Managing Innovation-bang And Olufsen

Bang & Olufsen: Design Driven Innovation BHOOSHAN PARIKH

CBS FTMBA 2008-09 MANAGING INNOVATION TERM PAPER 27 April 2009

Case Study The paper contains a model-based analysis of the innovation management scenario found at the Danish audio-video equipment manufacturer, Bang & Olufsen. The analysis is based on information contained in a case study and does not dwell into the current situation of the company. The paper takes into account various aspects related to the company in terms of balancing radical and incremental innovation, technology and business model innovation as well as designdriven and user-driven innovation strategies based on relevant theories and models as applicable to the subject. Finally, the analysis provides the reader with a different perspective to the approach adopted by the Bang & Olufsen that might have the potential open new possibilities for the company.

INTRODUCTION Bang and Olufsen (B & O) is a Denmark based high-end audio-video equipment manufacturer. The company has a tradition of creating ‘the best’ and ‘the first’ styles of products in its 80 year history. The company has been targeting fashion connoisseurs and sells its high-tech televisions, telephones, DVD players, loudspeakers, digital music players, and other products through some 1,500 stores around the world with UK and Denmark being the company’s largest markets. B&O also has subsidiaries that manufacture medical equipment, telephones, and audio components. Following in line with the Danish reputation in revolutionary design and innovative products, B & O has won global acclaim as one of the leaders in innovation and product development. The company has been catering to a very niche market segment and has even collaborated with some high volume manufacturers like Samsung Electronics of South Korea. A number of its products have earned a place in the Museum of Modern Art, New York and the company enjoys a strong loyalty from its existing customer base. Although an external look at B & O shows a picture of strength and high performance, all is not well at the company. The company’s future may not result in the same growth and profit that it has seen in the years leading up to 2004 (Austin, R. D. & Beyersdorfer, D., 2007). B & O is faced with uncertainty as it encounters troubles due to higher costs, competition, economic crisis, and management problems. A lot has to do with the way in which B & O manages its innovation and how it approaches its innovation strategy. This paper is an attempt to conduct an inside-out analysis of the structure of B & O with respect to its innovation management strategy with a view to addressing the issue about its uncertain future. Based on the information contained in the case study (Austin, R. D. & Beyersdorfer, D., 2007), the paper will provide a critical view of the existing design oriented structure of B & O using various theories and models pertaining to innovation management. The paper begins with a description of the basic framework of the Seven Rules of Innovation (Davila, et al, 2006) with a view to bring out the limitations of the design driven innovation (Verganti, R., 2006) being followed rather strictly by B & O. Following from this, the paper covers scenarios on how B & O can create an environment for a more structured innovation process to create a balance between radical and incremental innovation (Takeuchi & Nonaka, 1986). It also provides insights into areas Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 1

where the current setup of B & O is lacking in terms of both technological and business model innovation. Towards the end, the paper describes the importance of consumers and market research in innovation management (von Hippel, 1986; Gruner & Homburg, 2000) and shows a possible area for B & O to explore. Relevant theories from other subjects have been applied to act as a bridge between certain aspects to bring about relevance to the content. However, the paper does not address financial aspects of B & O and provides no recommendations for improving profitability or performance in this regard. INNOVATION STRATEGY The key concern perceived in the case of B & O is that the company does not seem to have a good balance between radical and incremental innovation and at the same time there is not an equal focus on business model innovation as compared to technological innovation. In order to address this concern, the deduction that follows is supported by Davila, et al, (2006) who have based their arguments on the premise that ‘how you innovate determines what you innovate’ and have suggested seven rules of innovation in this regard: 1. Exert strong leadership on the innovation strategy and portfolio decisions. 2. Integrate innovation into the company’s basic business mentality. 3. Align the amount and type of innovation to the company’s business. 4. Manage the natural tension between creativity and value capture. 5. Neutralise organisational antibodies. 6. Recognise that the basic unit of innovation is a network that includes people and knowledge both inside and outside the organisation. 7. Create the right metrics and rewards for innovation. On the basis of this it may be said that innovation is a structured management task and must form part of an organisation in order to achieve sustained growth. On observing the functioning of B & O we can see that the company and the management do not satisfy all the seven rules, as described in the succeeding text. The B & O management is clearly influenced by the designers and their perceptions of innovation.

The designers almost enjoy a ‘veto’ in the product development in the

Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 2

company and the management is mostly left with facilitating what the designers want. Evidently, it is not much of an issue for the existing management at B & O as they seem to be content in continuing with this way of working. However, in order to make informed decisions relating to the innovation strategy and the product portfolio, the management should be in a position to exert the required influence on all matters on the company. Important areas of concern are product portfolio management and the financial implications of extended lead times and slow product development. RADICAL OR SEMI-RADICAL INNOVATION? Furthermore, there seems to be a clear misalignment between the type of innovation that B & O is following and the existing business model of the company. Clearly, the company and all those associated with it believe that B & O are the leaders in radical innovation and that by adopting a design driven innovation policy, they are on the right direction to achieve breakthroughs over and over again. However, if we look at the innovation matrix below, it may be noted that B & O has been actually following only semi-radical innovation and not necessarily radical innovation as implied by the company and its designers. This is because the company has not altered its existing business model for many years and has only embarked upon new technological advances

Adapted from Davila, et al, ‘Making Innovation Work’ (2006), Wharton School Publishing.

in its manufacturing processes. Of course, B & O did see a major restructuring in 1992 but that might be attributed to more of a necessity than a planned event. Again, in keeping in line with creativity and the orientation on design, the company has not been able to capture optimum value for its products. At the same time, it has not been able to create a strong network that can provide further growth and insights into the market requirements. The company has not been adequately consumer focused and has not created any value for the potential customer. It is evident from the above discussion that many of the seven rules of innovation are not fulfilled by the current innovation strategy adopted by B & O. Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 3

MANAGING INNOVATION-STRUCTURE AND PROCESSES Another major issue facing B & O is the competitive nature of the industry and the requirement of speed and flexibility that are imperative for survival. Based on the theory proposed by Takeuchi and Nonaka (1986), this is more relevant to the product development at B & O and the current business model adopted by B & O simply does not work. It may be pertinent to note at this point that B & O does have a structured approach to innovation and that it does not need more structure and organising. However, this structure is inappropriately directed and there is a need to modify and improve the structure to provide a more holistic view to be able to effectively handle the dynamics of the fast-paced commercial market conditions. In view of the above, the following paragraphs analyse the organisation and functioning of B & O in relation to the six characteristics in managing new product development (Takeuchi and Nonaka, 1986). B & O has not digressed from its traditional linear approach (Appendix A) to product development and needs to adopt a more flexible and integrated approach (Type C). The fact that B & O is taking extended time (up to 5 years in case of the CD player BeoSound 9000) to get its products into the market indicates that there is a lack of speed and flexibility in their processes. One strong point is that the freedom for workers to take decisions regarding quality leads to extremely high quality products. But this would be possible only if all the workers are equally passionate about their jobs, which may not always be the case. B & O might find it more appropriate just to have stipulated guidelines or quality control measures. Moreover, linear approach also restricts learning through trial and error and leads to a status quo as far as product development is concerned. Considering the six characteristics, we can say that transfer of learning would be minimal in an organisational setup such as B & O. There would be no overlapping development process as the designers are external to the company and consequently, the learning from experience would be extremely limited. In these times of quick product development and improved time-to-market, B & O is most likely to lose its edge over the competitors and result in a decreased market share and future growth. It is clear from the information provided that this issue needs to be issued by the top management who is in a position to recognise that a linear and structured attitude towards product development can almost never be successful. However, with the strong influence of the designers the management is

Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 4

rendered ineffective in such important matters leading to overall repercussions. Additionally, such an approach will require that the management provides clear guidelines and scope for the new product development in order to bring about a change as well as promote individual growth and knowledge within the organisation. At this point, one might argue that this is in some sense related to establishing a stage-gate model where there are various checks and balances in the process of product development. But where a classical stage-gate approach would tend impede radical innovation (Davila, 2006), the rugby approach (Takeuchi and Nonaka, 1986) provides the required flexibility to overcome these limitations and helps to achieve radical innovation in the organisation. MANAGING INNOVATION-DESIGN DRIVEN INNOVATION When we consider design driven innovation, it is important that we also consider Roberto Verganti (2006) and his theory that design driven innovation is the approach for the future and is a necessity to follow a radical innovation strategy. One of the main conclusions drawn from this theory implies that design does not necessarily entail getting close to the customer. This can also be seen in the ideology of the B & O chief designer David Lewis. Lewis follows that every individual is a customer and so why should one ask others when he can provide the solution himself (Austin, R. D. & Beyersdorfer, D., 2007). According to Verganti (2006), the functionality of the products is more important than the aesthetics from the user’s point of view. While B & O believes that their approach in adopting a design driven strategy is the best way forward, it may be argued that this has the possibility of giving away too much of the future of the company into the hands of the designers. The designers at B & O have been creating the objective analysis of the customers based on their own perceptions, whereas they should be the ones to use their vision to guide the product development process in the organisation. Contradicting design driven innovation (Verganti, 2006) with the seven rules of innovation (Davila, et al, 2006), we can see that the current approach adopted by B & O does not lead to network creation. In fact, the design driven approach is not well suited for promoting incremental innovation, which is also important to maintain a balance in the innovation strategy of the organisation. Davila, et al (2006) argue that sharing of knowledge both inside and outside the organisation is the basis behind forming a network and that is the main input for product development and to bring about a balance of incremental and radical Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 5

innovation.

Moreover, it is not always possible for an organisation to be radically

innovative all the time. There has to be a consistent and systematic process of radical innovation interspersed with regular incremental innovation based on the user driven approach. MANAGING INNOVATION-LEARNING FOR INNOVATION Taking a quote from ‘Making innovation work’, (Davila, et al, 2006); You can’t improve any part of innovation-not the framework, strategy, processes, organisation metrics, or incentives-and expect to see good results unless you make sure that your organisation knows how to learn and change. (p.211) An intrinsic part of innovation is learning.

Innovation is all about change and

organisational learning and change are closely linked. Takeuchi and Nonaka (1986) have also talked about organisational transfer of learning as one of the six characteristics that define the holistic approach that they have recommended. One of the better ways of learning is through experimentation, which provides a good ignorance management tool (Davila, et al, 2006). However, we can see that organisations like B & O that are highly design oriented and are driven by the strong views of the designers, there is little scope for proper ignorance management. The organisations cannot identify the most important things that they do not know and this restricts their forward movement. To put it more concisely it may be said that following a purely design driven strategy B & O is more likely to be ineffective in its future growth and sustainability and in continuing with its tradition of radical innovation especially in the current situation of a highly dynamic and competitive environment. MANAGING INNOVATION-MARKET RESEARCH In providing further critical views on the sole design oriented approach, the areas of user driven approach and the possibility of market research come into play. Identifying the user needs is essential for radical innovation especially in high technology industry that B & O is part of. According to Eric von Hippel (1986), ‘lead users’ can serve as a real-time market research facility that will provide a glimpse of the future as far as such high technology products are concerned. They can act as ‘focus groups’ to promote interaction between the organisation and the users and provide insightful designs and concepts. Surprisingly, B & Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 6

O has not conducted any kind of market research since 1972 (Austin, R. D. & Beyersdorfer, D., 2007) and as a result has most likely not been involved with customer interaction as part of its product development process. The company has been producing products firmly based on the views and perceptions of its designers and this might also explain why consumers are buying more from volume manufacturers and not from B & O. There is a need for B & O to alter its business model in a manner that helps systematically identify such lead users and to integrate their perceptions and preferences in its products, processes and services. This will also provide better inputs for physical product development as the information flowing in through such actions will be first-hand and B & O can come up with products that would appeal to a larger segment of the market. MANAGING INNOVATION-USER DRIVEN INNOVATION Besides the market research data, information gathered from customer interaction is also important (Gruner & Homburg, 2000). On the basis of this argument we can also say that it can create a balance between technological and business model innovation for B & O. Getting accurate information from the consumers will require that the company does not blindly adopt the design driven strategy. It would be most likely that the user perceptions and needs differ from the views of the designers at B & O and in order to match these perceptions, B & O will have no choice but to alter its designs as well as the way it approaches its innovation strategy.

At this point forming functional teams providing

market information as well as involved in product development would channel the flow of relevant information. If the information indicates that the consumers are not willing to adopt or change to a different technology, it will be pointless for B & O to develop a product on such irrelevant technology. At the same time, if the designers are asked to cater to the actual needs of the users and not implement their own perceptions, it will fundamentally change the business model that B & O has been following for years. In all likelihood, this would lead to a more systematic and structured approach to innovation at B & O. What Gruner and Homburg describe matches well with the theory of von Hippel in that interaction at different stages of new product development, with customers exhibiting the characteristics of ‘lead users’, play an important role in the success of new product. CONCLUSION

Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 7

It can be seen from the above that there are a number of areas in which B & O can show improvement that can lead to a better future for the company. This does not mean to indicate any flaws that might exist in the strategy adopted by the company. Obviously, the company has been successful for the last 80 years and has earned itself a strong global reputation of high quality design innovation and durable, high-performance products. But the scope for further improving upon how innovation is managed should not be ruled out as has been brought out in the analysis of the design driven innovation strategy. B & O can always learn through a focus on the Structured Idea Management process (Davila, et al, 2006) that is designed to prevent the two mistakes most commonly made by companies. The management at B & O needs to radically change the business model to be effective in following a radical innovation strategy, and this has a lot to do with their understanding of the differences between incremental and radical ideas so that potential breakthrough ideas are not discarded prematurely. Moreover, they need to acknowledge that there is immense value in the fragmented ideas that can be put together to create breakthroughs. A culture of experimentation and prototyping will go a long way in making the best use of resources available and to get important feedback on the product relevance and characteristics. The synergy between design and user driven approaches may not be an easy task to accomplish, but establishing functional product development teams might help resolve these issues. What the company needs is to recognise the urgency to change (Kotter, 1996) and to create an environment that facilitates this change in the best possible manner. The management should look at deeper involvement in the decision making involved with innovation and implementation of its innovation strategies while the designers should be made to act as guides and providers of a vision for the products and not as representatives of the end-users. Finally, it should be appreciated that every organisation is unique and there cannot be one prescribed approach to managing innovation. In today’s highly competitive and dynamic market, innovation has to be planned, structured and implemented through clear analysis and assessment of the internal as well as external environments. Speed and flexibility in product development play an important role and B & O will surely benefit from looking deeper into the aspects mentioned above. If need be, it would be absolutely acceptable if the company decides to reposition itself as a ‘not-so-niche’ player in the AV market and thereby gain market share and recognition, and thereafter raise itself a notch higher once again. Highly radical, but makes sense!

Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 8

Appendix A

NEW PRODUCT DEVELOPMENT

Extracted from The new new product development game, Takeuchi and Nonaka (1986)

Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 9

References: 1. Austin, R. D. & Beyersdorfer, D. (2007) Bang and Olufsen: Design Driven Innovation, Harvard Business School, 9-607-016, September 2007, Harvard Business School Publishing. 2. Davila, T, Epstein, M.J. & Shelton, R. (2006) Making Innovation Work: How to manage it, measure it and profit from it, Wharton School Publishing. 3. Gruner, K. E. & Homburg, C. (2000) Does Customer Interaction Enhance New Product Success?, Journal of Business Research 49, 1-14 (2000). 4. Kotter, J. P. (1996) Leading Change, 1st edition, Harvard Business School Press. 5. Kumar, M. (2005) Bang and Olufsen: The Danish high-end Audio maker’s restructuring strategies, Case Study Reference No. RTS0062, ICFAI Business School Case Development Centre, India. 6. Takeuchi, H. & Nonaka, I. (1986) The new new product development game, Harvard Business Review, Jan-Feb 1986. 7. Verganti, R. (2003) Design as brokering of languages: Innovation strategies in Italian firms, Design Management Journal, Summer 2003. 8. Verganti, R. (2006) Design, meanings and radical innovation: a meta-model and a research agenda, Politecnico di Milano, Italy. 9. von Hippel, E., (1986) Lead Users: A source of novel product concepts, Management Science, Vol. 32, No. 7, July 1986. 10. http://www.bang-olufsen.com/ 11. http://www.beoworld.org/article_view.asp?id=29 12. http://www.businessweek.com/print/magazine/content/07_45/b4057057.htm?ch an=gl 13. http://www.cph127.com

Bhooshan Parikh CBS FTMBA 2008-09 Managing Innovation Term Paper

Page 10