Product innovation success in the ADF – an exploratory study

Author: 
Dr Gregor Ferguson

It is possible for Australian defence companies and the Australian Defence Organisation to achieve greater success and better mitigate the financial, technical and schedule risks in developing new, technology-based  equipment and services for the ADF.

The research leading to this conclusion was based on case studies of 20 successful and unsuccessful Australian defence projects, and addressed three key questions:

  • What are the factors which determine the success or failure of product innovation projects by companies in Australia’s defence industry?
  • Can these factors be measured and used to create a model, or a more general set of pre-conditions, for successful product innovation within Australia’s defence industry?
  • To what extent is Research and Development (R&D) investment an indicator of product innovation success in the Australian defence industry?

The research showed that a set of pre-conditions does indeed exist for Product Innovation Success in Australia’s defence market. The case study results showed a direct and positive association between Product Innovation Success and 62 separate factors – the essential pre-conditions for that success - which are grouped as follows:

  • Innovator Attributes
  • Innovator Behaviour
  • Customer Attributes
  • Customer-controlled Factors
  • Market Environment

The innovator lies at the heart of the process: a successful innovation outcome is the product of Innovator Behaviour, influenced by intrinsic Innovator Attributes and three external forces acting on him: Customer Attributes, Customer Controlled Factors and the Market Environment. The relationship between the Innovator, Customer and Market Environment is shown in Figure 1.

Figure 1: The Components of Innovation Success and how they relate to each other (Copyright: Gregor Ferguson 2012)

The literature on defence product innovation in Australia is sparse but a search of the wider literature on product innovation showed that the defence market resembles other markets for high-technology scientific and industrial capital equipment which have been studied extensively. 

The case studies showed that innovation success factors which apply in non-defence high-technology industry sectors apply also in the defence industry, at least to the extent they shape the characteristics and behaviour of the innovating companies. In this sense, the defence industry is not so very different from those other sectors.

However, the defence market in Australia is very different. It is a monopsony, because there is only one customer and he controls the size and behaviour of the market and the barriers to entry. It is also monolithic, in that the customer seeks uniformity of equipment for a particular task and therefore buys ’fleets’ of equipment, rather than purchasing items singly, so the supplier’s (or innovator’s) market share in a particular segment is typically either 100% or zero. 

Finally, it is shaped fundamentally by the Customer-Active Paradigm, or CAP, arising from the fact that the customer is a community of expert practitioners who develop their user requirements on the basis of classified information and critical assumptions that are generally withheld from the marketplace. This means that innovators can’t safely anticipate the user requirement, however pro-active they may be in engaging the customer and trying to inform him about options for tackling operational challenges.  And therefore the customer plays an important role in defence product development, both triggering and shaping the innovation process.

The effect of the CAP is amplified by the monopsony and monolithic nature of the defence market. This means in turn that Product Innovation Success depends far more on the customer’s attributes and behaviours (including his shaping effect on the market environment) than in other sectors.

There are two important conclusions from this research: firstly, that while the Australian defence market is unique, the defence industry is not. And secondly, that in Australia’s defence market there are indeed pre-conditions for Product Innovation Success. Some of these relate to the innovator, some to the customer and some to the market itself. 

The research identified some 62 separate factors relating to Product Innovation Success and attempted to ascribe different levels of value to them. These can be termed Pre-Conditions which, if satisfied appropriately in the context of the project in question, will help to increase the likelihood of success. This provides both a working tool for practitioners (the innovators and their customers) and a rudimentary predictive tool for these as well as for policy-makers and other stakeholders such as sources of project finance. The predictive powers of this tool, shown in Figure 2 below, enable practitioners and stakeholders to assess the strength of a project at the outset and to monitor its health as the project proceeds.

1.  INNOVATOR ATTRIBUTES Satisfied
Familiarity with this market  Y / N
Familiarity with technology and manufacturing in this sector  Y / N
In-house prototyping capability  Y / N
In-house Software and Hardware capabilities  Y / N
The availability of in-house IP  Y / N
Sound project screening capabilities  Y / N
The ability to make accurate cost, schedule and technical forecasts  Y / N
The ability to manage schedule  Y / N
Organic rather than Mechanistic structure  Y / N
A supportive, engaged CEO  Y / N
Absorptive capacity  Y / N

2. INNOVATOR BEHAVIOUR

 
Reliance on external partners and sources of technology  Y / N
A methodical, systematic approach to marketing  Y / N
Innovator’s focus on market position  Y / N
Innovator’s willingness to consider incremental innovation  Y / N
A close customer relationship  Y / N
Intimate understanding of both DSTO and customer  Y / N
Pro-active in seeking to test ideas and hypotheses on customer  Y / N
Pro-active in determining user needs  Y / N
Pro-active in shaping customer’s view of his needs  Y / N
Understanding customer price sensitivity  Y / N
A methodical, systematic approach to R&D  Y / N
Consistent, systematic R&D investment  Y / N
Relationship with DST  Y / N
Teaming or collaboration agreement with DST  Y / N
Appointment of a Senior Project Leader/Champion  Y / N
Use of cross-functional project teams  Y / N
Adequate schedule allowance for T&E  Y / N

3. CUSTOMER ATTRIBUTES

 
Customer understands and articulates own needs  Y / N
Customer familiarity with product/system type  Y / N
Customer has funded or undertaken previous work by DST/ other R&D organisation  Y / N
Customer seeks to innovate in practices and processes  Y / N
Customer has high level of risk tolerance  Y / N
Customer seeks innovative technical solutions  Y / N
Customer’s technical and professional understanding  Y / N

4. CUSTOMER-CONTROLLED FACTORS

 
Urgency of user need  Y / N
Urgency of user need reflected in acquisition strategy  Y / N
Customer validates needs through modelling/simulation  Y / N
User’s needs and desired outcome reflected in acquisition process  Y / N
Access to Defence T&E facilities  Y / N
Value of DST’s IP  Y / N
Customer sticks to his own schedule for decisions and processes  Y / N
Development partnership with Defence  Y / N
Defence support in export market  Y / N
Risk factors reflected in Capability Development and Acquisition processes  Y / N
Stable operational requirement (no changes during development)  Y / N
Customer appoints a project champion  Y / N

5. MARKET ENVIRONMENT

 
Sufficient information to build a sound business case  Y / N
Emerging market with growing demand  Y / N
TRL of External IP  Y / N
Size of domestic market  Y / N
Niche market, little competition  Y / N
Business Case satisfied by domestic market  Y / N
Potential for repeat sales to same or other customer  Y / N
Innovator’s ability to tackle export market without Defence support  Y / N
Strong link with White Paper/ higher level guidance  Y / N
High operational tempo  Y / N
Rapidly evolving threat environment  Y / N
Ongoing technology growth  Y / N
External R&D funding access  Y / N
External Access to critical technology  Y / N
ITAR effect on exportability or export market access  Y / N

The second column titled ‘Satisfied?’ simply turns this list of Pre-Conditions into a check list which the innovator should complete as part of his planning process, and then revisit throughout the project in order to ensure he remains on track and that key external factors – Customer Attributes, Customer Behaviour and Market Environment – haven’t changed in significant ways.

This Table includes four factors highlighted in red and which can be termed ‘Red Flags’:

  • Customer understands and articulates own needs
  • Sufficient information to build a sound business case
  • Emerging market with growing demand
  • TRL of External IP

The Case Studies show a very strong link between these factors and project failure. To some extent they are all self-evident, but the research suggests they are fundamentally important: if the customer doesn’t understand and/or cannot articulate his own needs; if there’s insufficient market information on which the innovator can build a strong business case for the project; and if the market is mature and demand is either static or declining, then the project is probably at high risk of failure. Similarly, if the project demands external IP, the innovator must ensure this is of an appropriate level of maturity or, again, the project faces a high risk of failure. 

The ‘Red Flags’ should not be seen as a reason for automatic termination of the project, but are so strongly associated with the risk of project failure they should be treated as an automatic trigger for review of the project.

While not all factors will be critical to all projects, completing this check list is important for two reasons: first, it requires the innovator to take a methodical approach to the innovation process; and second, it helps him to identify attributes and behaviours which require change or improvement in some fashion in order to enhance his prospects for success. 

One of those important behaviours is R&D investment. Australian defence companies which undertake successful product innovation projects spend significant amounts of their revenue on self-funded R&D: 9.62% of revenue compared with 6.99 per cent for unsuccessful companies.

Secondly, it would appear that smaller firms are more likely to be product innovators than larger ones, although a number of defence industry prime contractors have been relatively prolific developers of new products. This would seem to be a consistent with the rise of small, high-technology startups whose products and services have the potential to be extremely disruptive if developed and harnessed properly by the end user.

Thirdly, size is not a predictor of success: of eight projects undertaken by companies with a revenue of greater than $100 million a year, half were judged unsuccessful. However, of the 12 companies whose revenue was less than $50 million a year, eight were successful innovators. Failures only outnumbered successes where revenue fell below $5 million a year, which points to a potential structural issue: smaller defence companies may be too small to command the non-technical resources required for Product Innovation Success in the rather demanding defence market. This has implications also for high-technology start-ups and suggests that, if he wants to pursue genuinely disruptive innovations, the defence customer may need to be more pro-active in supporting small companies with disruptive technologies through the project funding ‘Valley of Death’. 

This combination of the conceptual model in Figure 1 and the predictive model in Figure 2 represents a tool which may help defence product innovators and their customers to choose whether or not to pursue a specific opportunity, how to prepare themselves if they decide to proceed, and how to structure their approach to the project.