Innovation Portfolio Valuation Using Predictive Models

Company Background

Our client is one of the largest US-based manufacturers of health and hygiene products. With a global presence and a one hundred year history, the company holds a unique position in the highly competitive Consumer Goods industry. Employing more than 55,000 people worldwide, the company realized sales of more than $16B in 2006, and has distinguished itself with unique global brands sold in more than 150 countries.

The organization is known for developing new product innovations and is recognized as a leader in bringing to market innovations that result in entirely new products, new product categories and new capabilities within existing products and brands.

Business Issue

In recent surveys, more than 60 percent of Consumer Goods companies surveyed, cited "making improvements in the new product development process" as the number one action to be taken to increase and improve innovation in their products and services area. In most organizations, current innovation management processes result in long product development cycles, uncertainty around selecting and removing initiatives from the innovation portfolio, and a lack of synergy among organizations involved in a successful product launch (such as Innovation, Marketing, Finance and Sales).

Crystallizing rapidly evolving insight based on consumer research, macro-market and economic factors and leveraging this insight to realize creative and unique product innovations is critical for success in this market.

Also key to success in this highly competitive environment, is not only the ability to identify and develop new and unique product innovations but to select from among a portfolio of these innovations the most valuable. Realizing innovations that are highly valued in the market and most profitable when compared to possible alternatives is a significant, ongoing challenge.

Developing an objective, unbiased, consistently applied and quantifiable financial valuation for an innovation initiative is crucial to optimizing the innovation process. Without a well-defined and integrated process, objective decisions cannot be made concerning which projects to discontinue and which to move forward, increasing the risk of a suboptimal innovation portfolio. Additionally, because costs associated with innovation projects are often substantial and increase as the project proceeds toward commercialization, a suboptimal decision can result in extreme consequences.

This solution focused on designing tools and processes to increase objectivity related to innovation portfolio quantification, optimization and management.

Inforte's Solution

Many different tools and processes are needed (and often already in place) to support innovation portfolio management in most organizations. Unfortunately, these resources are often not fully integrated with each other or with current systems, or are not applied with sufficient consistency and rigor. Because of the significant investment in these tools and processes, we believe it is important to leverage as many feasible resources in the design of an optimized innovation portfolio management approach. In the initial stages of the project, a comprehensive evaluation was performed to identify which of these potential enablers could be leveraged and integrated into a more comprehensive solution focused on valuing the innovation initiatives.

Predictive Models

As a result of our evaluation, several predictive modeling approaches were identified with high potential to increase objectivity, if applied consistently to all product innovation initiatives. Models of this type may use consumer study information already captured within the organization, and advanced statistical techniques to estimate the impact of a new innovation. They may also include new product planning, new product design, and market models. We discovered several available models; however, none in their current form were implemented in a manner that would support cross-functional, enterprise-wide, consistent use. The tools that were used were often on select individual's desktops or not widely used.

We also had to ensure that predictive models could be integrated with other tools and processes already in use during the new product development and introduction process. We ascertained whether the current technologies and processes could be evolved into an environment that would increase rigor in the innovation portfolio management process. As a part of this evaluation, consideration was given to estimate the impact on these already established processes.

Data to Support Prediction

Predictive statistical models require well-defined, high quality data. Examples include historical consumer preference data, market metrics, consumer study data and consumer purchase data. This data must be captured and made available to the modeling tool via standardized business processes. For this initiative, we defined business processes for three primary areas 1) Study Management, 2) Marketing Metrics and 3) Model Development. These business processes were highly dependent on the types of models to be applied in the solution and their associated data requirements.

The conceptual model below reflects the major inputs, outputs and processes. A primary input to the valuation calculation is consumer data, which is obtained from various external and internal sources and cleansed and mined for insights. This data is used to create statistical, predictive models throughout the remaining processes. Parameters which capture the market state of the product are included for use in developing the predicted volume impact of the innovation.

Technical Environment

Since the organization utilized SAP R/3 extensively and SAP's Business Information Warehouse (SAP BI) for reporting, we were able to leverage our expertise with SAP BI and SAP NetWeaver to rapidly perform a thorough assessment of the current state of the SAP environment and identify areas that could support an innovation portfolio management and optimization solution. During the analysis we found extensive use of SAP BI for reporting, and analysis of primarily financial and sales information. In addition, another key initiative already under way centered on the implementation of SAP's New Product Development and Introduction (SAP NPDI) solution.

SAP NPDI is an xApp that integrates key components of the new product development and introduction processes throughout the organization. It begins with the ideation phase in marketing and ends with the successful launch of the product. It also addresses activities embedded in the innovation portfolio management process such as research and development, production ramp-up, market activity planning, preparing the sales organization, and planning the distribution logistics. The complex nature of this process necessitates a comprehensive project management solution, including tools for cost management and continuous profitability analysis. Leveraging both of these environments (SAP BI and SAP NPDI), we developed a composite application that enabled close integration between the two solutions and integration with the supporting business processes. This approach is key and unique to the solution.

Technical Solution

To address these requirements, we developed a custom solution leveraging new capabilities in SAP NetWeaver 7.0. The solution consists of a composite that utilizes:

• SAP Enterprise Portal
• SAP Business Intelligence
• SAP WebDynpro
• SAP Business Intelligence Planning
• SAP New Product Development and Introduction (NPDI)
• Custom Predictive Models
• Non-SAP Study Management Data and Infrastructure

The resulting composite application enabled individuals responsible for new product development and introduction, to collaboratively develop business scenarios, based on differing assumptions about the market and market response to the innovation. Each scenario then had a resulting volume impact and was incorporated into financial calculations resulting in Net Present Value (NPV) which was calculated in SAP NPDI. Above is a high level architectural diagram of the solution.

We tailored the solution to optimally integrate with business processes already in place. SAP NetWeaver enabled custom coding, which was developed for statistical calculations and the integration required for all components of the SAP solution (SAP BI planning, SAP WebDynpro, and SAP NPDI) to work seamlessly. At left is a high level diagram of the custom development and key dependencies used to integrate all components of the solution.

Inforte interacted closely with the technology organizations to ensure adherence to corporate standards while developing an innovative solution leveraging the SAP NetWeaver environment. We were able to define, enable and implement creative, flexible business processes surrounding innovation management by integrating both SAP and non-SAP data, processes and technology in a seamless, integrated solution.

Words of Advice

Innovation is a critical component of any Consumer Goods organization's growth strategy, and selecting and focusing resources on the most valuable innovations is essential. To drive real growth, these companies need consistent and effective processes and infrastructure to support objective, consistent valuation of innovation initiatives. Ultimately, the organizations that enable all components of a robust innovation management process will be most successful in the marketplace.