was an increase of the e-commerce business, the web advertising could not be able to gain much profit.
Big Picture	What must the web advertising companies do?	The web advertising companies may need to create proper business model to capture value from customers because the underlying commercial websites, sponsors, customers are there already.
Big Picture	What were on sponsor mind regarding the web advertising?	The sponsor thought that the online web advertising could not be able to provide much of value proposition to their business. Therefore, they prefer other media advertising methods than the web advertising one.
Structural	How can the web advertising value capture be improved?	The methods of value capture can be improved in many ways. First, mapping and matching the sponsors with customer demands by offering the online software applications for free to gain a number of users’ profiles such as users’ interests, preferences, and other data. Second, map the right sponsors’ products to the right users’ profiles. Last, offer the advertisements via the free online applications.
Continuum	What are some alternative web advertising payment structures?	Google offered many payment collection methods from their customers such as payment per click, online bidding specific search keywords and phrases without going to the sales representatives.
Operational	What should be the payment methods for the sponsor?	The sponsor tends to be demand the easier and quicker method of payment so the online credit card payment is being used.
Generic	What is this similar to?	The concept of Google Advertising is similar to the Internet in terms of offering free services to gain more users and charge them later in the different forms.
Temporal	When does the payment by sponsors need to be received?	Since sponsors initially might feel hesitate to pay for the online advertising, Google offered the free advertisement posting and collected money from sponsor after clicked by the Internet users.

Degree of Innovation

Before Google could be able to launch its innovation to market, the critical points to consider is the degree of innovation since there are many examples that the products could not be sold. The table below shows the matching of the Google Web Advertising to the degree of innovation in which Google is categorized in “Start-up Business”. This Degree of Innovation leads to the proper value capture of the advertising as showed in Table 3.

Table 3: Degree of Innovation of the Google web advertising (Heany F, Spring 1983)

Degrees of Innovation	Google Web Advertising
Market established?	Yes, as described in the functional, big picture and operational system thinking perspectives, Google Web Advertising’s underlying technical supported architectures and the commercial website are existed.
Business servicing market?	No, there were less advertising services in the market.
Customers know features?	Yes, the Internet ended users are familiar with the Internet applications and features because there are many online applications and business transactions in the Internet already.
Change in Product	Major, the user interfaces of online advertising and the places are totally changed such as embedding the advertisements in the free social network applications.
Change in Process	Major, the processes in advertising, collecting money are totally changed from the past.

Google products and innovations

The innovative product creation processes

Lesson learned from case studies on the effect of innovation in Procter and Gamble

Introduction

“Connect and develop” has been introduced in Procter and Gamble as a new Research and Development Strategy in 2006. From 1980 to 2000, the 2^nd generation Research and Development could not bring solid R&D productivities in the company. In addition, Eli Lilly launched the “Open Innovation“. Therefore, Procter and Gamble CEO decided to move to the “Open Innovation” which later resulted in the brought-in 50% of new innovations from outside the company. This change led to the double increase in the company share price compared to the year 2000. Procter and Gamble now deploys the Connect and Develop Program in website as illustrated in the figure 8.

Figure 7 Procter and Gamble Connect and Develop website  (Gamble, 2010)

Research and Development Generations

Research and Development processes and practices have been developing from time to time. Currently, there are four generations of the R&D practices available for companies to adopt which can be described as follows.

2^nd generation R&D had been adopted by western MNCs in the end of 1960s and 1970s and later adopted by Japanese MNCs in 1970s and 1980s. This model was created under the built-in of the external customer (Business) and internal customer (R&D management). In addition, the funding is funded by Business and Business cannot use outside knowledge.

3^rd generation R&D had been adopted by western MNCs by the 1980s and 1990s. In addition, it was later adopted by Japanese MNCs in 1990s. The partnership between General Management and R&D management is established. R&D is sourced mainly inside the company. The balanced R&D budget is required for the planning of short, middle and long term needs of the business. However, the cost of R&D become too high for the company compared to the return from the sales.

4^th generation R&D has been adopted in the end of 1990 and 2000s by some MNCs which includes Procter and Gamble. The innovation contains both continuous and discontinuous. In addition, there is the welcoming of new ideas from outside the company or the external companies. Therefore, this leads to the existence of top Research Institutes worldwide. There are some organization changes. For example, the creation of Chief Knowledge Officer (CKO) and Chief Innovation and Knowledge Officer(CINO). Therefore, there is an increase of innovation (patents) business worldwide.

From 1980 to 2000, Procter and Gamble applied the 2rd generation R&D in the organization but the R&D productivities had leveled off. In addition, the cost of R&D was climbing. On the other hand, Procter and Gamble’s main competitor – Eli Lilly started using the “Open Innovation” so the company CEO decided to apply the practice by bringing 50% of innovations from outside and introduced the “Connect and Develop” program which can be seen in the figure of the S-Curve of the R&D generation on how one generation took over the others.

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Figure 8 R&D's S-Curve from 2nd to 4th generation

Applying the Connect and Develop to Swiffer Dusters’ smart (Gamble, 2010)

Ideas are everywhere

As our Swiffer brand was seeking to expand its lineup with a breakthrough dusting product, we discovered a high-potential offering already on busy store shelves in Japan. We immediately saw benefits over our own prototype- and although the manufacturer was one of our top competitors in Asia, we opened a dialogue.

Ideas need acceleration

In the duster product we discovered in Japan, we saw potential for an immediate win- and further innovation. Its dusting technology was truly breakthrough: material with thousands of soft, fluffy fibers that trapped and locked dust, capable of flexing to fit into household nooks and crannies.

A clear customer benefit

The Swiffer Dusters advantage

From talking with consumers, we knew they wanted an easier, more effective dusting tool- with breakthrough benefits. Compared to dry clothes or feather dusters, Swiffer Dusters capture more dust and common household allergens from cats, dogs and dust mites.

A growth opportunity

Extending the Swiffer portfolio

From Swiffer Dusters’ origins as a local Japanese product, we’ve expanded Dusters and the surface-care category to include 360-degree dusters, extended-reach handles and our Swiffer Dust & Shine spray. An immediate hit with consumers, Swiffer Dusters are now sold in 15 global markets.

Creating mutual benefits

Sharing in Swiffer Dusters’ success

For our Japanese partner, we quickly gave their technology global distribution, plus greater brand presence and sales potential- unlocking an opportunity for both of us to increase global market presence. Dusters have solidified Swiffer’s position as a household name in cleaning ease- and helped it become one of P&G’s billion-Dollar Brands.

Innovation comes full cycle

Over half of the innovation we’re bringing to market includes ideas or technologies from outside P&G. Connect+ Develop enables us to improve consumers’ lives in small but meaningful ways- and bring those innovations to life faster, more economically and more sustainably.

Procter and Gamble organizational culture

Everyone is an innovator (Gamble, Everyone is Innovator, 2010)

“Through innovations large and small, we touch and improve the lives of consumers everywhere. Because innovation is the engine of our growth, we make it everyone’s responsibility at P&G.”

Attitudes of innovation (Jr, M. H. (2010))

1.       Passionate about solving problems

2.       Playfulness and curiosity

3.       Ability to switch roles(yin and yang)

·        Cynicism and belief

·        Deep doubt and unshakable confidence

4.       What if these “weird ideas ” are true

·        Try them out!

Some guidelines (Jr, M. H. (2010))

1.       Positive attitude

·        Challenge seen as an opportunity

2.       The best management is sometimes no management

3.       Innovation means selling, not just inventing new ideas

4.       Innovation requires both flexibility and rigidity

5.       Incite and uncover discomfort

6.       Treat everything like a temporary condition

     

Table 4 the Innovation attitudes and guidelines criteria and organizational Configurations map

Innovation attitudes and guidelines criteria	Organizational Configurations (Levels(High, Medium, Low))
	Flexibility	Market Bundle	Professional		Bureaucratic	Procter and Gamble
Passionate about solving problems	High	High		Med	Low	High, company encourages the entrepreneurship.
Playfulness and curiosity	High	Med		Med	Low	Med
Ability to switch roles	High	High		Low	Low	High, employees  mandatory change roles every 3 years
What if these “weird ideas” are true – try them out!	High	High		Med	Low	Med
Positive attitudes	High	High		High	Med	High, It is embedded to the recruitment processes.
The best management is sometimes no management	High	High		Med	Low	High, the company prefers employees to manage themselves by having entry level as manager.
flexibility and rigidity	High	High		Med	Low	High, employees mandatory change roles every 3 years
Treat everything like a temporary condition	High	Med		Low	Low	High, employees mandatory change roles every 3 years

Procter and Gamble company type

Procter and Gamble is the market-driven company where the marketing and CBD (Customer Business Development) are the leader of the company. Table 4 shows different organization type in the relation to the innovation attitudes and guidelines criteria. As can be seen, even though Procter and Gamble is the multinational companies where there are rules and regulations being well-established, the company is classified as the Market Bundle organization type. Therefore we can derive the hypothesis that Procter and Gamble has the innovative organizational culture which is the mandatory in the consumer products market where the competition is fierce so that is why Procter and Gamble is able to survive for 145 years in the business.

Lesson learned from case studies on the lack thereof innovation in Phillips

Applying OARP to problem identification of the conversion from technology-driven to market-driven in Phillips

Observation

In 2000, Phillips incurred net loss of USD$3,206 million from the decrease sale growth. Before 2003, Phillips was the technology-driven company where the company emphasis more on the Research and Development than the market. Therefore the outside contract research work where it is closed to the consumers was limited.

Assumptions

The shift of company focus from technology-driven to market-driven would help Phillips resolve the gain the market share back.

Open innovation or the shift to 4rd generation R&D could resolve the profit loss issue by applying the success story of Procter and Gamble’s Connect and Develop.

Risks

There are several risks that we need to consider. First, since Phillip is the electrical company, the core competency or company’s core technology may be lost to the outside R&D institutes. Second, new technologies needed may be disruptive for the internal R&D organization. In other words, there might be some roadblocks on the organization change which takes some time until it comes back reliably such as the hiring and firing the internal staffs, the creation of new management plan for new technologies.

Second, the company may need to be aware of the backup budget for new business areas such as the disruptive and radical innovations. In addition, the external R&D might be more expensive than the internal in some circumstances.

Last, there might be the problem on the knowledge management in terms of the R&D evaluation and transfer.

Real Problem

The root cause of problem is the wrong focusing on the business model strategy. Phillips focuses on the technology but not the market. In other words, some markets like developing countries may not require the advance product features but they require the good enough and cheap products. That’s why Phillips overlooked several potential business opportunities. In addition, more market opportunities can be obtained from the outside organizations like outside R&D institutions.

Applying FRAT to the answer of the conversion from technology-driven to market-driven in Phillips

Functions

Phillips should be able to bring in the innovative products, new business model and new market from outside. In addition, Phillips should be able to change organization structure to gain the R&D cost reduction.

Requirements

Phillips would be able to reduce R&D cost and obtain better market share. In addition, the innovative products are continuously introduced to consumers.

Compare and contrast of organizational culture in technology and market-driven companies in different System Thinking Perspectives (STPs)

STPs	Market-driven	Technology-driven
Operational	Focus on the customers’ need and capabilities.	Focus on the advance of technology development.
Operational	A lot of collaborations with suppliers and partners.	Less collaboration from outside.
Big Picture	Quickly adapt to changes in the market	Stick to the current core technologies.

Implications

From the operational perspective, the market-driven approach is more likely to gain better advantage in the market since it focuses on the customers’ needs and easier to obtain knowledge from outside in order to improve the company’s market strategy. On the other hand, from the big picture perspective, technology-driven companies stick only to the core technologies and the features development which they may not fit with the market requirements.

Cases review on the success story of moving to 4rd generation R&D

The lists of successful Clients using the InnoCentive (Lakhani, 2009) which is one of the method derived from 4rd generation R&D. In fact, InnoCentive has worked with over 80 clients, including:

Procter and Gamble, Eli Lilly & Company, Janssen, Solvay, Rockefeller Foundation, GlobalGiving, Corona, Neah Power, SunNight Solar, Oil Spill Recovery Institute and Asset India

Answer

Phillips can do this by changing the company focus from technology-driven to market-driven. In addition, Phillips should change the R&D approach from 3^rd generation to 4^th generation.

Tests

There are some measurements here such as the increase of Phillips’ share price, the brand image improvement and the increase and expansion of market shares to other product types.

Today’s Phillips innovation processes

Overall, Phillips leverage on its suppliers and partners a lot more that in the past. Phillips collaborates with partners and suppliers with complimentary competency and technology and established the clear interface and control points. In fact, Phillips right now has coordinated with the research agencies such as A *Star.

Compare and contrast of the Innovation Funnel and Product Stage Gate to Phillips’

Since Phillips has changed its R&D and company strategy to be 4^th generation and market-based strategy, Phillips come up with new innovation planning processes as illustrated in figure 10 and 11.

The Innovation Funnel

Figure 9: The development funnel [S.C., 1993]

Figure 10: The Phillips Innovation Processes (Phillips, 2010)

Figure 11: The Phillips Innovation Process (Phillips, 2010)

Mapping and Matching between Phillips innovation processes and Innovation Funnel.

Innovation Funnel	Phillips Innovation Processes
Capabilities assessment and forecasting, Market assessment and forecasting Business strategy Development Goals and Objectives	Figure 11 – Know-How Generation (Explorations,. Feasibilities, Deployment)
Project Portfolio Planning	Figure 10- High Impact Innovation Initiative
Project management and execution	Figure 10- Product development and delivery Figure 11- Market introduction(Planning , Preparation, Launch and evaluation)
Post-project Learning and Improvement	Figure 11- Planning cycle
Capabilities Strategy - considering core competencies - Technological base/stage cycle - Technological integration	Figure 11- Architecture & Standard Design Creation, Product Realization
Product/Market Strategy -Clarifying position and priorities on new market/existing markets derivative product/new concept, Financial contribution	Figure 10 – the link between technology and consumer need, Applied Research, Understand of technology and Understand of Consumer need.

Applying the Bundling and bungling in Phillip technology

Phillips introduced the ambient lighting Television as the integration of normal Television features with Phillips’ ambient lighting technology. This initiative proposes the better feeling to the T.V. program audiences. Thus, it leads to new experience of watching Television as illustrated in figure 12.

Figure 12 Perfect: Ambient illumination should come from behind the screen, as seen here with this "Ambilight" TV [Loehneysen, 2009]

                               

Discussion

Lesson learned from the General Electric’s reverse innovation

STPs	Lesson learned
Operational and Temporal perspective	To create innovation is to do it in the non-linear way. The innovation of business is about something new to the market, something that totally changes the business model and how people work. Instead of doing it in the incremental way such as what we have in the operational excellences which are found in many organizations, the reverse innovation came from the non-linear thinking. Therefore, the future customers will less probably be the same as current ones. In other words, the future innovation may involve the customer discontinuities.
Functional perspective	If the organizations want to be the leading firms, they have to focus on the opportunities and innovation. There is one example on the Tata motor which is the India car company who developed the cheapest car. While the companies like Ford set up its global automobile platform in India and catered to the niche premium segments in India, Tata introduced the Tata Nano for the price conscious consumer in India in 2009. In addition, Tata plans to launch Tata Nano in Europe and U.S. subsequently [4]. This implies the shift in leading firms since Ford cannot compete with Tata motor that can produce cheaper car to India markets due to its focus on local market opportunities and innovation of low-cost car.
Operational perspective	No benchmarking, no gap findings are required anymore on the organization strategy development. The current organization strategy development may no longer require the benchmarking or gap findings since the total customer and market are totally changed. The old way of benchmarking the similar industries may not work out. The new strategy like “Blue Ocean Strategy” needs to be introduced so that the business will be able to adapt the new market and customer types.
Big picture perspective	Strategy is not about applying the best practices but it is about creating new best practices. By applying the best practices from other successful companies in the past may be possible to be survived in the current business crisis. The Glocalization is best practice being used in the past but the customers from the bottom of the pyramid are the next market to focus due to its mass purchasing power. While designing and researching products in the industrialized countries work quite well in the past, it creates a lot of trouble managing the emerging economic countries in terms of understanding their needs. Therefore, even though there are many debates and arguments, the reverse innovation is introduced in the world market.
Operational perspective	Do the things differently to your competitors, if you want to be in their business In the business world, you have to dare to be different since you can only gain the small market share when you sell the same products as your competitors. The next step to compete each other is to reduce the cost and increase more features which will not work in long run. There are many benefits of creating new market such as creating new dominant design which totally changes the current de-facto product standard. This result in the priceless benefits gained from doing things differently to your competitors.
Temporal perspective	Future is now Investment to the R&D reflects the future where the company will be positioned. If you do not reinvent yourself, you will die definitely.

Lesson learned from the effects of innovation in Procter and Gamble

Sometimes the internal knowledge is not enough so we have to bring it from outside The world keeps on changing so the current best practices are not enough to draw new process steps in the organization. Therefore, benchmarking and getting the knowledge from outside are the better ways.

The innovative deliverables come from the culture As can be seen that Procter and Gamble encourage everyone to be leaders and the entrepreneur, the company work and communicate in the innovative manner so that everyone need not to follow the old initiatives and current practices but employees always explore new methods and innovative products to serve their company.

Entrepreneurship is important When employees work as if they are the owner of the company, they will spend all their efforts in making everything better. Consequently, the encouraging to employees to work as the entrepreneur is vital as it creates more productivities and better product qualities.

Customer-centric strategy is vital for products and services companies Customers keep on changing their minds and favorites as the technologies and business models change. In the 4rd generation R&D emphasis on the customer-based product design and development which is wise.

It is better to get the product requirements and initiatives directly from the customers In 4rd generation R&D, consumers have to right to request for new products and initiatives. Many companies follow these practices in order to develop the products that can be sold. In the end, the companies that adopted this approach are the winner in the market.

Change is vital for all companies We cannot deny that the companies that are capable to adapt to changes can survive longer time in the industries. Many companies that have long histories stick to the continuous products development so they can still gain competitive advantage in market.

Lesson learned

System Thinking Perspectives	Lesson Learned
Functional	Focus on the users and everything will come after As can be seen from Google company’s vision as to get the thing better, Google focuses mainly on users. Therefore the Google products are clear, simple
Operational	It is better to do one thing really really well  As there are many competitors in the market, doing the same thing with same features would not be able to beat the other competitors.
Operational	It is better to develop fast products better than slow The faster and better products will attract users to use the products. Therefore, in order to gain competitive edge in market, it is better to find the technology gaps and the customers’ need and derive the initiatives and the fixes from that.
Big picture	Great today is not the great for tomorrow The continuous improvement is vital in business today as more and more technology is produced. The better today may not be the better thing for tomorrow. Therefore, the future product planning and assessing processes are crucial for the companies.
Generic	360-degree of information getting is important Business nowadays not only relies on the internal capabilities, it requires the emphasis on the outside technology and business models. Consequently, there is a need to
Operational and Temporal	Offer its for free and then derive the value back later The more users on using your products or services, the more popularities the product are. This can be called the “Network Effect” where people emphasis on numbers of users using the services and the availabilities of products. Thus, it is a need to invest by offering free products and services and design the business model to capture the value later.

Lesson learned

STPs	Lesson Learned
Functional	Innovation is crucial in the competitive market General Motors paid little attention on the innovations because it only focused on the cost reduction which was a wrong direction in today’s business. As Professor Rosabeth Moss Kanter (Harvard Business Review, 2009)at Harvard Business School eloquently puts it, “Where others see merely bankruptcy, I see a bankruptcy of ideas. The issue for GM is not just financial failure; it is a failure of imagination.”
Functional	Be simpler so that everyone can understand General Motors created many production lines so the customers confused on what models are proper for their needs. On the other hand, Toyota and BMW produced simpler models and production lines so that the salesperson could be able to clearly explain to their customers.
Functional and Temporal	Ensure that you are ready for any changes all the time General Motors was unable to decrease the design cycle time. Therefore, compared to other car brands, General Motors was too slow to capture the change of customer demands. This results in one of the gap that General Motors have to improve.
Functional and Operational	Innovation is the key to beat rivals in the market GM totally misunderstood that reducing production cost would make it win in the competitive market. On the other hand, it was innovation that made Japanese car firms won and sustains the market share until now.
Functional and Operational	Trust is important when you work If you grow, your suppliers, partners are expected to grow together. By the increase of coordination among the business partners would lead to the stronger relationship and trust. Trust is very important for the business nowadays since the ideas, licenses, and Intellectual properties are key factors for the business. In other words, if the company could not be able to maintain the relationship with its business partners, it would be likely that the partner will sell the company’s know-how to the rivals.

Lesson learned

System Thinking Perspectives(STPs)	Lesson learned
Generic	Keep on benchmarking what competitors are doing The competitors sometimes have better methods of doing things so it is advised that the company keeps on benchmarking what competitors are doing and apply what is fit for the company to use.
Big picture and Continumm	Sometimes outside sources know better than inside sources Some unique knowledge we sometimes cannot either develop inside or it may require a lot of investment. Therefore, the company needs to segment the products whether they are better to be developed inside or outside.
Operational	Cooperation among business suppliers, partners are vital To gain competitive advantage in the market, the co-development among suppliers and partners are vital since in the long term, suppliers and partners will be getting more and more understanding on the products. Specifically, the better relationship results in the confidentiality and quality products.
Functional	The applications of cross functions results in better products Although the products are categorized and developed separately, it is required that the co-development of product across categories is conducted.
Big Picture	Market is the first priority Technology is still important but it might be useless when we produce the products that consumers cannot either afford or use. Therefore, the focusing on market is nowadays the first priority compared to the others.

                                                               

Summary

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[1] Temporal work flow of company portfolio management mapped by Nathamon Wongsala, National University Of Singapore

[2] S-Curve of Research and Development generations mapped by Nathamon Wongsala, National University Of Singapore