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Traditional innovation planning approaches cause managers to misjudge the threat posed by more inventive and determined players and fail to lead talented engineers and scientists to solving the right problems.  How many counter IED solutions were on the shelf before the demand revealed itself?  Is the VLJ truly a market creator in air taxi service or is it just the next generation of general aviation aircraft?  Unlike other industries, the failure of traditional innovation planning approaches is magnified in Aviation, Aerospace and Defense where the inventive and determined players may be competing firms leveraging fast developing advanced technologies or hostile groups adapting to customer’s deployed innovations with new strategies.  Iphimedia’s innovation research has been focused on the unique strategic planning needs of corporations. 

 

Good innovation planning approaches anticipate what innovation will capture the next cycle of customer needs that create wealth.  Innovation planning approaches should answer the question:  Where to place the bets and at what values or order of magnitude?  manned or unmanned?  missile defense or total battle space awareness? big network airline business design or focus city long-haul international?  Spiral development of existing technologies or rapid prototyping of breakthrough technologies? 

 

While much has been written about the values of innovation, little has been done to tie innovation directly to wealth creation.  Aviation, Aerospace, and Defense investment analysts handicap the results through accepting the firm’s financial statements at face value and the assignment of future growth and profitability based on the firm’s current position in the industry structure.  Seldom do these analysts anticipate the rewards of investments in innovation, thus raising the real possibility of undervaluing a firm’s future prospects or worse causing the firm’s management to focus on short-termism undershooting their innovation agenda.

 

In this article, we take a closer look at Iphimedia’s innovation approach and show how Aviation, Aerospace and Defense companies can learn how to refine their innovation bets and improve their probability of winning the innovation game.

 

 

 

Not Enough Articulated and Valued Innovation in the Pipeline

 

Iphimedia’s study of Aviation, Aerospace and Defense companies by sub-sector reveals that companies in seven sub-sectors are not meeting shareholder expectations for future wealth creation. We looked at the number of stated innovation initiatives described by corporations in fixed-wing aircraft, aircraft engines, defense aerospace, defense marine, defense electronics, security and aviation.  We found that almost all Aerospace, Defense, and Aviation companies are short investor growth expectations in 2010 by on average 33%, in other words the forecasted growth from in-market products and already in process innovation does not add up to enough investor expected revenue in 2010 to maintain historical firm wealth creation.  Aviation, Aerospace, and Defense companies are not unique in this problem--- High Tech, Industrial, Healthcare, and Telecom companies also are short investor expectations in 2010 by a similar magnitude. 

 

There are a few companies meeting future investor expectations:  Cessna Aircraft, Vumii a homeland security start-up, and Apple are examples of companies growing sufficiently through innovation to meet shareholder expectations.  Companies that have historically had financial trouble such as United or Unisys have investors who do not expect innovation to occur, so they meet future investor expectations.  The majority of companies who have been successful in the past have not articulated enough innovation to meet future investor expectations for wealth creation.

 

Clearly, Wall Street is expecting far more innovation than companies in these sectors seem prepared to provide. The implications: Firms that wait too long to close their innovation gap put themselves at risk. Is the next innovation change going to originate in your firm or somewhere else?  Firm’s that wait too long to innovate face the real possibility of value collapse.

 

The Risk of Not Owning the Next Innovation in Your Industry

 

Successful innovation doesn’t come from carefully analyzing the safest and most familiar bets one at a time. Rather, it stems from establishing a purposeful series of bets—what we call strategic intents.  Strategic intents emphasize capability on a specific customer performance dimension or a bundling of new technologies that replace or depreciate the previous knowledge embedded in historical products. Well formed strategic intents are ambitions that stretch firm resources and all available knowledge.  (See “Innovating Successfully at Lockheed Martin Skunk Works.”)

 

Iphimedia’s study of Aviation, Aerospace and Defense companies by sub-sector found strategic intents vary in ambition.  Companies can have a strategic intent to sustain existing products with incremental innovation--- an example is sustaining Northrop’s ground based missile systems that detect track and destroy missles.  Companies can have strategic intents that vary or derive newer versions of existing products with innovation-- an example is the Boeing 737-900ER that innovates improved passenger capacity and range features for an existing product.  Companies can have strategic intents that significantly advance customer performance and industry knowledge--- an example is the Vumii security camera that is a cost-effective high operational range imaging device that is significantly better than current customer solutions that have serious deficiencies such as the cameras cannot read license plates or see through windows.

 

Each strategic intent once deployed has an anticipated customer revenue stream.  Iphimedia’s study of Aviation, Aerospace, and Defense companies by sub-sector found that new innovation occurs in about half of all corporations and it accounts for less than 20% of 2010 revenue.  Clearly new innovation’s in Aviation, Aerospace and Defense is an evolutionary force that occurs over several years allowing companies to have a variety of options to form a winning innovation strategy.

 

 

 

Innovating Successfully at Lockheed Martin Skunk Works

 

Fixed wing combat aircraft have gone through five major eras of revolutionary innovation:  the biplane era (1910-1930), the monoplane era (1930-1945), the subsonic jet era (1945-1955), the supersonic jet era (1955-1975), the stealth era (1975-today).  Each era had its dominant firms who pursued a strategic intent that destroyed the previous era’s firm’s ability to compete.

 

By articulating bold new strategic intents, Lockheed Martin’s Skunk Works division (founded in 1943) is to aviation what Edison’s Menlo Park was to electricity, a place where the daily pursuit of innovation produces aircraft, though few in number, that have heralded exceptional advances in aerospace engineering.

 

In the fall of 2001, the U.S. Department of Defense chose Lockheed Martin as the winner of the Joint Strike Fighter competition and as the prime contractor to develop and manufacture the F-35.  The decision came after a five year competition.  The US and UK future revenue for Lockheed Martin is estimated to be over $200 billion.  The Skunk Works Joint Strike Fighter team set out to produce the plane that the DOD really wanted, a single engine version that incorporates the Lockheed’s ongoing strategic intent of “supersonic low observable” otherwise known as “stealth”.

 

The figure below illustrates how the idea for a low-radar-signature aircraft traveled through Skunk Works’ innovation pipeline.

 

 

Playing the Innovation Game: Creating Winning Strategies

 

Iphimedia’s innovation gap methodology helps firms create winning innovation strategies. 

 

Assess your innovation gap.  Measure the future financial growth required by investors, determine if current in-market products and in-process innovation meet these investor growth expectations.  A good example of this approach was used by GE chairman Jeffrey Immelt.  In 2005 due to underperforming divisions GE had an innovation gap, Immelt repositioned GE’s innovation portfolio and added resources, with the main objective to get more immediate growth out of the businesses GE already has.  Immelt invested $5 billion in 80 projects that range from creating micro jet engines to inventing the next generation of security products. The goal was to generate $25 billion in revenue by 2007.

 

Right size your strategic intents.  There’s a universe of new ideas percolating out there—in the worlds of academia, business, and everyday public life. And they’re all free for the taking. From that universe of new ideas, you and other executives in your industry have culled it down to a pool of viable concepts—ideas that could reasonably be commercialized in the near term.

 

How do you know whether a viable concept constitutes a good strategic intent? It meets these criteria: 1) It could make a big difference in your company’s fortunes if it satisfies a it is a significant customer performance upgrade, is the firm has sufficient talented staff to resolve the strategic intent, and generates a handsome profit once commercialized. 2) You can test its viability gradually and iteratively before building up the idea into a full-scale business or product launch. (See exhibit below and Strategic Intents menu item on this website).

 

http://www.iphimedia.com/Pages/StrategicIntents.aspx

 

With investors expecting ambitious—and specific—rates of growth from A,A, &D companies, those firms are on the hook. Generating breakthrough innovations can help firms achieve the new growth that Wall Street is counting on. Yet to produce real breakthroughs—new offerings that change the game—a handful of interesting ideas isn’t sufficient. Companies must fill their innovation pipelines with enough initiatives to produce the number of marketplace successes required to deliver the expected growth.

 

To help our clients avoid that scenario, we recommend that they start viewing innovation through a whole new lens—as a seemingly chaotic but actually disciplined process. In this article, we’ve provided a sampling of the kinds of strategies that have helped Iphimedia’s clients take this new approach to innovation.