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INNOVATION MANAGEMENT

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Title: INNOVATION MANAGEMENT


1
INNOVATION MANAGEMENT
  • Jirí Vacek
  • vacekj_at_kip.zcu.cz
  • Department of Management, Innovations and
    Projects
  • UWB, Faculty of Economics
  • Summer semester 2009/10

2
Lesson 1
  • Introduction
  • Basic concepts
  • Importance of innovations

3
CHARACTERISTICS OF SUCCESSFUL INNOVATING
COMPANIES - 1
  • Systematic collection of all impulses that could
    lead to innovation
  • Creativity of employees
  • Ability to evaluate the possibility of the
    innovation idea
  • Good team work
  • Project-based approach and ability to manage
    projects

4
CHARACTERISTICS OF SUCCESSFUL INNOVATING
COMPANIES - 2
  • Cooperation with external experts (universities,
    research laboratories)
  • Proper rate of risk-taking
  • Employees motivation (the employees are willing
    to improve the product and the operation of the
    whole company)
  • Continued education of employees
  • Ability to finance the innovation activities

5
Definition of innovation - 1
  • Technological innovations are defined as new
    products and processes and major technological
    modifications to products and processes. An
    innovation is considered performed if it is
    introduced to the market (product innovation) or
    implemented in the production process (process
    innovation). Innovation includes many research,
    technological, organizational, financial and
    commercial activities.

6
Definition of innovation - 2
  • RD represents only one of these activities and
    can take place during various stages of the
    innovation process. It can play not only the role
    of the original source of the innovation ideas
    but also the role of problem solution framework,
    which can be turned to at any stage of the
    implementation.
  • OECD, Frascati Manual 1992

7
Oslo Manual
  • Product innovation
  • A good or service that is new or significantly
    improved. This includes significant improvements
    in technical specifications, components and
    materials, software in the product, user
    friendliness or other functional characteristics.
  • Process innovation
  • A new or significantly improved production or
    delivery method. This includes significant
    changes in techniques, equipment and/or software.
  • Marketing innovation
  • A new marketing method involving significant
    changes in product design or packaging, product
    placement, product promotion or pricing.
  • Organisational innovation
  • A new organisational method in business
    practices, workplace organisation or external
    relations.

8
  • Technological innovations based on specific
    technology, invention, discovery,
  • Social innovations in critical historic periods
    more important than technological ones (mail,
    educational systém, social systém, health care, )

9
DEGREE OF NOVELTY
  • Incremental innovations
  • Radical innovations
  • Systemic innovations

10
Classification of innovations
11
INNOVATION PROCESS
  • Research and development (RD)
  • Production
  • Marketing
  • Innovation is an opportunity for something new,
    different. It is always based on change.
  • Innovators do not view any change as a threat but
    as an opportunity

12
FOCUS
  • Use the limited resources in the most effective
    manner focus on one of the following
  • Operational output
  • Top-quality products
  • Perfect knowledge of customers

13
RECOMMENDATIONS
  • Solve the correct problem correctly be
    effective and efficient
  • Manage innovation as a project
  • Analyze risks
  • Use models, scenarios, computer simulation
  • Study examples of succesful and unsuccesful
    innovation projects

14
WHAT TO DO
  • Start with analysis and study of opportunities.
  • Go among people, ask questions, listen
  • Effective innovations are surprisingly simple.
    They must be focused on specific needs and on
    specific final products.
  • Effective innovation start on a small scale.
  • A successful innovation always tries to win a
    leading position, otherwise you create
    opportunities for your competitors.

15
WHAT TO AVOID
  • Dont try to be too clever. All that is too
    sophisticated will almost certainly go wrong.
  • Dont try to do too many things at once. Focus on
    the core of the problem.
  • Dont try to make innovations for the future but
    for today. An innovation can have a long-term
    impact but there must be an immediate need for
    it.

16
Three conditions for innovations
  • Innovation means work, hard, concentrated and
    thorough work. If these qualities are lacking
    then there is no use for the big talent,
    cleverness or knowledge.
  • Successful innovations must build on your strong
    points. The innovation must be important to the
    innovator.
  • Innovation must focus on a market, must be
    controlled by the market (market-pull).

17
CASE STUDIES
18
Linet Želevcice
  • Hospital products
  • Hospital beds, intensive care beds, medical
    furniture and other equipment increase the
    comfort of patients and help the nurses.
  • Nursing-care products
  • Nursing beds, bed accessories, bedside cabinets,
    mattresses and other furniture.

19
No comment
1990
2005
20
TOSHULIN
  • Development of new machines
  • Customized the machines developed for the
    specific customer according to its requirements
    market pull
  • Prototypes there is no specific customer
    market push

21
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23
Contipro
Connective tissue products
RNDr. Vladimír Velebný, CSc.
24
Holding current state
  • 167 employees
  • sales (2008) 242 mil Kc
  • export 98 of total sales one of the biggest
    produces of hyaluronanu inthe world
  • 30 of the world market
  • 60 of the European market
  • Customers in 43 countries

25
Sales in regions
26
3 pillars of success
  • Maximum attainable quality
  • Sharing expenses with customers
  • Development of original products

27
3M and post-it notes
http//www.3m.com/us/office/postit/pastpresent/his
tory_ws.html
28
More about 3M
A Century of Innovation The 3M Story
http//solutions.3m.com/wps/portal/3M/en_US/Abou
t/3M/
29
iGO distribution of bateries
  • Bateries and accessories for notebooks, mobiles,
    cameras and other equipment
  • Vision to develop and sell simple and elegant
    solutions, facilitate the use of electronic
    devices
  • online catalogue, e-commerce, CRM
  • Customer - targeted marketing, flexibility
  • Growth of sales by 80 in the first year, by 100
    in the following year
  • http//corporate.igo.com/about_us.aspx

30
Adaptors
  • Patented technology iGo Technology, powering of
    mobile electronic devices using single
    (universal) adaptor
  • Power Technology Patent Brochure (PDF)

31
Bang Olufsen
  • www.bang-olufsen.com
  • VISION Courage to constantly question the
    ordinary in search of surprising, long-lasting
    experiences.
  • Founded in 1925 in Struer, Denmark, Bang
    Olufsen a/s is world renowned for its distinctive
    range of quality audio, video and multimedia
    products that represent our vision Courage to
    constantly question the ordinary in search of
    surprising, long-lasting experiences. Bang
    Olufsen employs over 2.550 staff members and had
    a turnover of DKK 4.092 million (EUR 548,6
    million) in the 2007/2008 financial year.
  • Bang Olufsen manufactures a highly distinctive
    and exclusive range of televisions, music
    systems, loudspeakers, telephones, and multimedia
    products that combine technological excellence
    with emotional appeal. Bang Olufsen products
    are sold by over 1.200 dealers in more than 100
    countries in an extensive network of retail
    stores. Approximately 65 of these stores are
    B1-stores, which exclusively sell Bang Olufsen
    products. The B1 stores account for 81 of the
    total turnover.
  • Production also in the Czech Republic

32
Bang Olufsen products
33
More case studies
  • IBM Case Studies http//www.ibm.com/search/?enut
    fv14langenccuslvcqcasestudyinnovation
    x13y5
  • Industry podcasts Midsized clients and experts
    in seven industries share their insights -
    http//www-1.ibm.com/businesscenter/smb/us/en/mbpo
    dcasts?casmbIndustryPodcasts101706tacticmeW
    metinliresmbibmcomTopPagesIndustriesPromo1usen1
    01706

34
More case studies
  • Sustainable energy (hydrogen, fuel cells,
    biofuels, zero emission, http//ec.europa.eu/res
    earch/energy/nn/nn_pu/article_1078_en.htm
  • http//www.zoner.com/
  • http//www.kerio.com/

35
The most important innovations in last 30 years
  • http//www.pbs.org/nbr/site/features/special/subdi
    r/top-30-innovations_slide-show/

36
Lesson 2
  • Disruptive and open innovations

37
Innovation categories
  • sustaining better products that can be sold
    with higher margin to demanding customers
    incumbents win
  • disruptive commercialization of simpler, more
    user-friendly products, which are chepaer and
    targeted to new or less demanding customers new
    entrants win

38
Key elements of disruption
  • Customers at each market has limited absorption
    capacity
  • Technological progress usually is faster that the
    ability of the market to employ it. Companies
    focus on better products to be sold with higher
    margin to unsatisfied customers.

39
Sustaining vs. disruptive
  • Sustaining focused on demanding customers both
    incremental and radical. Incumbents have
    resources and motivation.
  • Disruptive introduce products and services not
    as advanced as existing ones, but offering other
    advantages (simpler, cheaper, more user friendly,
    ...) and focus on new or less demanding customers.

40
Clayton M. Christensen The Innovators Solution,
Harvard Business Press, 2003
41
  • Due to technological progress the trajectory of
    the disruptive innovation after some time crosses
    the trajectory of demands of more demanding
    customers and starts to replace incumbents who
    are not principally ready to react adequatelly,
    as they are motivated to suceed at better
    markets, not to defend themselves on inferior
    ones.

42
Clayton M. Christensen The Innovators Solution,
Harvard Business Press, 2003
43
Clayton M. Christensen The Innovators Solution,
Harvard Business Press, 2003
44
Clayton M. Christensen The Innovators Solution,
Harvard Business Press, 2003
45
Clayton M. Christensen The Innovators Solution,
Harvard Business Press, 2003
46
Conditions of success - 1
  • Disruption is successful, as it is easier to
    defeat competition that tries to escape than the
    competition who fights
  • Innovation must be disruptive for all companies
    in the industry
  • Ex. Internet for Dell sustaining, they sold
    computers formerly by mail, phone, etc.

47
Conditions of success - 2
  • Following the trajectory upwards to market tiers
    where it is possible to attain higher margins is
    what good manager is expected to do.
  • Each company therefore prepares its own
    disruption. This is the innovators dilemma, but
    also the start of innovators solution.
  • The advice to new, growing firms focus on
    products and markets ignored or neglected ba
    incumbents.

48
Two types of disruption
  • New markets compete with non-consumption
    simpler, more user frindly, can be used by less
    sophisticated customers (PC, transistor radio,
    desk copiers).
  • Low-end focus on lower tiers of main markets
    (minimills, discount stores, Korean auto-makers)
    motivate incumbents to leave the market

49
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50
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51
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52
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53
OPEN INNOVATION
  • Chesbrough, H., Open Innovation, Harvard
    Business School Publishing, Boston MA, 2003
  • Closed innovation - requires control
  • Open innovation
  • companies use external as well as internal ideas
    and both external and internal ways to market
  • internal ideas can be taken to the market through
    external channels to generate additional value

54
Chesbrough H.W. The Era of Open Innovation, MIT
Sloan Management Review, Spring 203, p. 35 - 41
55
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58
Business model
  • Formulate value proposition, i.e. the value
    delivered to the customer by the product based on
    specific technology.
  • Identify market segment, ie. users to whom the
    technology brings value and performs the job to
    be done.
  • Define structure of the value chain, required for
    the product creation and distribution. Value
    creation is necessary, however not sufficient
    condition of profitability value creation is
    conditioned by
  • balance of forces among our business, suppliers
    and competitors
  • presence of complementary assets (e.g. in
    production, distribution, etc.) necessary for
    supporting the company position in the value
    chain.

59
Business model contd
  • Specify the mechanism of profit creation and
    evaluate product cost structure and target margin
  • Describe the company position in the value
    network that connects suppliers and customers,
    including identification of potential alternative
    producers and competitors.
  • Formulate competitive strategy enabling to the
    innovative company to gain and keep competitive
    advantage.

60
Product architecture
  • Hierarchy of connections between disparate
    functions within a system

61
Interdependent Architecture
62
Interdependent Architecture
  • changing one component requires changes in all
    other parts of the system, because the
    relationships between the parts are not clearly
    understood
  • can be best managed through internal processes

63
Modular Architecture
64
Modular Architecture
  • components could change without causing any
    change in other components
  • modular design enables to assemble system more
    easily, from plug and play components whose
    interfaces are well understood
  • modular architecture makes it easy for many
    companies to innovate components without worrying
    about possible impact on other parts of the
    system

65
IMPLICATIONS FOR NPD
  • extended circle of company stakeholders -
    customers, NGOs, local and regional governments
  • not only superior quality, but also
    environmentally friendly, aesthetically appealing
    new products
  • designed for X, where X can be quite large and
    multi-faceted set
  • after-sale service plays an increasing role and
    brings increased turnover and profit

66
Lesson 3
  • Assessment of company innovation potential

67
COMPANY INNOVATION POTENTIAL
  • A company with high innovation potential
  • scores high in the following areas
  • Strategy and planning
  • Marketing
  • Technological process
  • Quality management
  • Logistics
  • Human resources

68
INNOVATION POTENTIAL ASSESSMENT
  • For a company, it is important to know its
    innovation potential. It can use the
    questionnaire
  • For every of the six areas, there are six
    question, each with four possible answers. The
    answers are formulated so that they reflect the
    existing situation in the company.

69
A. STRATEGY AND PLANNING
  • Idea about the company future
  • Vision and employees
  • Company innovation programs
  • Plan modifications
  • Financial indicators of the plan
  • Project management

70
B. MARKETING
  • Monitoring of current market trends
  • Evaluation of the market competition position
  • Customer-orientation
  • Monitoring of customers attitudes to the company
    product
  • Market information flow inside the company
  • Marketing and financial control

71
C. TECHNOLOGICAL PROCESS
  • Future companys competitiveness in the industry
  • Changes of technologies
  • Collection of impulses for implementation of
    technology changes
  • Evaluation of the return on investment
  • Calculation of production costs and their
    monitoring
  • Creation of resources for development

72
D. QUALITY, ENVIRONMENT
  • Monitoring of changes conditioning the quality
    management in the company
  • Employees personal contribution to the quality
    system
  • External quality audit in the company
  • Monitoring of the environmental impact
  • Impact of quality monitoring on the company
    processes
  • Covering of costs resulting from modifications of
    standards, regulations and legislation in the
    sphere of quality and environment

73
E. LOGISTICS
  • Organization of purchase and distribution
    channels in the company
  • Optimization of the company logistics
  • Information and communication flows between the
    company and its partners
  • Flexibility of logistics processes
  • Introduction of innovations in logistics
  • Logistics and financial control

74
F. ORGANIZATION AND HUMAN RESOURCES
  • Employees satisfaction
  • Employees motivation
  • Management and communication
  • Conflict resolution
  • Company information system
  • Company culture

75
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77
Lesson 4
  • STRUCTURING THE NEW PRODUCT DEVELOPMENT PROCESSES
  • EVALUATION OF THE NEW PRODUCT DEVELOPMENT AND RD
    PROJECTS
  • HOW TO SELECT THE PORTFOLIO OF NEW PRODUCT
    DEVELOPMENT PROJECTS

78
STRUCTURING THE NEW PRODUCT DEVELOPMENT PROCESSES
79
The objectives of process models
80
Stage-gate process
  • R. Cooper, 1960s
  • phases with inputs and outputs specified
    beforehand
  • gates, in which the gatekeepers decide about the
    continuation of the process
  • Activities were standardized and the indicators
    of the process performance significantly
    improved.

81
2-nd generation SG process
82
Evaluation criteria
  • Operational, realistic, differentiating
  • Must meet to kill not well proceeding projects
    as soon as possible
  • Should meet prioritization, support of portfolio
    management
  • Strategic buckets resources allocated to various
    strategic goals

83
Interdisciplinary view
84
Fuzzy Front End (FFE, FEI)
  • quality of pre-development phases significantly
    influence the product success
  • early phases to a large extent influence, which
    projects will be realized, why, what will be
    final costs, time, and in the end the final
    success in the market
  • highly dynamic, not strictly documented,
    creativity competes with systemization.

85
Phase 0
  • results in product concept, including preliminary
    identification of customer requirements, market
    segments, competitive position, business
    opportunity and compliance with strategy

86
Incremental vs. radical innovations
  • Koen systematic approaches using process models
    can be successful in the case of incremental
    innovations, where both business and technical
    uncertainty is rather low
  • whenever at least one of those uncertainties is
    high, we need more flexible approaches with
    iterations and parallelization of activities
  • successful radical innovations often use rapid or
    virtual prototyping even in the 0-th or 1-st
    phase, as it allows better visualization and
    communication of the product concept.

87
New concept development model
  • in the early phases it is not suitable to use the
    same approaches as in the later, more structured
    process phases

88
Difference Between FFE and NPD
89
New concept development model (NCD)
Technology push
Market pull
90
NCD components
  • Engine represents management support
  • Engine powers the five elements of the NCD model
  • The engine and the five elements are placed on
    top of the influencing factors.

91
Technology stage-gate process (TSG)
  • Management of high-risk projects within and at
    the transition between the fuzzy front end and
    new product development
  • traditional SG gates are transparent, the
    product development team can "see" all the
    deliverables at the gates
  • TSG gates are opaque, the team can only "see" to
    the next gate and understands that the
    deliverable may change as the technology is
    developed

92
Traditional and technology stage-gate processes
93
EVALUATION OF THE NEW PRODUCT DEVELOPMENT AND RD
PROJECTS
94
Stage-gate process
95
Project feasibility
  • The stage-gate model divides the innovation
    process into five stages with gates, in which
    evaluators decide if to continue or kill the
    project.
  • Each phase has its cost, duration and probability
    of success. Usually only the last stage generate
    profits.
  • To justify the project development cost, we
    should prove at the very beginning its
    feasibility. Traditionally we have to show that
    the project net present value is greater than
    zero, i.e. that the whole project, taking into
    account the time value of the money, will
    generate net profit.

96
DCF methods
  • The generally accepted method of evaluation of
    investment, is based on discounted cash flows
    (DCF).
  • The method is successfully used for investment
    projects with low level of uncertainty and
    duration from several months up to few years.
  • In many cases it is not suited to long-term NPD
    and RD projects, as it penalizes projects with
    high risk and potentially valuable projects can
    be rejected or terminated.

97
Weakness of DCF methods
  • Do not take into account the typical nature of
    the NPD and RD projects that can be divided into
    stages separated by gates, deciding about project
    continuation or termination.
  • Financial models assume that the decision about
    the project realization is done at its very
    beginning and is irreversible. However,
    investments into NPD or RD projects are
    incremental and the evaluators at the gates
    decides about the project fate on the basis of
    changing situation.

98
Project Expected Commercial Value (ECV)
  • Takes into consideration all three important
    characteristics of each phase its cost,
    duration and probability of success
  • The project is modeled by the probability tree.
  • The stage duration, together with the discount
    rate, is reflected in the net present value
    calculation.
  • Illustration project with only two stages
    development and commercialization

99
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100
Example
  • The first stage (1 year) laboratory tests
    success probability 50.
  • The second stage (2 years) field tests success
    probability 75.
  • If tests are successful, the necessary investment
    into the technology is 5M, expected earnings 8M
    ? project net present value 3M.
  • Financial data are discounted, assuming the
    weighted capital costs WACC 12, risk-free
    discount rate 5.
  • Development costs and specific project risk are
    high ?resulting ECV negative (-109 000)
  • according to this criterion, project should be
    rejected.

101
Probability tree in project evaluation
102
Real options
  • The concept of real options is closely related to
    financial options that found their place in
    financial markets in recent decades. Real options
    relate to company opportunities and emphasize the
    basic idea that risk can bring the competitive
    advantage and as such it should be rewarded.
  • The application of the real options theory is
    briefly described in Boer 2003, the related
    website contains further information and
    references to more detailed resources. Here we
    will give only a brief account of basic concepts
    and terminology.

103
Two kinds of risks
  • specific risk
  • market risk

104
Specific risk
  • Specific for the partial situation
  • At lest partly under your control (e.g. risk of a
    fire or risk of project failure)
  • Can be diversified - we can use insurance to
    share fire risk and maintain the diversified
    project portfolio to protect against the risk of
    project failure
  • Therefore the market does not pay any premium for
    specific risks
  • Specific risk can be often characterized by its
    probability.
  • Better management of specific risk can help us to
    achieve the competitive advantage.

105
Market risk
  • Is not under your control
  • Cannot be diversified. The pharmaceutical
    company, as a part of health care sector, can do
    little to diversify the market risk.
  • Traditionally, market risk increases the capital
    expenses and therefore decreases the project
    value.
  • However, the situation is different with options
    here the higher market risk, expressed as
    volatility, increases the option value, which can
    be quantified using the Black-Scholes algorithm,
    well known from financial options.

106
Volatility
  • Quantifies the rate of change of market value of
    the underlying asset, i.e. the asset to its
    ownership we are entitled by buying the option
    (technology, database of customers ).
  • Is usually specific for the industry and can be
    estimated on the basis of information available
    from e.g. stock market, industry statistics, etc.
  • The higher the volatility, the more advantageous
    is to hold the respective option.
  • The higher volatility means the higher potential
    of both the increase and decrease of the related
    asset price. As the option holder we can fully
    exploit the increase, while in the case of
    decrease we do not realize the option and the
    maximum loss is limited by the option cost.

107
Application
  • Boer Boer 2003 applies the real option model
    (OPT) with volatility equal to 50 to the example
    from Fig. 3
  • He shows that using this method the project value
    is 0,171M, i.e. it is positive and the project
    is feasible.
  • The difference in project value assessed by ECV
    and OPT models is 0,279M, what is enough to
    justify the project. The difference is caused by
    market volatility.
  • Boer also proves that in case of the zero market
    risk, i.e. the zero volatility, both methods give
    the same result.
  • The method of real options brings the most
    significant effect to projects with high level of
    risk having slightly negative net present value
    determined by ECV or other models based on the
    discounted cash flow.

108
Conclusion
  • Illustration of the often neglected side of the
    new product development and RD projects.
  • The researchers, engineers, designers must work
    together with investors to determine before the
    project launch and in the gates how efficiently
    the capital invested into the effort is used.
  • It is not an easy task however, we hope that we
    succeeded to persuade the auditorium that this
    important task cannot be avoided.

109
References
  • Boer 2003 BOER F.P. Risk-adjusted Valuation of
    RD Projects, online, http//www.tigerscientific.c
    om
  • Cooper 2001 COOPER R.G., EDGET S.J.,
    KLEINSCHMIDT E.J. Portfolio Management for New
    Products, Basic Books, 2001, ISBN 0-7382-0514-1
  • Cooper 2005 COOPER R.G. Product Leadership,
    Basic Books, 2005, ISBN 0-465-01433-X
  • Vacek 2006 Vacek J. Structuring the new
    product development processes, in AEDS 2006
    Proceedings, pp. xx, University of West Bohemia,
    Pilsen, 2006, ISBN

110
HOW TO SELECT THE PORTFOLIO OF NEW PRODUCT
DEVELOPMENT PROJECTS
111
Outline
  • Portfolio management, consequences of its lack
  • Portfolio management goals
  • Goal 1 Maximizing the portfolio value
  • Goal 2 Balance
  • Goal 3 Strategic alignment

31.10.-1.11.2008
111
AEDS 2008 - Jirí Vacek, KIP FEK UWB
112
Portfolio management
  • Resources are always limited, it is neither
    possible nor effective to invest in every idea
    without due consideration.
  • It is important to select from many possibilities
    those with the highest potential todays
    innovation projects decide about the future
    profile of the company, its customers and market
    share.
  • Goal to create such portfolio of products that
    is rooted in the company strategy and optimizes
    the company performance.
  • Portfolio management dynamic decision-making
    process of evaluation, selection and
    prioritization of new projects active project
    can be fostered, put on hold or even killed
    their priorities and allocation of resources can
    change.
  • The process is characterised by uncertainty,
    changing information, dynamics of opportunities
    and threats, links between projects. The whole
    process must be based on the long-term company
    strategy and must support it

31.10.-1.11.2008
112
AEDS 2008 - Jirí Vacek, KIP FEK UWB
113
31.10.-1.11.2008
113
AEDS 2008 - Jirí Vacek, KIP FEK UWB
114
Portfolio management goals
  • Maximization of value
  • long-term profitability, return on investment,
    probability of success,
  • Balance
  • Long-term projects vs. short, fast ones
  • High risk projects with high potential vs.
    lower-risk sure bets (e.g. radical vs.
    incremental innovation)
  • Focus on different market segments (dont pull
    all eggs into one basket)
  • Different technologies
  • Different project types new products,
    improvements, cost reductions, frontier research.
  • Strategic alignment
  • portfolio is strategically aligned and reflects
    the businesss strategy.

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Goal 1Maximizing the portfolio value
  • Net present value, bang for buck
  • Expected commercial value
  • Multi-criteria project valuation
  • Scoring models

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Projects net present values and resource
requirements
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Rank-ordered list of projects
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Project expected value (ECV)
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Rank-ordered list according to ECV/D, resource
constraint 15 mil
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Rank-ordered list according to ECV
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  • ECV model prioritizes more highly the projects
    with the following properties
  • closer to launch (increase of PV and consequently
    of ECV),
  • higher income streams after launch (increase of
    PV and consequently of ECV),
  • less resources to be spent (decrease of D),
  • higher probabilities of success (increase of
    ECV),
  • utilize less of the constraining resource (its
    easier for them to be above the line).

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Multi-criteria project valuationinput data
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Project ranking
  • Project ranking procedure is the following
  • calculate adjusted values of IRR and NPV
    multiply them by PTS.
  • rank projects according to adjusted values of IRR
    and NPV and according to SI.
  • calculate the average value of those three
    rankings and use it for final ranking

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Multi-criteria project valuation, final project
ranking
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Applicability of financial models
  • Main weakness unreliability of input data,
    especially in the initial project stage
    they should be used only in later stages.
  • Small errors in probabilities of success rapidly
    propagate and can result in significant
    differences.
  • The complexity and sophistication of financial
    models fairly exceeds the quality of input data
  • It does not mean that we should not pay proper
    attention to financial data in the initial
    project stages. However, we should not make
    decisions solely on their basis they should be
    combined with non-financial models

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Scoring models
  • Give very good results.
  • Important selection of criteria that really
    separate the winners from the losers. Such
    criteria must be based on the analyses of your
    own company and other companies in the same
    industry. You must develop the expert base to be
    used in project valuation.
  • One of the models described in Cooper 2001 uses
    five main factors
  • business strategy fit (2)
  • strategic leverage (4)
  • probability of technical success (4)
  • probability of commercial success (6)
  • reward to the company (project profitability) (3)

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Goal 2 Balance
  • In many cases, the project portfolio is not
    balanced often it contains too many small
    projects and not enough of radical, visionary but
    highly risky projects necessary to maintain the
    company competitiveness.
  • Suitable tools for creation of the balanced
    portfolio are bubble diagrams most frequently
    used diagram is the risk reward bubble diagram,
    which is used by 44 companies

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Risk-Reward bubble diagram
OYSTERS
PEARLS
WHITE ELEPHANTS
BREAD BUTTER
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Diagram quadrants
  • Pearls potential star projects high
    probability of success, high expected reward. We
    would like many of such projects.
  • Oysters highly speculative projects low
    probability of success, high expected reward.
    Here the breakthroughs pave the way for solid
    payoffs.
  • Bread and butter simple projects, high
    probability of success, low expected reward.
    Often too many of them in the portfolio,
    consuming substantial ratio of resources.
  • White elephants low probability of success, low
    expected reward projects that are difficult to
    kill, often from personal reasons.

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Goal 3 Strategic alignment
  • Strategy and allocation of resources are closely
    linked until we start allocating resources to
    specific activities, strategy is only paperwork.
    In portfolio creation we will follow the
    following objectives
  • Projects are aligned with business strategy
  • All projects contribute to achievement of
    strategic goals and objectives
  • Allocation of resources reflects specified
    strategic goals and objectives.
  • In portfolio management we use three basic
    approaches top-down, bottom-up and combined.

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Top-down approach
  • from the strategy formulation (using principles,
    methods and procedures of strategic management,
    see e.g. Grant 2008). Objectives for new
    products are often stated in terms of ratio or
    growth of turnover, profit, market share, etc.
    during several (usually 3-5) years.

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Technology roadmaps
  • Technology strategic roadmaps, results of
    technology foresight and other studies performed
    often on the macro-economic level.
  • In the Czech Republic such studies are prepared
    e.g. by Technology centre AV CR
    (http//www.strast.cz/) and CESES Centre for
    social and economic strategies
    (http//www.ceses.cuni.cz/),
  • at the EU level the Institute for Prospective
    Technology Studies in Sevilla (http//ipts.jrc.ec.
    europa.eu/).
  • Technology roadmaps are developed also within the
    framework of technology platforms of the 7-th EU
    Framework Programme for Research, Development and
    Demonstrations (http//cordis.europa.eu/fp7,
    http//cordis.europa.eu/technology-platforms).

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Strategic buckets
  • The company management, on the basis of strategy,
    decides what resources will be allocated to basic
    categories of development projects (e.g. X to
    platforms, Y to new products, Z to
    incremental innovations) and projects are then
    prioritized within those buckets.
  • Resources originally allocated to one category
    may not sufficient, while there are still free
    resources in the other bucket. In such a case the
    resources can be redistributed.
  • However, after the final allocation of resources
    to strategic buckets it should not be possible to
    reshuffle the resources between buckets.
    Especially it should be avoided to take resources
    originally allocated for strategic, long-term
    goals and use them for short-term, more urgent
    projects, often backed from political reasons.
    Such redistribution undermines long-term
    strategic goals and all the strategic planning

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Bottom-up and combined approaches
  • Bottom-up approach build strategic criteria into
    the model of project selection, usually to the
    scoring model.
  • This approach guarantees that all projects are
    strategy aligned, however it cannot guarantee
    allocation of resources in compliance with
    strategic priorities.
  • This weakness can be overcome by the use of
    combined approach we first use the top-down
    approach to establish strategic buckets, and then
    we evaluate all active projects and projects on
    hold and prepare their ranked list. Finally we
    assign projects to corresponding categories
    (buckets) and study the exhaustion of resources.
  • Usually this first iteration is not completely
    satisfactory and it is necessary to use more
    iterations to reach satisfactory results.

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References
  • Cooper 2001 COOPER R.G., EDGET S.J.,
    KLEINSCHMIDT E.J. Portfolio Management for New
    Products, 2nd edition, Basic Books, 2001, ISBN
    0-7382-0514-1
  • Grant 2008 GRANT R.M., Contemporary Strategy
    Analysis, 6th edition, 2008, Blackwell
    Publishing, ISBN 978-1-4051-6309-5
  • Vacek 2007 Vacek, J. Evaluation of the new
    product development and RD projects. In AEDS
    2007. Pilsen University of West Bohemia, 2007,
    p.83-87. ISBN 978-80-7043-600-4.
  • Vacek 2006 Vacek, J. Structuring the new
    product development process. In AEDS 2006. Pilsen
    University of West Bohemia, 2006, p.111-118.
    ISBN 80-7043-490-2.
  • Vacek 2004 Vacek, J. New product development
    and current trends in innovation management. In
    AEDS 2004 Workshop. Plzen University of West
    Bohemia, 2004, p.35-36. ISBN 80-7043-331-0.

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Lesson 5
  • Innovation impulses

137
SOURCES OF INNOVATION IMPULSES Internal
environment
  • Own RD
  • Technical divisions design, technology
  • Production divisions (production, provision of
    services)
  • Marketing and sales
  • Logistics (purchase and supplies)
  • Guarantee and post-guarantee service
  • Owners

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SOURCES OF INNOVATION IMPULSES External
environment
  • Customers
  • Suppliers
  • Competitors
  • Consultants, RD institutions
  • Schools, universities
  • Professional publications, Internet
  • Exhibitions, fairs, specialized seminars and
    conferences
  • Advertising agencies
  • Investors
  • Media
  • Authorized testing laboratories, certification
    agencies
  • State institutions, public sector
  • Legislation
  • Globalization

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MARKET PULL - RD PUSH
  • Market pull
  • looking for the best way of satisfying a newly
    emerging customer demand
  • improvement of the existing products, extension
    of the existing offer or decrease of price
  • impulses for continuous, incremental innovations
    or for process innovations
  • Research and development push
  • looking for commercial use of new impulses
    resulting from the RD results
  • generating of new markets for conceptually
    different products

140
7 SOURCES OF INNOVATION IMPULSES (Drucker)
  • INTERNAL
  • unexpected event
  • contradiction
  • change of work process
  • change in the structure of industry or market
  • EXTERNAL
  • Demographic changes
  • Changes in the world view
  • New knowledge

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1. Unexpected event
  • Unexpected success
  • 1.      What will the use of the offered
    opportunity mean to us?
  • 2.      Where will its introduction take us?
  • 3.      What do we need to do for its
    implementation?
  • 4.      How can we achieve that?
  • Unexpected failure
  • Unexpected external event

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2. Contradiction
  • Non-compliance with economic reality
  • Contradiction between reality and anticipations
    about it
  • Contradiction between the anticipated and real
    behavior of customers and their values

143
3. Change of process
  • realize the necessity of change, identify the
    weak point of the chain
  • be convinced that if something does not work the
    way it should, then it is necessary to attempt a
    change
  • the solution must be convenient for those who
    will implement it. It must place moderate and
    feasible requirements

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4. Change in the structure of industry and market
  • Rapid growth of the industry
  • Identification of new market segments
  • Convergence of technologies (e.g. use of
    computers in telecommunications)
  • Rapid change of the industry and resulting need
    of a structural change

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5. Demography
  • easiest to describe and to predict
  • influence what will be bought, who and in which
    amounts will purchase

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6. Change of attitudes
  • change in the approach to health health-care,
    food, spending the leisure time
  • upper-middle class a chance to offer
    non-standard services at non-standard prices
  • increasing migration, feminism, regionalism etc
  • Timing is essential - to be the first

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7. New knowledge
  • Based on convergence or synergy of various kinds
    of knowledge, their success requires, high rate
    of risk
  • Thorough analysis of all factors. identify the
    missing elements of the chain and possibilities
    of their supplementing or substitution
  • Focus on winning the strategic position at the
    market. the second chance usually does not come
  • Entrepreneurial management style. Quality is not
    what is technically perfect but what adds the
    product its value for the end user

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IMPULSES FROM THE MARKET ENVIRONMENT
  • Customers
  • product presentation
  • realistic
  • simple, demonstrative and precise
  • moderate
  • representative sample of customers
  • Suppliers
  • Competitors

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INNOVATION IMPULSES OF THE RD
  • identification research to monitor the
    scientific, technical and economic information
    and identify innovation impulses applicable in
    the company
  • basic research
  • applied research acquire knowledge and means
    applicable for the meeting of specific,
    beforehand-defined goals
  • development systemic use of knowledge and means
    acquired in the applied research for the creation
    of a new or improvement of the existing product
    or for the creation or modification of processes

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INTERNAL IMPULSES
  • usually combined with external sources
  • supported by
  • creative techniques
  • innovation tools
  • REGISTER OF IMPULSES

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Lesson 6
  • Innovation management tools
  • INNOMAT
  • http//www.inno-pro.com/aainn0.htm

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General Innovation Tools
154
BENCHMARKING
155
BRAINSTORMING
156
REENGINEERING
157
CHANGE MANAGEMENT
158
Specific techniques useful at the different
change management process steps.
INNOVATION MANAGEMENT TOOLS http//www.wiley.co.uk
/innovate/website/pages/atoz/atoz.htm
159
TECHNOLOGY AUDIT
160
TECHNOLOGY FORECAST
161
VALUE ANALYSIS
162
Product Innovation Tools
163
DESIGN FOR X
                                                
                                     ltgt
164
X - examples
165
QUALITY FUNCTION DEPLOYMENT
166
House of Quality
Interrelationships
Technical Features
Voice of the Customer
Relationship between Customer Desired Traits and
Technical Features
Importance of Traits to Customer
Assessment of Competition
Importance of Technical Features
167
House of QualitySteps for Generation
  • 1. Identify Customer Attributes
  • 2. Identify Supporting Technical Characteristics
  • 3. Correlate Customer Attributes with Supporting
    Technical Features
  • 4. Assign Priorities to Customer Requirements and
    Technical Features
  • 5. Evaluate Competitors Stances and Products
  • 6. Identify Technical Characteristics to Deploy
    in the Final Product Design

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Managerial Innovation Tools
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FAILURE MODE AND EFFECT ANALYSIS (FMEA)
170
INNOVATION MANAGEMENT TOOLS http//www.wiley.co.uk
/innovate/website/pages/atoz/atoz.htm
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INNOVATION MANAGEMENT TOOLS http//www.wiley.co.uk
/innovate/website/pages/atoz/atoz.htm
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PEER EVALUATION
173
TEAM BUILDING
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ISO 9000
  • ISO14000
  • refers to procedures for ensuring sustainable
    and environmentally friendly operations
  • EIA Environmental Impact Assessment

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TOTAL PRODUCTIVE MAINTENANCE
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Process Innovation Tools
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DESIGN FOR MANUFACTURING AND ASSEMBLY (DFMA)
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LEAN THINKING
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CONTINUOUS IMPROVEMENT
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CONCURRENT ENGINEERING
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JUST IN TIME (JIT)
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INNOSKILLS
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FASTER
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Lesson 7
  • CREATIVITY
  • BASICS TECHNIQUES

185
Innovation and creativity
  • creativity is manifested in the production of a
    creative work (for example, a new work of art or
    a scientific hypothesis) that is both original
    and useful
  • innovation begins with creative ideas,
  • creativity by individuals and teams is a starting
    point for innovation the first is a necessary
    but not sufficient condition for the second

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  • creativity results
  • in producing or bringing about something partly
    or wholly new
  • in investing an existing object with new
    properties or characteristics
  • in imagining new possibilities that were not
    conceived of before
  • and in seeing or performing something in a manner
    different from what was thought possible or
    normal previously.

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  • Many creative ideas are generated when somebody
    discards preconceived assumptions and decides on
    a new approach or method that might seem to
    others unthinkable
  • Serendipity - effect by which one accidentally
    discovers something fortunate, especially while
    looking for something else entirely

188
Quotations on serendipity
  • "In the field of observation, chance favors only
    the prepared mind." Louis Pasteur
  • "Serendipity. Look for something, find something
    else, and realize that what you've found is more
    suited to your needs than what you thought you
    were looking for." Lawrence Block
  • "The most exciting phrase to hear in science, the
    one that heralds new discoveries, is not
    'Eureka!', but 'That's funny '" Isaac Asimov
  • "In reality, serendipity accounts for one percent
    of the blessings we receive in life, work and
    love. The other 99 percent is due to our
    efforts." Peter McWilliams
  • "Serendipity is looking in a haystack for a
    needle and discovering a farmer's daughter."
    Julius Comroe Jr.
  • "Serendipity is putting a quarter in the gumball
    machine and having three pieces come rattling out
    instead of oneall red." Peter H. Reynolds
  • "--- you don't reach Serendib by plotting a
    course for it. You have to set out in good faith
    for elsewhere and lose your bearings ...
    serendipitously." John Barth, The Last Voyage of
    Somebody the Sailor
  • "Serendipity is the art of making an unsought
    finding." Pek van Andel (1994)
  • source wikipedia

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BASIC CONCEPTS
  • Creative thinking represents a combination of
    logic and intuitive approaches
  • Being creative means dealing with the aspects and
    possibilities of today and tomorrow
  • That requires a person to be open to everything
    new, do not stick to things that we are all used
    to, do not adhere to yesterday so much
  • Creativity does not mean dreaming, it means
    productive managing of specific tasks.
  • Only a creative approach to the problem solution
    can be successful.

190
Creativity in organizations
  • Amabile to enhance creativity in business, three
    components are needed
  • Expertise (technical, procedural intellectual
    knowledge),
  • Creative thinking skills (how flexibly and
    imaginatively people approach problems),
  • and Motivation (especially intrinsic motivation).
  • Nonaka creativity and knowledge creation are
    important to the success of organizations. In
    particular, he emphasized the role that tacit
    knowledge has to play in the creative process.

191
Creativity and economics
  • Joseph Schumpeter creative destruction - the
    way in which old ways of doing things are
    endogenously destroyed and replaced by the new.
  • Paul Romer the recombination of elements to
    produce new technologies and products and,
    consequently, economic growth. Creativity leads
    to capital, creative products are protected by
    intellectual property laws.
  • The creative class as important driver of modern
    economies. Richard Florida in The Rise of the
    Creative Class, 2002 popularized the notion that
    regions with "3 T's of economic development
    Technology, Talent and Tolerance" also have high
    concentrations of creative professionals and tend
    to have a higher level of economic development.
  • Important aspect to understanding
    Entrepreneurship.

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Stages of creative process
  • Orientation Need identification, intention to
    create
  • Preparation Information collection, problem
    formulation
  • Incubation seeking solution, evaluation of
    variants, unconscious thinking
  • Illumination (Eureka!) synthesis, creation of
    ideas
  • Realization transformation of the idea into
    reality
  • Verification evaluation, learning, improvement

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Barriers to creativity - 1
  • The value of getting things right time can induce
    a fear of mistakes and experimentation.
  • So can a blame culture where people become afraid
    of making mistakes.
  • Managers who are not as secure as they should be
    can resist or block ideas that are not their own
    or which they see as threatening.
  • A culture that over emphasizes cost containment,
    processes, consistency or efficiency.
  • A reward system that too exclusively celebrates
    getting things done fast with no mistakes.
  • A general fear of risk taking, wanting to analyze
    everything to death, to wait and see what others
    do in the market before acting.

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Barriers to creativity - 2
  • A lack of explicit funding for experimentation.
  • A strict requirement to demonstrate the value of
    an idea before it has a chance to prove itself.
  • A tendency to shoot down novel ideas as a way of
    scoring points.
  • An over allegiance to past successes, proven
    experience and tried and tested methods.
  • A suspicion of novelty, a fear of the unproven.
  • A resistance to learning from mistakes or trial
    and error, a tendency to blame external factors
    or other people for failures rather than to learn
    from them.
  • Short termism - a drive to meet short term
    financial goals rather than to invest in the
    future.

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Barriers to creativity - 3
  • http//members.optusnet.com.au/charles57/Creative
    /Basics/obstacles.htm

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CREATIVITY STIMULATION
  • Keep in touch with creative people
  • Accommodate the effort to the targets
  • Evaluate and appreciate the effort
  • Protect creative employees
  • Leave them peace and time
  • Provide them with security
  • Tolerate failures
  • Maintain creative atmosphere
  • Evaluate the creative ideas quickly
  • Be persistent - nothing comes for free

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Fostering creativity
  • Establishing purpose and intention
  • Building basic skills
  • Encouraging acquisitions of domain-specific
    knowledge
  • Stimulating and rewarding curiosity and
    exploration
  • Building motivation, especially internal
    motivation
  • Encouraging confidence and a willingness to take
    risks
  • Focusing on mastery and self-competition
  • Promoting supportable beliefs about creativity
  • Providing opportunities for choice and discovery
  • Developing self-management (metacognitive skills)
  • Teaching techniques and strategies for
    facilitating creative performance
  • Providing balance

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METHODS OF CREATIVE ACTIVITY
  • increasing the individuals or teams creative
    potential
  • contributing to the improvement of the creative
    work conditions
  • facilitating the problem solution

199
Creative Process
  • Problem Definition - including problem analysis,
    redefinition, and all aspects associated with
    defining the problem clearly.
  • Idea Generation - The divergent process of coming
    up with ideas.
  • Idea Selection - The convergent process of
    reducing all the many ideas into realistic
    solutions
  • Idea Implementation - Turning the refined ideas
    in reality.
  • Processes - Schemes and techniques which look at
    the overall process from start to finish (or at
    least 3 of the above 4 areas)..
  • http//www.mycoted.com/CategoryCreativity_Techniq
    ues

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Brain hemispheres
201
Convergent vs. divergent thinking
  • Convergent thinking involves aiming for a single,
    correct solution to a problem
  • Divergent thinking involves creative generation
    of multiple answers to a set problem.

202
CREATIVITY TECHNIQUES
  • trial and error
  • brainstorming
  • Inspirational questions
  • psychological-cognitive, such as
  • Osborn-Parnes Creative problem solving (CPS)
  • Synectics
  • Lateral thinking (courtesy of Edward de Bono),
  • the highly-structured, such as
  • TRIZ (the Theory of Inventive Problem-Solving)
  • ARIZ (the Algorithm of Inventive
    Problem-Solving), both developed by the Russian
    scientist Genrich Altshuller and
  • Computer-Aided Morphological analysis.

203
Trial and error
  • select a possible answer, apply it to the problem
    and, if not successful, select (or generate)
    another possibility that is subsequently tried.
    The process ends when a possibility yields a
    solution.
  • more successful with simple problems, often
    resorted to when no apparent rule applies.
  • the approach need not be careless, for an
    individual can be methodical in manipulating the
    variables in an attempt to sort through
    possibilities that may result in success.
    Never
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