6.4.1 Why Should We Search for New Business Ideas?

This is the first link to the innovation strategy. Everyone involved in NBD should be crystal clear on what the overall goal of the NBD activities is. General statements such as “making money” or “building a sustainable, profitable business” are not precise enough for creating the necessary understanding about the goal(s) to be reached. A precise answer to the question of why one is searching for a new business idea depends of course on the company itself. Consider a company that has ambitious growth targets. Depending on the time horizon of these targets, the company might consider growth through a number of acquisitions, a combination of acquisitions and NBD, or primarily through NBD.²

6.4.2 What Kinds of Business Ideas Are Requested and Hence Searched for?

This is the second link to the innovation strategy. The answer to this question depends on the general expectations a new business needs to fulfil. These conditions build the framework for searching for new ideas and include, but are not limited to, expectations regarding collaboration with external partners, demands about time‐to‐market or time‐to‐breakeven, budget restrictions, or requirements with respect to the profitability of the business, for example, certain EBITDA margins that need to be achieved.

6.4.3 Where Do You Search for New Business Ideas?

This question can also be derived from the innovation strategy with respect to the market segment or field of application where a new business should be built. As depicted in Figure 6.2, the search process starts with an analysis of market trends (external analysis) and analysis of existing competencies (internal analysis). There are two general ways to assess the internal competencies in relation to market trends: traditionally, one would compare the existing competencies (or means the company has) to those required to seize a given market opportunity. If competencies are missing, the company would have to acquire or build new competencies. This approach can be classified as an outside‐in approach because the starting point is the external analysis – the environment determines if the existing competencies are sufficient. Another way to start the trend analysis is to define the unique competencies that already exist and search for potential fields that can be seized by means of these competencies. While both approaches might look very similar, they are very different in their nature for identifying potential NBD search fields. Consider the simple picture of cooking a meal: the outside‐in approach is to have the recipe (the market trends derived from an external analysis) and then acquire the necessary ingredients (the competencies) to cook the desired meal. In contrast, the inside‐out approach starts with the existing ingredients (the competencies) that can be combined to create various types of new meals; an approach that one can term “creative cooking”. The reality will be between the outside‐in and inside‐out approaches because it is not only the environment of a firm that determines its path (with the firm having no influence at all) nor is it the firm that can always shape or influence its environment. Hence, defining new search fields is a combination of market trends and competencies with an emphasis on the fact that such a combination can be realized with existing and non‐existing market access and with existing or non‐existing competencies. But, a company should have either access to a market or possess a competence – one of the two should be present. In other words, without any means in‐house and without any access to a market, internal development through NBD is questionable and an acquisition might be more promising.

To illustrate the application of the Why‐, What‐ and Where‐question, consider an example from Evonik Industries, former³ business unit Advanced Intermediates (e.g. active oxygens, specialty catalysts and polymer additives). In order to enable additional growth, the unit considered the idea of growing its product portfolio of “advanced intermediates” by focusing on methods to replace petroleum‐based chemicals. The industrial branch devoted to the use of living cells and enzymes to synthesize products that can replace petroleum‐based chemicals is known as white biotechnology. Because white biotechnology has prospered in recent years and because Evonik has strong competencies in this area, especially in its animal nutrition business, the idea was to search for new business opportunities in the area of bio‐based advanced intermediates. However, as all of these opportunities would have required investments in the three digit million Euro range, the idea did not fit with the overall business strategy of Evonik and was, therefore, not developed further. As an alternative, Evonik considered building on its existing technology and product know‐how in the field of amine chemistry and applying its competencies in a different application field. The idea was to offer customers a chemical absorbent in the area of acid gas removal that would not require process modifications. This idea, later commercialized as CAPLUS®, required much lower investments and, thus, had a better fit with the firm’s innovation strategy. Hence, while the “What”‐question did not fit with Evonik’s strategy in the case of bio‐based chemicals, its newly developed specialty amine formulation CAPLUS did fit. In order to be successful with an initial idea, it has to demonstrate fit in all three dimensions of the Why‐, Where‐ and What‐ questions. If an idea does not fit for any (significant) reason, like the mismatch of the required and available investment for bio‐based chemicals, the idea should not be further developed and the resources allocated to other ideas that better fit with a company’s strategy.

6.4.4 Looking Outside the Boundaries of the Firm

In addition to collaborating with internal partners,⁴ new business development involves connecting the firm to external partners such as suppliers, industry associations and universities. Hence, new business development entails the creation of a network beyond the boundaries of the firm. To build such a network, the new business development manager needs to talk to (existing and potential) customers, attend industry conferences and science fairs, consult with experts inside the chemical industry but also with those outside the chemical industry, for example, in the automotive or construction industries. It also entails reading scientific articles, industry magazines and management literature and studying patent landscapes.

Networking with a diverse group of external partners enhances business intelligence (e.g. by obtaining customer know‐how), provides access to a wide range of ideas and complementary competencies and increases flexibility in the business development process. In fact, inter‐firm networks and strategic alliances are increasingly a source of competitive advantage [16–21]. This includes concepts such as “Open Innovation” – a term promoted by Henry Chesbrough from the Haas School of Business – that assume that “firms can and should use external ideas as well as internal ideas and internal and external paths to market” [22: 1]. Open Innovation is a holistic approach to innovation management that not only means opening a firm’s innovation process to external parties (with ideas flowing inside and outside the firm) but goes beyond simply using external sources of ideas and technologies [23]. Open Innovation can be used to change the way companies manage intellectual property and guide the integration of exploration‐oriented firm‐level capabilities and resources (e.g. internal R&D capabilities) with exploitation‐oriented capabilities and resources (e.g. supply chain management). The concept, therefore, has a significant strategic element as it concerns the strategic capabilities of the firm, such as a firm’s ability to manage alliances.

To better utilize external sources of innovation, chemical and pharmaceutical companies increasingly employ a variety of techniques to connect to external parties. The chemical company Evonik, for example, regularly holds so‐called “Evonik Meets Science” events in Germany, China, Japan and the United States to strengthen its networks with leading international researchers. In these events managers from Evonik exchange knowledge with scientists from different disciplines and institutions [24]. The consumer goods company Henkel organizes a competitive fair, called the “Henkel Innovation Challenge”, where students from all over the world come together in teams of two and imagine being a new business development manager. The students “develop their own vision of life in 2050 and develop a new Henkel product or technology for the future. With their concepts, which also take into account Henkel’s sustainability strategy, they compete with international students around the world: Who has the best idea and who will succeed in the national and international final?” [25]. The pharmaceutical company GlaxoSmith Kline (GSK) operates a website where it publishes so‐called “Wants”, that is, technologies or innovations the company is looking for. If external parties (e.g. individual researchers or a team of researchers) have an innovative idea that matches GSK’s wants, they can submit the idea and potentially partner with GSK. According to the company, “[t]he ultimate goal for GSK […] is to in‐licence and commercialize innovative technologies matching our strategic wants. Through appropriate legal agreements, we hope to link external innovative technology to our global brands—a process that can result in a win for GSK and a win for innovators” [26]. On average, the early stage review for new ideas submitted to GSK takes 3 months, and12–18 months to plan a development programme and execute legal agreements in the field of consumer healthcare. Box 6.1 discusses another approach to finding external ideas – ideation jams.

6.5.1 The R‐W‐W Screen

While the growth needs of large chemical companies demand investments into radical product innovation and new business development, studies show that the majority of projects in firms’ development portfolios focus on continuous improvements of existing product lines and established businesses [27]. Hence, despite the need to invest in a few but risky NBD projects, firms often rather tend to approve a large number of safe projects that result in incremental innovations or opportunities that improve businesses that already exist.

Although the tendency of established firms to bet on projects with certain outcomes is not surprising, focusing on incremental developments during the selection process has two key disadvantages. Firstly, though necessary for continuous improvement, safe projects don’t contribute much to the growth needs of the firm and its profitability targets. Secondly, selecting a large number of safe projects congests the firm’s project pipeline, resulting in “traffic jams” that delay NBD projects. As a result, firms fail to achieve their revenue goals and may even risk future competitive advantage. Accordingly, what companies need is a systematic and disciplined selection method, resulting in a balanced portfolio of safe projects that sustain the present businesses of the firm (e.g. through incremental product innovations) and more risky projects that build future competitive advantage and contribute significantly to the growth of the corporation.

Such a tool is the so called R‐W‐W (“real, win, worth it”) screen – a method developed by George Day from the Wharton School – which lays out a series of questions about every NBD project, its potential market and a firm’s capabilities – “not for making go/no‐go decisions but, rather, […] to expose faulty assumptions, gaps in knowledge, and potential sources of risk” [27: 114]. The R‐W‐W method is used by companies such as Evonik, Honeywell, Novartis and 3M to assess the potential of business ideas and select individual new business development projects [27]. In the following we will summarize Day’s method, apply it to the context of the chemical industry and highlight key aspects.

Based on the R‐W‐W method, the potential of an NBD project is evaluated in three categories: product‐market relation (Is it real?), competition (Can we win?) and value (Is it worth pursuing?). Following these three first‐column questions (see Figure 6.3), the screen guides the NBD team to ask six fundamental questions (second column of Figure 6.3): Is the market real? Is the product/service real? Can the product/service be competitive? Can our firm be competitive in this business? Will the product/service be profitable at an acceptable risk? Does launching the NBD project make strategic sense?

Usually, not all of the second‐column questions (see Figure 6.3) can be answered at an early stage of developing a business opportunity but these questions are a helpful guide to navigating through the unknown jungle of unproven business concepts and should be repeatedly asked throughout the different stages of the NBD process. Specifically, the R‐W‐W screen points at the type of questions to be asked and where an NBD team should focus its resources in order to determine the viability of a business idea. As an example, when the initial answer to the question “Is the market real?” is “maybe”, the NBD team has to explore ways to turn the answer into a yes. If, after a thorough investigation, the definite answer to any second‐column question is no (i.e. the team cannot identify any way to change it into a yes), then the project will typically⁶ be terminated. In such a case, one should document the reasons why it has been stopped (in order to come back to the project when market conditions have changed or, in case a project has been terminated but later successfully exploited by a competitor in order to explore why the project was dismissed).

In supporting the NBD team answering the six core questions, the team can deal with a number of sub‐questions (third column in Figure 6.3)⁷:

1. Is the market real? To determine whether a market exists is the first step towards making the decision to pursue an NBD project or not. In general, a market exists when four conditions are fulfilled:
   • Is there a customer need for the product? The proposed product/service has to solve a customer problem better than the available alternatives (best case, there are no alternatives available in the market). Market research can be used to effectively determine whether there is a desire in the market, what motivates customers to demand a solution and how customers behave.
   • Can the customer buy it? The customer must be able to buy the proposed product/service. The goal in answering this question is to explore purchasing barriers such as regulations, existing long‐term contracts that prevent customers from switching, or distribution problems (e.g. providing health care solutions in developing countries is often difficult due to a lack of infrastructure).
   • Is the size of the market adequate? A market opportunity is not real if the customers’ demand for the product/service is not big enough. Particularly in the chemical industry it is often not the number of customers but rather the quantity they order that determines the size of the market.
   • Will the customer buy the product? Having a real customer need and ability to purchase the product/service is insufficient if customers are not willing to buy the offering. Substitutes or other aspects such as perceived risks, brand loyalty, or customers’ assessment of the price–performance ratio influence the purchasing decision. In the end, it is the customer who compares the benefits (as viewed by the customer, not the NBD team) in relation to associated costs and compares the offering to alternatives in the market before making the purchase decision.
2. Is the product/service real? After the NBD team has established the reality of the market, it needs to evaluate the feasibility of the concept. The following questions foster the analysis:
   • Is there a clear concept? At the early stages of NBD, technology and performance requirements need to be assessed in order to determine what exactly the project is about. Besides technical dimensions (e.g. reaction speed, required energy), social and environmental dimensions (e.g. waste, emissions, fresh water consumption) of the concept should also be evaluated.
   • Can the product/service be made by the respective business unit? The product/service can only be created when the business unit has the legal rights (e.g. in the form of patents) to produce it, can source the required raw materials at appropriate costs, can establish a value chain (i.e. the primary activities and their linkage to create value – from inbound logistics to outbound logistics, marketing and sales, and services – as well as secondary activities such as training) and has the financial resources to do so. Moreover, answering this question also requires determining whether external partners such as biotechnology firms are needed to produce the product/service.
   • Will the final product/service satisfy the market, therefore the customers’ needs? During the development of a new business several attributes of the offering (e.g. modification of product features) and the surrounding business conditions (e.g. availability of staff) naturally change. It is therefore important to monitor these changes during a new business development.
3. Can the product be competitive? In a next step the NBD team needs to assess the company’s ability to gain and hold market share with the initiative. This can be done by answering three questions:
   • Is it a source of competitive advantage? In general, this advantage can be achieved in one of two ways: by supplying a product/service at lower costs, in which case the product/service provides the basis for a cost advantage, or by supplying a differentiated product/service in a way that the customer is willing to pay a price premium, in which case it provides the basis for a differentiation advantage. Hence, the NBD team must investigate whether a competitor can offer the same benefit to customers at lower operational costs (often at a lower price) or in a more differentiated way (e.g. through better customer service or a well‐known brand).
   • Can the advantage be sustained? Having an advantage for only a short period of time is (typically) not desirable. The NBD team must therefore explore what means exist to defend the new business against imitators. This concerns questions of IP and knowledge protection and continuous R&D efforts, but also questions about how to ensure not only continuous but maybe even exclusive supply of raw materials and how to attract and keep the best people to work on the project.
   • How will the competitors respond? A common mistake in NBD is to assume that competitors stand still. Considering the reactions of rivals is therefore an important aspect in analysing NBD projects. A medium‐sized chemical company should, for example, carefully consider retaliation from large chemical companies such as BASF or Dow Chemical (market leaders could, for instance, escalate marketing activities or start price wars to fend‐off market entrants). Even among equals, historic sentiments (e.g. visible in statements such as “this business has always been our flagship”) might result in severe reactions from competitors. As a result, industry prices that have been assumed in the project’s pro forma calculations might no longer hold.
4. Can our firm be competitive? Having a competitive product is insufficient to succeed in NBD if the company is not able to successfully compete in the marketplace. In order to create sustainable competitive advantage, the firm must – relative to its competitors – possess superior resources and capabilities, superior market insight and an appropriate management. The following questions help to evaluate the competitive position of the firm:
   • Do we have superior resources? Superior resources, such as know‐how in chemical engineering, logistics, technical sales professionals, or information networks (e.g. customer relationship management) are crucial to be competitive. This also concerns the strategic capabilities of the respective business unit. Does the business unit have capabilities that are valued by the customer and provide potential competitive advantage? Do current or potential competitors possess the same or similar capabilities? Are the capabilities difficult to imitate? Is there a risk of substitution?
   • Do we have appropriate management? The NBD team must also raise important questions about having the right people in place to commercialize and scale the project. Do managers of the company have experience in the market and can they handle a complex project? Overall, does the NBD project fit with the culture of the company?
   • Can we understand and respond to the market? NBD requires a good deal of marketing know‐how, particularly an understanding of customers’ desires, needs and concerns. Managers involved in NBD need to be open to customer response and able to share customer intelligence among team members. Customer feedback is important to refine the concept.
5. Will it be profitable at acceptable risks? At this stage of the screening, the NBD team investigates the financial value of the project. Two questions can guide this rigorous analysis:
   • Are forecasted returns greater than costs? A firm’s top management typically will not approve an NBD project if its forecasted returns are smaller than the cost. The project’s capital outlays, expenses, expected margins, time‐to‐breakeven and other aspects need to be clarified.
   • Are the risks acceptable? In order to assess the associated risks of an NBD project, a sensitivity test can be carried out. At the core, this test should reveal how small changes in, for example, market share, price, or timing of market introduction affect cash flows and time‐to‐breakeven.
6. Does launching make strategic sense? At the final stage of the screening, the NBD team needs to consider the strategic value of the project by asking two more questions:
   • Does the product fit our overall growth strategy? Here, the NBD team should analyse whether the project fits with the business strategy of the respective business unit (e.g. is the project meeting expected growth rates and profits?).
   • Will top management support it? It is not only the initial but the ongoing support and commitment of a firm’s top management that plays an important role in developing a new business. Having a respected supporter at the top of a firm is naturally a big advantage for an NBD project. The rigorous assessment of an NBD project by means of the R‐W‐W method will provide a solid base to gain such support. Moreover, the NBD team should be aware of the top management team’s characteristics, such as functional backgrounds when presenting project proposals. Building a common ground with those who make the final decision, may eventually be the final ingredient for project approval.

At Evonik Industries, the R‐W‐W screen is applied especially in the first three stages of the idea‐to‐profit (I2P) process (see Figure 6.2). Therefore, project leaders would need to answer a few questions in Stage 1, revisit these questions in Stage 2 and add some more questions and repeat the process in Stage 3, to be able to answer all of the previous questions that are often based on reasonable assumptions.

6.5.2 Understanding and Mapping the Whole Value Chain

In order to create and deliver a product or a service, a specific set of activities needs to be performed. This set of activities is, in line with the process‐view of organizations, known as the value chain [28]. The value chain describes what activities a firm needs to undertake to create value.⁸ But, the value chain is not only about choosing activities, it is also about how to link (e.g. sequence) activities. When engaging in NBD, it is important to understand this chain of activities and their linkages because it allows evaluation of the feasibility of an NBD opportunity and, thus, selection of promising projects.

Compared with building a new business in a business‐to‐consumer (B2C) context, such as online retailing, chemical companies (primarily) build businesses in a business‐to‐business (B2B) context that is characterized by smaller numbers of potential customers (e.g. 1–50) and by smaller numbers of suppliers from which one can source raw materials (e.g. 1–30). The starting point in constructing the value chain is the customers and their needs (i.e. what does the customer actually want?). Discussions with potential customers at very early stages of NBD allow creation of insights on product requirements, potential quantities and product prices that, in turn, enable firms to analyse the consequences on the value chain and might also lead to joint development agreements with customers. Thus, based on an analysis of customers’ needs, one can start to think about the components required to meet those needs (e.g. production facilities with a certain capacity) and the design of the processes for creating, communicating and delivering the offering (e.g. given the requirements, do we have the marketing and sales capacity to serve our customers in a reproducible fashion?).

Furthermore, the value chain should not only be analysed in the direction of the outputs, which is forward towards the customer, but also in the direction of the inputs, which is backward towards the suppliers. In NBD, one needs to understand where one can source the required raw materials, at what price and in what quantities. Supplier integration during the early stages of NBD may not only allow a better understanding of inbound‐logistics in one’s value chain but also reduce development time and improve quality of new products [29, 30]. Integrating both customers and suppliers is, hence, an important and advisable aspect of NBD to understand and fine‐tune a business model to the needs and restrictions of the market one aims to enter (for more insights into customer and supplier integration see Chapter 8).

To illustrate the role of understanding and mapping the value chain for NBD, consider the following examples from Evonik Industries:

• Together with a start‐up, Evonik has developed a catalyst that can transform a specific class of linear olefines into polyolefines. The unique selling point of this catalyst is that it can transfer bio‐based linear olefines – which are in this specific case not that pure compared with fossil‐based linear olefines – into polyolefines. In contrast, the catalyst that is traditionally used in this application field cannot transfer bio‐based linear olefines into (bio‐based) polyolefines. Producers of the given type of polyolefines were very keen on sourcing bio‐based polyolefines in order to fill the supply–demand gap of polyolefines. While Evonik had all the resources to produce the catalyst, the missing piece in the value chain was on the supply side: only a very limited number of companies are able to produce the required type of bio‐based linear olefines and plans for building further production capacities for bio‐based linear olefines were dragging on. Despite a well‐performing catalyst, the project was put on hold, as it was unclear if the customer of Evonik (the polyolefines producer) would be able to source bio‐based linear olefines in sufficient amounts.
• As a leading company in the production of hydrogen peroxide, Evonik must not only understand the hydrogen peroxide market and the technology that enables its customers to produce propylene oxide from propene and hydrogen peroxide, but it must also understand the propylene oxide business (e.g. volumes and prices) and the market for propene (e.g. access to the required volumes of propene and the prices). It is not sufficient to understand the hydrogen peroxide market; Evonik must also understand the forward part of the value chain.

Both examples illustrate that it is not sufficient to understand the technology or the product alone, but companies also need to understand the whole value chain, especially with respect to the sourcing of raw materials and the markets their customers are selling to. Hence, NBD projects should be assessed in terms of how well the value chain is understood towards the supply side, that is, suppliers, and how well the value chain is understood towards the demand side, that is, the customers.

6.5.3 Discovery‐driven Planning

Another way to approach the selection of NBD projects is discovery‐driven planning. This method – developed by Rita McGrath from the Columbia Business School and Ian MacMillan from the Wharton School – focuses on testing and re‐evaluating assumptions and is, hence, particularly suitable for the unpredictable setting of NBD projects [31]. In the following we summarize McGrath and MacMillan’s method, apply it to the context of the chemical industry and highlight key aspects.

Discovery‐driven planning is a tool that takes the fundamental differences between planning for an established business and planning for an NBD project into account [32]. Conventional planning tools such as discounted cash flow or net present value analysis are based on the premise that future returns can be extrapolated from past experience. These methods are therefore appropriate in the context of established businesses, where technology is well understood, forecasts are reliable and market conditions are relatively safe. By contrast, the context of an NBD project, particularly during the early stages of development, is by its very nature uncertain, difficult to predict and not obvious. Instead of relying on existing knowledge that doesn’t change during the development of a project, NBD projects rely on assumptions that often turn out to be wrong. Conventional planning tools that require reliable data are hence in general not suitable to select NBD projects. What is needed is a tool that allows discovering the potential of a project as new data are uncovered. Discovery‐driven planning is such a tool that “systematically converts assumptions into knowledge” [31: 44]. As depicted in Figure 6.4, discovery‐driven planning is based on a five‐step process to develop and select NBD projects.

The first step is to create a reverse income statement. Instead of estimating the revenues and then calculating the profits for each project, a reverse income statement starts with the required profits. Following this approach, the NBD team will begin with the required profits and then work backwards to the revenue necessary to deliver the required profits and the allowable costs (required profits = necessary revenue – allowable costs). Accordingly, the team has to define what the profit margin and the absolute profit should be at a minimum. To calculate the required profits, we must understand that the project should: (i) significantly contribute to the total profits of the firm and (ii) compensate for the investment risk (alternatively, the chemical company could invest in an established business). If, for example, the existing business has an EBITDA⁹ margin of 20% then the new business should have a margin of about 25% (i.e. in this example an NBD project must deliver a premium of 5% to compensate for investment risks). Here, the absolute profit should be in balance with the amount of resources and the expected risk. If the upfront costs are, for instance, several million Euros over several years, the targeted absolute profit, such as EBITDA, should be a two digit Euro million figure. Based on these two figures one can then calculate the necessary revenues and derive from this the necessary volumes and prices. Already at this stage one can double check if the necessary volumes lead to a reasonable and achievable market share. Going further one can now also calculate the allowable cost for production, general and administrative expenses, and marketing and sales expenses. For example, in the case of the previously mentioned CAPLUS project (see also Box 6.2), analysing how fast Evonik can ramp‐up production volumes if customers are willing to replace their existing amine scrubbing agent, enables the NBD team to estimate what resources (e.g. sales forces) are necessary to fulfil the demand. Such an analysis not only creates a more detailed but also a more realistic picture of the business opportunity compared with deriving volumes from aspired market shares.

In a second step, the value chain is laid out, describing key activities necessary to run the NBD project. Activities that create value are, for example, inbound logistics (e.g. receiving raw materials), production, marketing and sales and services (e.g. training). The operations specifications also allow identifying activities that are most significant in terms of operating costs and test how the existing value chain of the business unit is affected by the NBD project. Looking at related chemical businesses allows identifying typical operation standards such as plant utilization, asset to sales ratios, or other key performance indicators that can be used to determine whether a project holds together and to test and adjust underlying assumptions. The goal of this exercise is not to create the most accurate but a reasonable model of the logistical and economic reality of the new business.

The third step of discovery‐driven planning is to create an assumption checklist in order to track assumptions. This is an important step, as the model will be based on a number of assumptions due to the natural uncertainty that comes with an NBD project. Keeping this checklist is an important discipline to ensure that each assumption is flagged and tested as NBD projects unfold. This is a key advantage of the discovery‐driven planning, not only because it allows tracking of the assumptions but also because the tool facilitates the discussion with senior management. It lays out clearly not only the promised additional sales and profits (which every manager will happily accept) but also the necessary resources with respect to cash and employees that need to be committed in order to capture the benefits. Furthermore when, for example, assumed sales need to be adjusted, discussing the reason for this adjustment allows making changes in assumptions transparent and, therefore, sets the basis for constructive discussions.

Next, the company uses the new data to loop back the entire process into a revised income statement. At this step, the NBD team needs to ensure that all the assumptions are in line with the figures in the income (or profit and loss (P&L)) statement. Having transparent assumptions and figures, one can see if the entire business proposition hangs together or not. If, after several tests, the performance requirements cannot be met, the NBD project should be terminated and another project selected.

The fifth and final step in discovery‐driven planning is to use milestone events to test assumptions. This allows NBD managers to formally plan while ensuring learning.¹⁰ In contrast to conventional planning tools, the idea of milestone planning is not to focus an NBD manager on meeting a plan but rather to monitor the progress of the new business opportunity. Essentials are to further update the assumption list (if necessary) and to postpone major resource commitments until evidence from a previous milestone indicates that assumptions are still valid. If an NBD project does not pass a milestone test and the company does not see any way to redirect the project, the project would normally be terminated.

6.5.4 Portfolio Management

Another view on the selection process is not looking at a single idea but rather at the overall portfolio of ideas and projects. Portfolio concepts such as the BCG‐matrix (Boston Consulting Group) in the case of corporate strategy are frequently used in management practice and can also be applied to the selection of new business opportunities. In the context of NBD, the following concepts have been used by a leading specialty chemical company:

• Ansoff matrix: A tool that is frequently used to illustrate the basic directions of firm growth is the so‐called Ansoff product/market growth matrix [34]. Like the BCG‐matrix, the Ansoff matrix is normally used as a corporate strategy framework but can be adapted to the context of NBD. In the context of NBD, the matrix has nine zones based on different technology–market combinations (see Figure 6.5). Businesses in the lower left part target an existing market with an existing technology. This is the zone where the established business lines of a company are active. Future businesses that bring together a technology that is new to the world and a market that does not yet exist belong to the upper right part of the matrix. In the case of Evonik Industries, this is the zone where the strategic innovation unit of the firm (called Creavis) is active. Figure 6.5 also shows an NBD portfolio from Evonik. The majority of the presented NBD projects combine a market that is new to Evonik with a technology that is either new to the world or to Evonik. No NBD projects are in a zone where a market is new to the world and, hence, not existing yet because it is often difficult to anticipate new markets in the chemical industry. As a result, NBD projects often target existing or potential customers in existing markets. If a business idea brings together a technology and a market that are both new to the world, the idea would not be selected for NBD but could be recommended to be screened by the strategic innovation unit of Evonik.
• Comparison of reward to expense: Another way of looking at the project portfolio is to sort the projects by the size of the rewards,¹¹ for example, net present value (NPV) or expected cash flow in 10 years, and display the projects in a 2 × 2 matrix with cumulative R&D expenses on the x‐axis and the cumulated rewards on the y‐axis. In this way, the portfolio manager can easily see which projects give a satisfactory “bang‐for‐the‐buck” and from which point the project portfolio becomes too unfocused. For instance, it is not uncommon that the 80:20 rule applies in a way that 80% of the expected rewards are based on 20% of the expenses. Such a result would give a good hint to focus more and reallocate resources from the weaker reward/expense to the more promising ones.
• Risk reward matrix: Comparing investment and reward is not sufficient. As in any investment, the associated risk needs to be taken into account. Therefore one should analyse the portfolio with respect to the dimensions of risk, derived from a product’s estimated technical feasibility (in percent) and commercial feasibility (in percent), and display the results on one axis. On the other axis, one can display the reward (e.g. information on NPV or cash flow contribution). As a third dimension (e.g. bubble size), one can display the expenses of the NBD project.
• Reward and time‐to‐market: Finally, the fourth important parameter is when to expect rewards out of the overall portfolio and in what amounts. Therefore, a good way to display this is to use time‐to‐market on the x‐axis and a reward variable (e.g. NPV, CF) on the y‐axis. Again, the third dimension can be used to display the size of the NBD project with respect to its expenses.

6.7.1 Learning from Failures: Post‐completion Audits

Given the high failure rate of NBD projects, it is important for companies to conduct post‐project reviews to analyse the causes of failure or positive developments that should be applied again. A retrospective analysis of terminated projects enables firms to examine what has been learned from failure and to apply the lessons learned in future projects. However, despite the relevance of learning from failures, studies show that many companies do not review projects at all (e.g. due to time and management constraints) and the small number of projects that are reviewed, are reviewed without established guidelines [37]. In the following, we present the essentials of a project learning or debriefing process that works well, which is based on Evonik’s recommendations for post‐completion audits (PCA) that can be used as a guideline for post‐project reviews in NBD. Table 6.3 summarizes different types of post‐project reviews.

The PCA should take place from a certain project stage onwards, for example, in Cooper’s Stage‐Gate model after Stage 3 (i.e. “Development”). A PCA should be conducted when an NBD project is terminated, when an NBD project is launched (Stage 5: “Launch”) and approximately two to five years after the launch. The PCA is usually prepared by the project team and presented to the steering committee of the project.

The PCA should contain a business case review and a process review:

1. Business case review In the business case review, the last business case and previous versions of the business case are analysed with respect to deviations in market entry date, sales, project cost, manufacturing cost, investment (capital expenditures), profits (contribution margin, EBIT(DA) or cash flow) and NPV. The analysis is also based on additional information such as the market and competitive environment, competitive strategy, competencies and customers’ feedback (i.e. the “voice of the customer”).
2. Process review In the process review, the project is analysed in terms of its development. This review includes, for example, the experiences made, the interactions of the project team members, critical success factors and the main challenges of the project. These factors are analysed with respect to what can be recommended for future projects and what can be improved (e.g. “What went well?” or “Options for improvement”). In order to have a meaningful review, it is essential to have a culture in place that allows an open discussion about mistakes without fear of personal disadvantages and a top management that supports continuous learning.

6.7.2 KPIs for Measuring the Success of an NBD Unit

Employees in an NBD unit can be doing a great job; however, as the nature of the development process takes several years to reach the first sales, the normal metrics to measure the success of an established business will not work in this case. In order to measure the success of the NBD unit’s efforts, different metrics have been developed by one of the present authors, to give an overview of the performance of a respective NBD unit without considering the details of several highly complex projects the unit is pursuing. This task is fulfilled by defining and measuring a number of key performance indicators (KPIs). As depicted in Figure 6.6, depending on the development phase, different KPIs are used. As the term KPI indicates, these indicators focus on “key performance” metrics and it is, thus, important to keep in mind that they do not create a comprehensive picture. KPIs are “only” indicators and reality might be more complex. For example, the KPI “Number of ideas moved to new phase per FTE and per month” indicates the progress of the innovation pipeline in relation to the number of employees in the unit. Whereas a static view on the innovation pipeline only shows how many projects are at which stage, this KPI shows how many projects are really “alive” and being worked on. Furthermore, the KPI is not only an incentive to push projects forward to higher stages but it also takes terminated projects into consideration. Therefore, it incorporates the reality of a high failure rate, as discussed earlier, and still shows that the unit produces productive outcomes (a terminated project could save the company significant amounts of money, especially when done at an early stage).

The KPI “Weighted number of ideas per FTE” shows the workload of the group and its development over time. Furthermore, it could be benchmarked between similar groups in and outside of a chemical company. Whereas an idea in an early stage needs less time and resources, projects in higher stages require more time and resources and are usually worked on by several employees. Therefore, ideas and projects in different stages need to be weighted in order to have meaningful numbers that can be compared.