Applied Research Case Study Essay

Global Innovations ChallengesOn June 5, 2006, Peter Vyas paced his office as he grappled with a request for $2 million to relaunch a mini pissing-oxidation harvest. Despite two failures to bring this fruit to securities industry everywhere the past three years, his group was confident this latest iteration was a winner. For Vyas, full normal manager of the Filtration building block of Applied Research Technologies ( trick), the request presented a major repugn. He recognized that his team had worked tirelessly to make this project a verity and warmly believed they were now headed in the right direction. But he also unders excessivelyd that the Filtration Units track record of failure during this products fall apartment had hurt its credibleness. If he supported the proposal, he knew he would be putting on the line not only his own personal credibility alone also that of the entire building block. Due to the projects sizing, final approval would be made by Vyass boss , Cynthia Jacksonthe newly nominate vice president of ARTs pissing Management member. Jackson was acutely aw are of the mounting losses in the Filtration Unit, and she had already devoted a significant amount of time trying to get them gage on track. She had confided to one of her colleagues When I took on this assignment, I was told my number one task was to fix the Filtration Unit. The unit only had one r hithertoue-generating product line and had failed to bring a arrive atable new product to market in five years. It was clear that I was evaluate to either turn it around or shut it down.Im trying to protect them and ensure they get support, but my initial feeling is if they are to survive, they must become much more disciplined. They seem to be making progress on that front, but in all honesty, I sometimes interview if it is time to cut our losses and initiate a harvest strategy for the unit._________________________________________________________________________________ _______________________________ HBS Professor Christopher A. Bartlett and Heather Beckham prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective wariness. This case, though found on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration.Copyright 2010 Harvard Business School Publishing. To localise copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http//www.hbsp.harvard.edu. No crack of this publication may be reproduced, stored in a retrieval trunk, used in a spreadsheet, or transmitted in any form or by any instrumentelectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School.ART was one of the technology worlds emerging giants. The phoner had grown with the merger and acquisition of numerous technology-based industrial companies, acquired in the LBO buyout waves of the 1980s and 1990s.By 2006, ART consisted of a portfolio of about 60 business units, to each one of which operated as a profit center. Total corporate revenue was $11 billion in 2006.1 Major fragments in the corporation included healthcare (medical symptomatic equipment), Industrial Automation (robotics), Energy ( particular(a)ction, conversion, and transportation solutions for the oil and gas industryincluding the piddle Management Division), and HVAC (Heating Ventilation and Air Conditioning, including climate visit solutions for residential, technical, and industrial markets). manifest 1 shows the organization structure of the company.The companys success had been built on its innovative and entrepreneurial culture, coupled with a decentralized management philosophy. ARTs vision statement, proudly displayed in almost every office and cubicle, stated We aim to change the world through innovation, and to grow our place in it through entrepreneurship.Culture and PracticesART was dedicated to supporting innovation not only with funding (the companys R&D spending was duplicate the rate for U.S. industrial companies), but also in its practices, several of which were deeply embedded in the companys culture. ART encouraged employees to spend a half day each week experimenting, brainstorming, and thinking outside the box. It was a practice that the companys visionary founder and current CEO, David dormitory, referred to as monkey time. He explained the imaginationInnovation and entrepreneurship are the twin engines driving this company. Its the reason weve ingrained tinker time in our cultureI conceptualise all our managers, and particularly those on the front line, to create, promote, and back assure ideas. But we understand that when you go for the big leap, you wont always clear the bar. So there is no shame in failure when you are stretching for big objectives. Around here we routinely celebrate what we call worthy attempts even when they are unsuccessful.Knowledge sharing and dissemination was another key part of ARTs business philosophy, and despite the high level of decentralization and profit accountability, technology and human capital were both widely shared among particles. For example, experts in one division routinely served as advisors on project committees for other divisions, and it was not uncommon for employees to go on loan to help another unit with a promising product idea or technology. The company also locomote quickly to bring products to market. If an idea showed promise, funding was usually available for polished beta batch productions, which often freeed market testing to achieve what was called proof of concept within ART. Once an innovation was proven, significant investment was q uickly put behind it.Objectives and PrioritiesTo infuse discipline into its decentralized organization, ARTs top management set highly aggressive performance objectives and tied executive compensation tightly to them. In 2006, as in 1 Of that total, Water Management Division sales were $560 million and Filtration Unit sales were $38 millionany other year, each division was expected to deliver sales growth of 10%, pretax margins of 15%, and return on invested capital of 20%, referred to as the 10/15/20 Target. The belief that innovative products were the source of the companys ongoing competitive advantage was reflected in a companywide metric requiring 30% of each divisions total sales come from products developed in the defy four years.2Hall also continually emphasized that to be competitive, ART had to shorten the life cycle between a new technologys conception and its commercialization. In response, the company had introduced the Fast Track Pipeline, a program that focused on t he highest priority projects by providing them with additional resources and management assistance. ART currently had 67 such projects in the pipeline, six in the Water Division, but none in the Filtration Unit. (The mini oxidation unit had not been identified as a Fast Track project). In the late 1990s, Hall began pushing to grow ARTs global presence. Its important not fair to expand our market access, but also to broaden our talent access, he insisted. Innovation and entrepreneurship know no national boundaries. In the quest to meet this challenge to attract the best and the brightest wherever they live, in 2000, the corporate R&D group opened the India Technical Center (ITC)a substantial operation that Hall hoped would become a model forother R&D centers he syllabusned to open up around the globe.The Filtration Business UnitThe Filtration Unit was part of a business ART acquired from an oil and gas services company in 1996. Its core product line was in mobile body of water m anipulation that allowed oil and gas exploration companies to meet government water recycling requirements at well heads and drilling sites. These products were still the units core line, but in the late 1990s, new competition from Chinese manufacturers had led to a commoditization of the business and an erosion of margins. ARTs newly acquired filtration business had tried to develop the next generation of products and technologies, but after two high-profile new product failures, the unit had lost confidence. By 2006, it was losing about $6 million annually. refreshing Management, New EnergyIn a promotion from his role as a lab manager in the HVAC Division, the 32-year-old Vyas had assumed the role of business manager for the Filtration Unit in June 2001. He immediately confronted the units twin organizational problems of low morale and growing turnover, and in his premiere year, rebuilt the team by guardedly selecting entrepreneurial-minded individuals to fill the vacancies left by turnover in the unit. One of his key recruits was Janice Wagner, whom he knew from her five years as a market manager in the HVAC Division. She was excited to join a unit that had an opportunity to develop a new business from scratch.Convinced that survival depended on innovative growth, Vyas appointed a technology evaluation team early in his tenure, charging them with the responsibility to focus on technologies with the potential to turn the unit around. In one of his first reviews with that team, Vyas learned that for almost a year, the filtration unit had been working with ITC technicians on an exciting new technology the young Indian team had developed based on a license obtained from a Delhi-based start-up company. Developed as a potential solution to the widespread triad World problem of obtaining clean water in contradictory regions, this minuscule-scale oxidation system was thought to have2 Hall had recently increased this target from 25% of each units sales from p roducts developed in the last five years.application in many less-developed markets. But in an effort to cut costs, the filtration units previous management had decided to abandon the collaboration a year earlier. After reviewing the technology, Vyas became convinced that this had been a mis take aim and encouraged his evaluation team to pursue the project. Working nigh with the ITC technologists, the team cerebrate that the oxidation technology was the most promising opportunity in their portfolio, and recommended developing a small-scale oxidation system that enabled waste-water disinfection in small batches. We were so excited by that decision, said Div Verma, the ITC technologist in charge of the project. We believe this project can make a huge difference to the lives of millions. move by the support they received, the ITC technicians developed a promising initial design. Without bulky equipment (the equipment was a 26-inch cube) or an electrical power source (it utilized bat tery power), this small system could transform waste water into potable water without chemicals in minutes. A single unit had the capacity to process approximately 2,000 liters of contaminated water per day. With pride, they took their design to Vyas. But Vyas wanted to understand the business opportunity and asked Wagner to prepare a brief overview. Wagner learned that only about 2.5% of the worlds water was fresh, and most of that was frozen. Population growth, industrial development, and agricultural expansion were all putting pressure on fresh-water supplies in both developed and developing countries. Indeed, the World Resources institute found that demand for water was growing at twice the rate of the population. As a result, the World Health Organization estimated that over 1.1 billion heap lacked access to clean water, and that 2.4 billion lacked access tobasic sanitation. The research also revealed that waterborne diseases accounted for 80% of infections in the developing world, and in 2002, 3.1 million deaths occurred (90% children) as a result of diarrheal diseases and malaria. As countries such as India and China industrialized, they used more fresh water and added more pollution to existing water sources.Wagner concluded that the scarcity of clean water was reaching crisis levels in developing nations, and that the mini-oxidation system could help avert some of the catastrophic effects. But she also reported comparable R&D efforts also underway in the government and private sectors in China and Europe, and that several companies in the United States and Canada were researching the technology. Nevertheless, her analysis suggested the ITC teams product was further along and probably superior to anything else in the space.New Opportunities, New InitiativesVyas decided to pursue the project and convinced the VP of Corporate R&D who had ITC oversight to allow the three ITC technologists working on it to become members of his technical teama move that would allow them to focus on developing commercial designs for the oxidation technology. Simultaneously, he asked Wagner to do a first-cut market assessment to identify potential opportunities for the technology. Over the next few weeks, through focus groups and interviews with potential customers, she reveal several promising applications. (See Exhibit 2). But while the market research was exciting, progress in bringing a product to market proved to be slow and difficult. From January 2003 to February 2006, the technology team coordinated with separate manufacturing and marketing teams located in the United States to work through two complete cycles of product development, beta batch productions, and test marketing of two different versions of the mini-oxidation system. Both failed due to what were subsequently revealed to be defects in the design and lack of interest in the marketplace.The first-generation product was aimed at the application for which the technology was origina lly developedto provide developing nations with safe drinking water. Largely supported by foreign aid, the mini-oxidation system was field-tested by representatives from funding agencies. Unfortunately, the output water had a detectable odor which the funders found unacceptable. Despite assurances that ITC technicians could fix the problem, the trials failed to convert into orders. The team decided to refocus a second-generation product on specialized applications in Western countries where funding was more available. The plan was to develop a slightly modified version of the product and aim it at a potential market for military use and NGO disaster backing activities that Wagner had identified in her initial analysis. This decision was enormously disappointing to the Indian technologists who had developed the initial examples, and Vyas had to work hard to keep them on board. The second-generation product fixed the odor problem, but field trials showed that the solution caused the unit to consume too much power, requiring frequent battery replacement. Once again, no orders were forthcoming.While these trials were occurring, the filtration units small R&D team in the United States persuaded Vyas to allow them to work with corporate R&D on an entirely new version of the product that would utilize ultrasound waves for water disinfection. High frequency vibrations were shown to control the growth of algae, organic waste, and bacteria such as E. coli. commercialize applications for this technology included treatment for clean water storage receptacles, public/private ponds, seek tanks, and ballast water. However, in 2006 this technology was still in the earliest stages of research and testing.New Oversight, New DisciplineIn January 2006, just as Vyas and the rest of the mini-oxidation team were launching their secondgeneration system, Cynthia Jackson was appointed vicepresident of the Water Management Division. Jacksons attention was soon drawn to the troubled Filtration Unit which she matt-up needed to put much more rigor into the planning and analysis that supported their product development activities. According to JacksonPeter Vyas seems to be an excellent talent manager. He was able to recruit and retain good people to his unit, and then build them into highly motivated teams on two different continents. Hes also shown himself to be an outstanding advocate for the groups ideas -skilled at managing upward, gaining support, and running interference so his team can concentrate on the task at hand. And Im aware that the company has high hopes for the Filtration Unit, but the results just are not there.In my view, the unit lacks discipline. They had a promising technology that was in search of a market, but had not done the work to nail down either. In the first meeting I had with them I explained that they would be developing any future proposals using a rigorous three-phase process linking market analysis and technological development to business planning. In her first meeting with Vyas, Jackson also made it clear that the units continued existence was in jeopardy if they did not turn things around.Mini-Oxidations Third Launch AttemptTo coordinate the third launch of the mini-oxidation system, Vyas assembled a single six-person development team with representatives from various functions located in the United States and India. Because Janice Wagner had demonstrated strong project management skills, Vyas named heras the team leader. (Exhibit 3 details committee membership.) From the outset, the team was highly committed to the product and worked tirelesslyto complete Jacksons three-phase process.Phase 1 General mathematical product Concept and Market AnalysisWagner took the lead in preparing the Phase 1 requirement to develop a general product concept supported by market research. Having learned that the unit lacked the expertise to sell to developing markets, governments, and NGOs, she decided to focus additiona l research on U.S. data that seemed to indicate strong potential for a residential water purification system. She also decided to see if opportunities might exist in national agricultural applications. According to the Palmer Drought Index from April of 2006, 26% of the United States was considered in moderate to extreme drought conditions, and Wagners research showed that low rainfall, high wind, and fast population growth in the Western and Southeastern regions of the country caused a major water scarcity problem for these areas. The resulting government-imposed water restrictions often led to good limitations or outright bans of water used in residential landscape irrigation.Because re-use of waste water would serve conservation efforts while preserving residential landscaping, Wagner felt that the mini-oxidation system offered a perfect solution for the needs of homeowners in these drought-stricken areas. In addition, since the product would be used for irrigation and not for drinking water, the disinfection quality could be lowered and goose egg consumption would therefore be reduced compared to past product iterations. Wagners research on the U.S. water industry indicated that the domestic water-treatment equipment market generated sales of over $9 billion. (Exhibit 4 provides selected data from the research.) Residential water treatment products ranged from water filters that reduced sediment, rust, and chlorine odor (average retail price $50) to systems that provided more comprehensive kinsperson water purification (retail price $1,500 to $3,000). The research also showed that in-ground sprinkler systems cost between $1,800 and $4,000, and after conducting some industry interviews and focus groups, Wagner felt this was a good barometer of what a homeowner was willing to pay for a lush, green lawn.After discussing the product concept with the development committee members, the team decided to recommend a retail price of $2,000 ($1,000 wholesale pri ce) for a residential irrigation mini-oxidation system (RIMOS) capable of supporting a 10,000 square-foot lawn. Pricing for an agricultural irrigation large oxidation system (AILOS) would be importantly less on a per-acre basis, with details to be developed only after further research had been done. Wagner and Vyas compiled the data and product concept information in a formal proposal for Jackson to approve. Jackson responded to the teams Phase 1 proposal with a flurry of questions and challenges. She highlighted the sparseness of concrete market numbers and their lack of data on target markets. And when the team floated the idea of innovation a larger-scale agricultural version of the system, she asked them to think about whether that would stretch resources too thin. With the whole company under pressure to trim budgets, Jackson asked the team to consider reducing the projects costs by eliminating either the RIMOS or AILOS product. After some discussion, Vyas and his team agreed to focus future product development and marketing efforts on the RIMOS product for the U.S. market.Phase 2 Technical Specifications and paradigmHaving won the approval of Phase 1, the team was now ready to begin the second phase of Jacksons product development process. This involved designing actual product specifications and determining how to do this within the $1,000 wholesale price point that the group had determined was appropriate. A working prototype was also to be created as part of this phase. The team relied heavily on ITC expertise to adapt the existing product originally designed to provide potable water in remote locations, to one capable of processing wastewater for lawn irrigation. During this phase, several misunderstandings surfaced between team members in the United States and India. For example, Wagner became concerned when the Indian teamrepeatedly helpless design deadlines she had requested. When she confronted Div Verma, the lab leader responsible for the proj ect, he responded terselyPeter told us he wanted the new design to be flawless. I take that as my number one priority. We cant meet this deliverable without proper testing. Why is everything so rushed with you? If we dont have a perfect design, then we run the risk of failing a third time and that is not acceptable. My team will not provide designs for a prototype until we are sure that all the bugs have been worked out. We dont want to be involved in another failure. Emphasizing the mandate to move quickly while ensuring product quality, Vyas mediated the disagreement by crafting a compromise that gave the Indian technical team a formal schedule allowing them two weeks of extra testing time. I felt there was a mix of disappointment and pride that had to be dealt with, said Vias. I also told Div that this third generation product would give us the credibility to return to the developing world project. Once the prototype was finished, the final designs and specs were again submitted for review.Jackson was impressed by the attention to detail in this latest iteration, but wanted to ensure that the team was fully utilizing the internal expertise available at ART. With Jacksons help, Vyas tapped engineers and manufacturing managers from the HVAC and Healthcare Divisions who had expertise his team was lacking. He invited them to join his development team, and they quickly became deeply engaged in the project. They identified several design changes and production specifications that increased might and lowered manufacturing costs.Phase 3 Business PlanThe development of the business plan was the most difficult phase for Vyas and his team. They were unaccustomed to creating complex sales compute models and cost estimates. But eventually they developed a detailed product concept, marketing approach, and manufacturing strategy for RIMOS, as well as sales forecasts, cost projections, and cost estimates. They also acknowledged that they still believed there was a signi ficant market in water treatment for the developing world and in emergency relief work, butthese future options had not been included in the current forecasts or business plan. They hoped to explore these with the help of the Oil and Gas Division which had excellent transnational contacts.Jackson challenged the teams pro forma financials which she felt lacked the data to support their assumptions. She asked the team to perform additional due diligence and to justify their assumptions. She also pushed back on the projected sales assumptions and suggested that the pro forma financials needed to be stress-tested. But after testing the analysis, Wagner felt her research was sound and was adamant about the size of the opportunity and their ability to capture the market. Vyas stood by Wagner and also defended the financial data which he felt had been carefully developed by the manufacturing and technology experts. Exhibit 5 summarizes the teams sales and operating margin forecasts.The te am acknowledged that its assumptions relied on the ability to gain access to the HVAC Groups Residential Market Division. As Wagner pointed out, ARTs norms encouraged them to take advantage of these types of synergies, and they had good contacts in the division. However, the HVAC Residential Market Divisions senior executives had full courtesy regarding the products distributed through its channels, and they had not yet made a formal decision aboutJackson also expressed her concerns with the $2,000 retail price point and pushed Vyas to clear identify the risks associated with the plan. After further consideration, the team developed a risk assessment and response matrix, which they included in the business plan (Exhibit 6). The business plan revealed the need for $2 million in funding for beta batch production of RIMOS and the marketing budget to support its distribution and promotion.Toward a Decision Go or No Go?An hour after receiving the investment proposal from his team, Vyas was still pacing back and forth trying to decide whether to support or reject their request for the $2 million in funding for RIMOS. He knew his development team was absolutely convinced it could succeed, but he also realized that the units existence and even his own career were being openly questioned. Two floors above Vyass office, Jackson was also contemplating the RIMOS project. Having heard through the company grapevine that a funding request had been submitted to Vyas, she began to think about how she would handle the request if it was sent up to her. She had heard rumblings from other managers in her division that the Filtration Unit was a drain on division resources and that it was time to pull the plug on any additional funding.As a newly promoted division VP, Jackson understood that her actions would be closely watched. She wanted to make sure she did not drop the ball.Exhibit 1ART Organization with Filtration Unit incidentFinanceEngineeringLegalR&DHRDavid HallCEOHealth careExecutive VPEnergy3 divisions17 business units2 divisions13 business unitsPowerGenerationOil/GasExtraction4 business units2 direct reportsT. SmithAdministrationCynthia JacksonVP WaterManagementDivision5 business units3 other business unitsB. BradyR&D USAIndustrialAutomationW. SteilowPlantSuperintendent5 direct reports40 plant personnelHVAC3 divisions14 business unitsPowerDistribution3 business unitsPeter VyasManagerFiltration UnitJ. Wagner gross sales andMarketing2 direct reportsB. WangProductionControlP. GuptaIndian TechnicalCenter Team2 direct reports3 direct reportsExhibit 2Wagners List of Potential MarketsDeveloping Nations Provide potable water solutions for areas with unsafe drinking water U.S. Residential Landscape irrigation Pools In-house water recirculation for non-drinking purposes (e.g., laundry, dishwashers, etc.) U.S. Commercial Restaurants marketplace stores Laundromats Linen/Uniform companies Farms Landscape irrigationU.S. and Overseas Emergency Units Disaster r elief MilitaryExhibit 3ART Mini Water Oxidation strategyDevelopment Committee Team Structure New Product Introduction Team MembersD. VermaR. PatelB. WangH. LewisJ. WagnerT. SmithC. CortezaG. SteinbergaLaboratory LeaderIndian Technical CenterProduct DevelopmentIndian Technical CenterManufacturingQuality AssuranceMarketing (TEAM LEADER)Project AdministrationHVAC Division RepresentativeHealthcare Division Representativea Member from another unit of ART added in Phase 2Exhibit 4Market Research Summary DataThe U.S. Water effort (Revenues in millions)aWater Treatment EquipmentDelivery EquipmentChemicalsContract OperationsConsulting/EngineeringMaintenance ServicesInstruments and TestingWastewater UtilitiesDrinking Water UtilitiesTotal U.S. Water Industry$9,110$11,660$4,020$2,350$7,460$1,780$1,400$34,130$35,070$106,980sU.S. Residences (2000 Census)Total Housing UnitsSingle-Family Detached Homes116 million70 millionDrought Indicators (Palmer Drought Index 4/10/2006)% of the continuous U.S. in severe to extreme drought% of the continuous U.S. in moderate to extreme drought13%26%NOTE Mini-Oxidation Systems are a new-to-the-world product with unnamed market potential. a Source Adapted from the Environmental Business Journal, 2006Exhibit 5Summary Sales and Profit regard for RIMOS2007Forecast Sales ( $ millions)Forecast Operating Income (%)Exhibit 62008200920102011$ 5.4510%$ 7.0815%$ 8.8620%$ 10.8920%$ 13.0720%Summary Risk Analysis and Risk Mitigation for RIMOSRisklevelPlanMay not gain market acceptanceHighEnsure HVAC distribution supportHighlight ART nameSupplement marketing budget for product launchProduct design flaws averageMonitor beta batch closelyPrice point too highMediumQuantify customer savings from increased waterefficiencyProvide sales training to distributorsEmerging competitionLowGet to market firstLeverage ART global presence, technical support,supplier relationships, and distribution network