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TU
Graz
INNOVATION
AND INDUSTRIAL
MANA G EMENT
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LECTURE NOTES
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X INNOVATION AND INDUSTRIAL MANAGEMENT

UNIV..PROF. DR. CHRISTIAN RAMSAUER
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INSTITUTE OF
INNOVATION
AN D IN DUSTRIAL
MANAG EM E NT
Head of lnstitute
Christian Ramsauer
Univ.-Prof. Dipl.-lng. Dr.techn. c
Graz University of Technology
lnstitute of lnnovation
and lndustrial Management \
Kopernikusgasse 24lll
8010 Graz, Austria
Phone +43 316 8737291

Fax +43 3168737791
E-Mail iim@tugraz.at
Web iim.tugraz.at
DVR 0800 1833

urD ATU 57477 929
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InzotT the Institute of Industrial Management and Innovation Research andthe
Institute of Production Science and Management have been merged to establish
the Institute of Innovation and Industrial Management (IIM).
The Institute of Industrial Management and Innovation Research (IBL) was es-
tablished inrgTowithin the faculty of mechanical engineering and business eco-
nomics at Graz University of Technology (TU Graz). Hans Hinterhuber was the
first head of the IBL institute, followed by Prof. Josef W. Wohinz in rg7g, who
shaped the institute for 3z years. In zoo5, Prof. Wohinz also assumed the cura-
tion of the study program and Institute of Production Science and Management
(PSM) which was founded in cooperation with Magna International Inc. at TU
Graz. Since zorr Prof. Christian Ramsauer is the head of the IBL and curator of
the PSM.
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INNOVATION
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The IIM is a problem solver in the field of Industrial Management. Their research
activities are oriented towards defined focal points arising out of present prob-
lems of particular relevance, where they strive for application-oriented research
results which are reflected in reports, publications, dissertations and habilita-
tions. Current research emphasizes especially on innovation in the fields: Maker
Movement, Agility, Ramp-up Management, Industry 4.o, Product Design and
Lean Management.
W;trI^-, CHRISTIAN RAMSAUER

Graz,2017
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The Institute of Innovation and Industrial Management focuses on its core com-
it developed over the past years by conducting
petences within its lectures that
research and industry projects in various industries. Thereby multiple courses
within the three basic thematic pillars of the institute are offered to a broad range
of different studyprograms. These three pillars are: Innovation Management, In-
dustrial Management and Social Economics. Within its teaching philosophy the
institute focuses, besides the required elaboration of fundamental basics, on
practice oriented teaching. By combining experienced external lecturers, field
trips to industrial companies, Harvard Business case studies and exercises within
the laboratories of the institute with frontal university lectures a high standard of
teaching qualrty and access to state-of-the-art knowledge is guaranteed for the
students. The aim of the IIM is to educate the leadership personalities of tomor-
row and therefore it sets itself high standards within the lectures in terms of top-
icality and processing of the contents.
Courses within the topic of Innovation Management:
o Product Innovation Project

. Implementing Innovation Strategy through Merger and Acquisition
o Value Management
o CreativityTechniques
o Enabling Innovation
o Product Innovation Management
Courses within the topic of Industrial Management:
o IndustrialEngineering
o Industrial Management Seminar
o Industriebetriebslehre*
. Bnergiewirtschaftslehre*
o Lernfabrik
r Qualitdtsmanagement*
o Quality Management
o ProductionStrategies
o Warehouse Logistics
r Logistik Management
. Arbeitssicherheit"
. Safety and Sustainability
o Operational Risk Management
o Manufacturing and Supply Chain Network
Courses within tle topic of Social Economics:

o Management Topics in Automotive Industry
o Teambuilding
o Leadership and Motivation
o Change Management
o Career Management
o Marketing in Automotive Business
*Lectures offered in German

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The course "Innovation and Industrial Management" aims at discussing the two
main questions that industrial companies have to answer within their daily busi-
ness routines:
o Which products are we going to develop in order to serve our cus-

tomer's needbest?
a How are we going to produce these products in order to stay competi-
tive?
The course introduces the topic of Innovation Management as the key to corpo-
rate survival and growth. Students learn what Innovations are and howthe man-
agement of industrial companies can increase the possibility for successful inno-
vations. The second main part of this lecture discusses Industrial Management as
a necessary prerequisite for corporate productivity. Students learn how the effi-
ciency of corporate activities can be measured and improved by certain methods
and tools. Thereby students get perfectly prepared for a successful career within
industryby gaining basic knowledge on the complexity, challenges and solutions
within Innovation Management and Industrial Management.
Targets of this lecture are:
Providing the students with basic knowledge of the value creation

process of industrial companies
a Discussing current challenges of industrial companies and knowing po-
tential solutions
a Understanding Innovation Management as the key to corporate sur-
vival and growth and challenges within Innovation Management
a Understanding Industrial Management as prerequisite of corporate
productivity and challenges within Industrial Management
o*ruYHht? sF Yt-*3S fi0g.iKsH
lnnovation and lndustrial Management
lnnovation as the key to corporate survival and growth
Historical development of industry
Economic importance of industry
Delimitation of industrial management in the context of economic sci-
ences
The Product Creation Process
Product Creation
Integrated Product Creation Processes
lndustrial lnnovation
Definitions and Terms
Dimensions of lnnovation
Types of lnnovation
Innovation Management
Innovation & Strategy
lnnovation Process
Innovation and Entrepreneurship
Operations Management
lntroduction to operations management
The tasks of operations management
I INNSVATIOhI
ANil ilNNU$TRilAL
I$ANAGtrMtrNT
1 lnnovation as the key to corporate survival and growth 2
2 lndustrial management as prerequisite of corporate productivity......' 4

2.1 Terms and definitions......... 5
2.2 Functions in industrial management............... b
3 Historical development of industry 9
4 Economic importance of industry........... ..'........... 13
5 Delimitation of industrial management in the context of economic

sciences 17
References 20
'1 lnn*vaii*n as the k*y to corporate surviva! and growth
1 Innovation as the key to corporate survival and

growth
"Innoustion distinguishes betuteen a leader and afollorner."
Steue Jobs
Innovation is an essential means by which organizations survive and thrive.l

Whether a company offers products, services or other goods to customers,
innovating these "goods" leads to by far the strongest form of differentiation from
competitors and thereby to sustainable competitive advantage. In general, a
company can compete based on three fundamentally different strategies: 2
o StrateSy of overall cost leadership
o Focus
. Differentiation
Depending on the specific industry and market a companyis acting in, its specific
resources, strengths and weaknesses as well as the strategic orientation of its
competitors, each company has to decide which strategic approach to follow.
Companies that focus on cost leadership excel in aggressively constructing
efficient-scale facilities, vigorously pursuing cost reductions derived from
experience, tightly controlling cost and overhead, avoiding marginal customer
accounts and minimizing costs in areas like R&D, service, sales force or
advertising. Strong cost control is necessary to offer products at lower costs
relative to competitors though quality, service and other areas cannot be ignored.
If a company decides to pursue a focus strategy its attention is put onto a buyer
group, specific product line segments or geographic markets. Thereby the
company aims to serve a specific and narrower strategic target very well and each
functional policy is developed. The company does so in a more effective and
efficient way than competitors which compete broadly.
Especially in high cost regions like Europe or USA most companies pursue a
strategy of differentiation from competitors. A company can differentiate its
products e.g. by superior quality, special service offerings, the ability to
specifically tailor a product to the customer's needs or by developing innovative
products that solve customer's problems in completely newways that customers
are willing to pay for.
'Dodgson et al. zor4, p. 3

z Porter r98o, p.
35
IH HCVATICIN A}IO H DI.ISTNNL ilAT.TAGEME}IT

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UNIV.-PROF. OR. CHRISTIAN ftAM$AUER
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1 lnnovation as the key to corporais survival and growth
Strategic advantage
Uniqueness perceived
Low costPosition
by the customer
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Figure 1: Three generic strategies companies can pursues
However, as labour costs are a main determining factor for the overall costs of
most industrial products, low cost regions like China or India make use of their
significantlylower average income levels and decreasing global shipment costs to
flood the market with mass-produced goods at very low prices 4. Companies in
high cost regions thereforeinvest larger portions of their revenues in research and
development to stay ahead of competition and bring new and innovative products
or services to the market. According to the 2oL6 Global Innovation looo Study, 9
out of the ro most innovative companies in the world come from the United States
(Figure z) which shows the dominance of western companies in terms of
innovation capabilitiess.
Figure 2: Most innovative companies in 20166
e Porter r98o, p. 39
+ Abele et al. zoo8, pp. 9
s Strategy& zo16
6 Strategy& zo16,
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2 lndustrial mafiegarn*nt as pr*:-*quisite af cerrpr:rate productivity
As the quote from Steve Jobs at the beginning of this chapter states, innovation
is necessary for
companies to lead within an industry. only by constantly
innovating and finding new approaches to solving a customer's problems can a
company sustain growth in the long runz. Great academics like Schumpeter or
Arndt have investigated innovation as the engine of economic development of
whole economies and thereby expressed the importance of innovation not only
for companies but for society in generals.
Definitions, different approaches and processes within innovation management
and theories of corporate innovation are elaborated in detail in chapter 3 of this
script. So far onlythe importance of innovation for corporate growth and survival
has been expressed.
2 lndustrial management as prerequisite of corporate

productivity
"Manegement is doing things right; Ieadership is doing the right things."
Peter Drucker
The subject of industrial management deals with a specific type of company, that
is the industrial company. An industrial company mainly produces and
distributes goods, this distinguishes it from service-companies. Industrial
companies make use of machine plants, division of labour and specialisation of
employees which distinguishes them from workshops. Industrial companies can
produce their goods in large volumes as mass products for the general market but
also in small quantities or even in batch-size one for specific customers.
z MacFarland zo13, http://www.huffingtonpost.com/scott-macfarland/why-innovation-

management-is-importa nt_b _4r7 448 z.html
8 Vahs & Burmester 2oo5, p.
4
t{ I}INOVATION AilO OUSTN$L MAHA€E}II EilT

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2 lndustrial management as prerequisite of corporate prod*ctivity
I Workshops
@ lndustrialcompanies
Figure 3: Diffcrentiation belween workshops and industrial companies
lndustrial lndustrial $ervice ,pure"

"pure' Company Company service
industrial company
company with withprimary with sales company
secondary services of tangible
services assets
Figure 4: Differentiaiion between industrial and service ccmpanies
2.1 Terms and definitions

Before industrial management can be described in detail a deeper understanding
of the different terms is necessary. The underlying definitions are:
An industry is characterized by the commercial production of goods within a

factory-system.
Companies can act within different areas or industries such as the automotive
industry or the chemical industry.
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2 lndustrial manag*ffisnt as prerequisit* of corporate productiviiy
An industrial company is a technical, social, economic and environment-

related entity engaged in the commercial production of goods within a factory-
system with the aim of supplying foreign needs, with independent decisions
and own risks.
Economic entities
Production company Households
Provider of tangible Provider of services

assets
I
tt
Material production Material processing
companies companies
Agricultural Workshop Trading lnsurance Transportation

Banks
companies companiescompanies--""-companies companies
Figure 5: lndustrial ccmpanics as economic entities
Management means the coordination of activities within a company aimed at

reaching predefined goals.
Malik defines three dimensions of management: the functional dimension which

describes management as a certain type of action of people that is necessary for a
working company. Second the institutional dimension which includes the
organisationally defined organs of an organisation like the executive board or
managing directors. And finally, the personnel dimension which contains the
people behind the organs.
2.2 Functions in industrial management

Industrial management deals with increasing the efficiency across all value
creation steps. Thereby industrial management has to be seen as truly
interdisciplinary. Industrial managers have to consider the tasks and objectives
of product development, ramp-up management and production management as
IHHOVATIOI{ AH N IN OU$TNNL ]4ANAGEI{EHT

FI ulilv.-F80r. 0R. cilRisTrAil RAM$AUIR s
2 ln*lnstrial rilfrnagement as prerequi*itc of c*rparal* productivity
well as the areas of distribution logistics and marketing. According to Bleicher the
functions of industrial management are: e
. Design of a framework that enables the creation of development
capabilities
o Control of targets and realisation of desired activities
o Development and initiation of change processes

In fact, industrial managers have to ensure that the products developed by the
innovation department are transferred into a production-ready version, that the
required resources are in place at the right time and that the products are
produced and brought to the customers at the right costs. This broad area of
responsibility makes industrial management very complex and requires the
integration of different viewpoints and target values whereby trade-off decisions
are inevitable.
Figure 6: Fun*ticns *f industrial managementlc
s Bleicher tg99,p.54
to Bleicher tggg,p.54
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2 lneiu*trial ffi&{}€}{}eft}*nt a$ prersqui{rit* of t:*rp*ral* productiviiy
E.g. a target value for production management could be the reduction of the
throughput times of a specific product. In contrast another common target value
is the increase in capacity utilization. These two target values very often are
incompatible with each other as a throughput improvement in one stage of
production are often not matched later in the manufacturing process. Different
production assets often have different performance capacities. Intermediate
stocks are built up in industrial reality in order to e.g. reduce set-up costs which
in turn increase throughput times. Therefore, industrial managers constantly
have to evaluate the different targets and to decide which target to weight more
strongly.
Dilemma in
operations
management
Figur* 7: *ilttrwa in *;:eralir:r:s rnanag*menl
Throughput time and capacity utilisation are only two potential performance
indicators that have to be optimized by industrial managers. Further performance
indicators that are used in industrial practice very often are:
quantitative output
Productivttv" :
quantitative input
Productivity is one of the most commonly used performance indicators in

industrial companies. This indicator expresses the ratio of produced goods or
services and the required production factors. Productivity can be related to
working hours, machining hours or material used. In summary productivity
describes how much input was necessary to produce a specific output.
Economic ef ftciency =
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3 l*listodcal devol*pr*ent ol inelustry
Economic efficiency assesses the generated performance on a monetary basis.

Performance-based revenues are calculated as the product of quantitative output
and the achievable market prices of the products. These performance-based
profit are then divided by the cost incurred in generating the turnover.
Profitabi,litv = capital Tofit

0R turnover=
Profitability is calculated as the ratio between the profit of a certain financial

period and the utilized capital (capital profitability) or the ratio between profits
and turnover (turnover profitability;. In general profitability is a measure of the
financial success that a company has achieved.
liouid assets
Li.qutdity
liabilities
In economic sciences liquidity expresses the ability of an entity to meet its

liabilities at any time, on time and unrestricted. A lack of liquidity is, besides a
low equity ratio, the most common reason for insolvencies.
These performance indicators are only a small selection out of a large number of
potential indicators that industrial managers have to deal with. A closer definition
of industrial management and the related tasks are discussed later in this script.
3 Historical development of industry

The rst Industrial Revolution started around L7So, driven by the development of
the steam engine. Labor and power machines made industrialization possible and
have made a major contribution to the fact that no structural famine catastrophes
have arisen since then in industrialized countries. This development led to a
population explosion. The population could be supplied with clothing and food
as the transport system (steamship, railways) was improved. In addition,
productivity in the manufacture of basic supplies improved enormously, e.g. in
agriculture.
Of course, such revolutions always have an impact on society. Employment in

traditional crafts and agriculture has greatly reduced and two new layers
emerged; factory workers and the factory owners. A number of people became
very wealthy, but factory workers were exploited in the early days of
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3 Histcric*l development of inelustry
industrialization. There was child labor; four-year-olds worked hard in the

factory, the workforce did not grow old. Even though working conditions were
verybad at the time, more and more people moved into the cities, which resulted
in structural poverty of factoryworkers, the pauperism. This development finally
led to a bourgeois revolution at the end of the Second Industrial Revolution. The
Second Industrial Revolution was characterized by mass production and the
introduction of division of labor concepts supported by electrical energy. This is
often forgotten.
The second Industrial Revolution is often described as an organization driven

revolution. Examples of developments at this time are the production line by
Henry Ford and scientific management theory according to Frederic W. Taylor.
At the same time, electric drives and combustion engines were also developed.
The electrified drive systems, in particular, made it possible to decentralize, e.g.
to operate the machines not by central engines, but to operate decentrally. In
addition, petroleum became increasingly important as a basic raw material of the
chemical industry and also as a new fuel for mobile systems - above all for
automobiles.
The large-scale industrial mass production, which was made possible by this,
advanced most notably in the chemical and electrical industry as well as, of
course, in mechanical engineering and the automotive industry. The population
continued to grow. It became clear to society that factory workers could not be
exploited, but that there was also a need for sharing prosperity to be taken into
account in order to reduce social tensions. This need could be met with large-
scale industrial mass production, which made it possible to produce products
very cost-effectively due to scale effects. At this time the importance of trade
unions grewvery strongly. In the transition from the first to the second Industrial
Revolution social-democracy came into being. The ideas of communism spread
and corresponding systems emerged. At that time, the basis was laid for our
present-day, consumer-oriented prosperity.
Interrupted by two world wars industrial progress then went on with the 3rd
Industrial Revolution in the early 196os. In Germany the economic miracle was
driven by electronics, and later by information and communication technology,
which enabled progressive automation of the production processes.
In the transition of the economic miracle years into the 198os many markets were
saturated, as many basic needs of the prosperous societies were satisfied. More
and more, the sales markets became buyers markets and so it was no longer a
matter of producing, and everything you produced was sold anyway. Customers
became more and more differentiated; their requirements became more
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3 Histcrical devel*pment of industry
individual. Customers became very selective about quality and individuality.

Serial production with many variants up to mass customization came more and
more to the fore. At the same time, the market economy continued to evolve,
especially the social market economy in Germany. There was a worldwide
availability of knowledge, driven by information and communication
technologies and later by the Internet. In addition, industrialized societies began
to live beyond their ownmeans. At that time in the r97os and rg8os the
foundations were laid for the indebtedness of national economies. After the fall
of the Iron Curtain, globalizationcould proceed unhindered. We are still in this
globalization phase where companies sell their products and employ workers
worldwide.
In the course of the grd Industrial Revolution the contribution to gross domestic
(GDP) output by the manufacturing sector declined, meanwhile GDP from the
service sector increased. At the time economists believed the manufacturing
sector would sink to only to% of GDP. This development has been observed,
particularly in France, England and the USA. An exception here is Germany.
Germany has managed to keep its industrial share stable since reunification in
the r99os.at around 25 percent of total GDP This was only interrupted by the
financial crisis, where it fell below 20 percent. After the crisis, Germany recovered
very quickly and now its manufacturing sector contributes more than z5% of
GDP.
Germany was laughed at for a long time. Ten years ago, it was often heard that
Germany was the "sick man" of Europe. In particular, the Anglo-Saxon
economies, which developed in the direction of service companies, criticized
Germany for not creating a change to the knowledge and service society. From
Germany's point of view, its structures did not fit into a modern economy. Its
relatively high industrial share, its savings banks and people's banks, the way its
financial sector was structured, its medium-sized structures, and the relatively
strong social benefits imposed by law differentiated it from the US or UK
economies. Due to the impact of the financial market crisis in zoo7lo8, many
economists have rethought their models and changed their views.
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3 Historica! devclopment of industry
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Figure 8: Progres* anci histarical d*veiopme nt within inclustry
Currently, industry representatives and politicians are discussing the fourth

industrial revolution under the umbrella term industry 4.o. Driven by the rapid
development of electronics and digitalization coupled with the ever decreasing
prices of these technologies, companies hope for the next gain in productivity by
the implementation of cyber-physical systems within their production
environment, big data analysis or the industrial internet of things.
"Industrie 4.o" is a future project of the German federal government, intended to
advance the digital networking of classical manufacturing industries. It is about
the establishment and expansion of competitive industrial structures in order to
"enable German industry to be prepared for the future of production" Meanwhile,
the concept has spread rapidly and there are various opinions about this subject.
In Germatry, ? number of industrial associations (BITKOM, VDMA and ZVEI)
have joined forces to form "platform industry 4.o", headed by the Federal
Ministry of Economics and the Federal Ministry of Research, and has voiced the
following conceptual understanding:
The term industry 4.o stands for the fourth Industrial Revolution, a new stage in
the organization and management of the entire value chain over the lifecycle of
products. This cycle is geared towards increasingly individualized customer
requirements and extends from the idea, the development and manufacturing,
and the delivery of a product to the end customer right up to recycling, including
the associated services. The basis of industry 4.o is the availability of all relevant
information in real-time through the networking of all entities involved in the
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H lltNOVATlOll AiID INOt
UNIV,-PROF. OR. CHR]STIAN RAMSAUEft
ilAI'IAGEMENT "15
4 Ha***rt"'ir: irnp*rtar:** r:f inclu*try
value creation as well as the ability to derive the optimal value flow at any time
from the data. Byconnecting people, objects and systems, dlnamic, real-time and
self-organizing, cross-company value-added networks emerge, which can be
optimized according to different criteria such as cost, availability and resource
consumption.
15 comp onents of the smart factory of the future
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Figur* 9: l:rdu alri* 4.*1 |
Digitization is about to revolutionize the way products are actually brought to life.
New business models are arising and new ways of generating knowledge out of
data gathered along the whole life cycle of a product are becoming possible.
Products, machines, transportation means and further production factors are
becoming "smart" objects. Workers are supported by assistive technologies and
robots are taking over tasks that people are not willing or not able to perform. In
fact, the use of technology in industrial companies is about to rise in order to
support the increase in productivity and to realize the vision of batch-size one
production of highly customized products directly on demand and according to
each customer's specific needs.
4 Economic importance of industry

As elaborated above, Germany and Austria profited a lot during the last economic
crisis from having a relatively greater share of manufacturing industry and their
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4 Ecanomic impofiance of indusiry
economy recovered much faster compared to countries where the share of

manufacturing industry was substantially lower. The United States of America
therefore have setup an initiative to restore manufacturing industry in the US and
to stop the trend of outsourcing manufacturing to low cost regions. This not only
increases emplo5rment and GDP, but also the ability to innovate is tightly
connected to manufacturing capabilities of a company. If the knowledge on how
to actually produce a product moves overseas, in the long run also capabilities to
develop innovative products gets lost. Ahigher share of manufacturing capacities
close to the place where the goods are developed therefore makes sense for
industrial companies.
A look at the facts and figures of employees in industry shows the importance of
industryfor the job market.
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Figure 10: Fmployme nt rates cf irrdustry
Also, industrial companies still play a major role in terms of GDP in Austria. Even
though the share of industrial contribution to GDP is constantly falling it still
remains above zB% which is considerable.
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F{ UNIV..PNOF. OR, CHRiST'AII FAI.{SAUER 14
4 W"**narnie imi:ortan*e of industry
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zSS* - 2fi16
figure 11: Gt]P Aus{ria in th* field of industty
The Roosevelt Institute has published six reasons why manufacturing is central
to the economy:
r. Manufacturing has been the path to development
It has been the strategic achievement of rich nations over the last several hundred
years to create a high-quality manufacturing sector in order to develop national
wealth and power. From the rise of England in the rgth century, to the rise of the
US, Germany, Japan and the USSR in the 2oth, to the newly industrializing
countries like Korea, Taiwan, and now China, manufacturing has been the key to
prosperity.
z. Manufacturing is the foundation of global "Great Power"

The most powerful nations in the world - the "Great Powers" - are those that
control the bulk of the global production of manufacturing technology. That is, it
isn't enough simply to have factories and produce more goods, you have to know
II{ HOVATION Ail O I N OIJSTA|AI }4ANAGEM ET{T

hr UiIIV-.FRdF. OR.'tiRISTIAN NAM$AUE*
15
4 Economic impr:(ance *f industry
how to make the machinery that makes the goods. The key to power, then, is to
make the "means of production."
About 8o% of the world's production of factory machinery is controlled by what

we would consider the "Great Powers."
3. Manufacturing is the most important cause of economic growth

The growth of manufacturing machinery output, and technological
improvements in that machinery, are the main drivers of economic growth. No
machinery industry equates to no sustained, long-term economic growth. Just
consider the explosion of the Internet, iPhones, and the like
- all made possible
by u small subset of production machinery called semiconductor-making
equipment (SME), which itself is dependent on other forms of production
machinery, such as the machine tools that grind the lenses they use or the alloys
of metal the metal-making industries produce. The technological and productive
potential of machine tools and SMEs affect each other as well, leading to the
explosive economic growth of the last two hundred years.
4. Global trade is based on goods, not services

A country can't trade services for most of its goods. According to the WTO, 8o%
of world trade among regions is merchandise trade
- that is, only zo% ofworld
trade is in services. If, in the extreme case, an economy was composed only of
services, then it would be very poor, because it couldn't trade for goods; its
currency would be worth very little. The dollar is also vulnerable in the long-term.
A "post-industrial" economy is really a pre-industrial economy that is to say,
-
poor.
5. Services are dependent on manufactured goods

Services are mostly the act of using manufactured goods. You can't export the
experience of using something. Retail and wholesale, which make up about rr%
of the economy, are the act of buying and selling manufactured goods. The same
goes for real estate, another tgg6,which is the act of buying and selling a "real" or
physical asset, a building. Even health, which makes up about B% of the economy,
is the act of using medical equipment and drugs (all figures from United States in
2oLo, GDP).
Finance involves the redirection of surplus resources that the non-financial sector
of the economy produces, which means that indirectly, even finance is dependent
on manufacturing. The cycle of rise and decline usually runs like this: some highly
skilled society figures out how to take advantage of the current technologies of
production, thus generating huge surpluses, which either the financial
institutions, the very wealthy, or the military then appropriate for their own
IilHOVATISN Alt 0 IIUSTR|AL IvIAHAGEHFI|T

FI I H
UNIV.-FROF, OR. SHRISTIAN RAMSAUTR
'o
5 DelinT itation of industrial nran*genrent in the csntsxl of *conomic sciences
wealth and power. To sum up: the health of the economy is critically dependent
on the health of the manufacturing sector.
6. Manufacturing creates iobs

Most jobs, directly or indirectly, depend on manufacturing - and reviving the
sector could provide tens of millions of new jobs. In 2oo5, the Japanese
manufacturing sector was 2l.2yo of its economy, in Germany it was zg.z%o, and
in the US manufacturing accounted for t1. %o, according to the OECD. Using
2oo5 figures, if the US had the same percentage as Japan, the US would have had
7 million more high-quality, long-term, well-payrng jobs. According to the
Economic Policy Institute, each manufacturing job supports almost three other
jobs in the economy.
5 Delimitation of industrial management in the context

of economic sciences
Industrial management is the part of economic sciences that deals with the
economy of manufacturing plants and businesses taking into account their
interactions with other businesses and their environment. \{hile the general
economic sciences try to answer questions that arise equally in all types of
businesses, industrial management focuses on industrial companies as the object
of investigation.
Industrial management thereby can be defined as:
Industrial management is an economic discipline which deals with

organisation and commercialization of industrial companies
Industrial management thereby holistically investigates the functional areas of an

industrial company.
HAHAgEMEilT
TI II|}|P##I3-*#*,il:OHSTNNL 17
5 Selimitaiion nf industrial management in the context of economic sciences
Economic sciences
':
Macroeconomic$ Business ecCInomics
General business $pecial business

econ0mics economic$
lnstitutional Functional
doctrines doctrines
":'--" .:t:."\
Purchasing',' :",''..Controlling
Trading
Bank
management management
$ales ,, ; .f\danagement
;-
ll ltnance
ttr
Chemistry Textile Construction Mechanical R&D

industry engineering
Figure 12: lndustrial nranagement as pad cf economic sciences
tlN OVATI 0 I'l At{ D I t't O USTR nL }-{ANAG XT

FI I
UNIV..PROF. OR. CHRiSTIAN FAI'TSAU€R
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18
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{J References
References
Abele E., Meyer T., Ndher U., Strube G., Sykes R. Eds (2008): Global
Production: A Handbook for Strategy and lmplementation, Springer, Berlin
Heidelberg
Afuah A. (2003): lnnovation Management: strategies, implementation, and
profits, Second Edition, Oxford University Press, New York
Bauernhansl T., ten Hompel M., Vogel-Heuser, B. (20141: lndustrie 4.0 in
Produktion, Automatisierung und Logistik: Anwendung - Technologien -
Migration, Springer Vieweg, Wiesbaden
Bleicher K. (1999): Das Konzept lntegriertes Management: Visionen -
Missionen - Programme (st. Galler Management-Konzept), campus, st. Gallen
Brockhoff K., Ghakrabarti ,4. K., Hauschildt J. Eds. (1999): The Dynamics of
lnnovation: Strategic and Managerial lmplications, Springer, Berlin Heidelberg
Burns T., Stalker G. M. (1961): The Management of lnnovation, Oxford
University Press, New York
Ghristensen C. M. (1997): The lnnovator's Dilemma: When New Technologies
Cause Great Firms to Fail, Harvard Business Review Press, Boston,
Massachusetts
christensen c. M., Raynor M. E. (2003): The lnnovator's solution: Creating
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Massachusetts
Corsten H., G6ssinger R. (20121: Produktionswirtschaft: EinfUhrung in das
industrielle Produktionsmanagement, 13. Auflage, Oldenbourg, MUnchen
Dodgson M., Gann D. M., Phillips N. Eds. (2UQ: The Oxford Handbook of
lnnovation Management, Oxford University Press, New York
Dyer J., Gregersen H., Christensen G. M. (2011): The lnnovator's DNA:
Mastering the Five Skills of Disruptive lnnovators, Haryard Business Review
Press, Boston, Massachusetts
Furr N., Dyer J. (2014): The lnnovator's Method: Bringing the Lean Startup into
Your Organization, Harvard Business Review Press, Boston Massachusetts
Hansmann K. W. (2006): lndustrielles Management, 8. Auflage, Oldenbourg,
MUnchen Wien
Hauschildt J., Salomo S. (1994): lnnovationsmanagement, Vahlens
HandbUcher, 5. Uberarbeitete, ergdnzte und aktualisierte Auflage, Vahlen
Verlag, MUnchen
Hill, L. A. (1994): Becoming a Manager: How New Managers Masterthe
Challenges of Leadership, Harvard Business Review Press, Boston,
Massachusetts
Gutenberg E. (1965): Die Produktion: Grundlagen der Betriebswirtschaftslehre,
11. Edition, Springer, Bedin Heidelberg
Gilchrist A. (2016): lndustry 4.0: The lndustrial lnternet of Things, apress
INNOVATI$H Ail D l,l BUSTR|AL HAI'IAGEMEilT

F{ I
U}IIV.-FBOF. NR. CHRI$TIAI{ RAI.{SAUER 20
0 Refsrences
loT Analytics (2015): Will the industrial internet disrupt the smart factory of the
future?, Online verfUgbar unter: https://iot-analytics.com/industrial-internet-
d is ru pt-s ma rt-fa ctory/, Zu g riffsd atu m : 04 .08.20 1 7
MacFarland S. (2013): Why ls lnnovation Management So lmportant to

Compete? http://www.huffingtonpost.com/scott-macfarland/why-innovation-
m a n a g e m e n t- i s- i m po rta n t_b_4 1 7 4 482.htm l-Z u g ri ffs d atu m : 0 4 .08 .20 1 7
Schweitzer M. (1994): lndustriebetriebslehre: Das Wirtschaften in

lndustrieunternehmungen. Vahlens HandbUcher der Wirtschafts- und
Sozialwissenschaften, 2. Auflage, Vahlen Verlag, MUnchen
Porter M. E. (1980): Competitive Strategy: Techniques for Analyzing lndustries
and Competitors, The Free Press, New York
Rainey D. (2005): Product lnnovation: Leading Change through lntegrated
Product Development, Cambridge University Press, New York
Rogers E. M. (1995): Diffusion of lnnovations, Fifth Edition, Free Press, New
York
Roosevelt lnstitute (2011): Six Reasons Manufacturing is Central to the
Economy, Online verfUgbar unter: http://rooseveltinstitute.org/six-reasons-
ma nufactu ri ng-central-economy/, Zu g riffsdatu m 04.08.20 17
Roth A. Ed. (2016): EinfUhrung und Umsetzung von lndustrie 4.0: Grundlagen,
Vorgehensmodell und Use Cases aus der Praxis, Springer Gabler, Berlin
Heidelberg
Schuh G. (2012): lnnovationsmanagement: Handbuch Produktion und
Management 3, 2. Vollsttindig neu bearbeitete und erweiterte Auflage, Springer
Vieweg, Bedin Heidelberg
Slack N., Ghambers St., Johnston R. (2007): Operations Management, Fifth
Edition
Strategy& (2016): 2016 Global lnnovation 1000 Study, Online verfUgbar unter:
https://www.strategyand.pwc.com/innovation1000#GlobalKeyFindingsTabs3lVis
ualTabsl, Zugriffsdatum: 04.08.2017
Strebel, H. Ed. (2007): lnnovations- und Technologiemanagement, 2. Auflage,
Facultas, Wien
Utterback J. M. (199a): Mastering the Dynamics of lnnovation, Harvard
Business School Press, Boston, Massachusetts
Vahs D., Burmester R. (2005): lnnovations-Management: Von der Produktidee
zur erfolgreichen Vermarktung, 3.Auflage, Sch€iffer-Poeschel Verlag, Stuttgart
Voigt K.-1.. (2008): lndustrielles Management: lndustriebetriebslehre aus
prozessorientierter Sicht, Springer Verlag, Berlin Heidelberg
WKO (20141: Beschdftigte in Osterreich nach Wirtschaftsbereichen, Online
verfUgbar unter: https://www.wko.aUservicelzahlen-daten-faktenibranchen-
ueberbl ickstabel le n. htm l, Zu g riffsdatu m : 04.08.20 17
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http://data.worldbank.org/indicator/NV.IND.TOTL.ZS, Zugriffsdatum: 04.08.2017
MAHAGE M ENT tl
F{ iIIXPJ,|;[I?#-*$ *jl:OUSTN'uL
0 Refarences
Ztipfel G. (2000) Taktisches Produktionsmanagement, 2. Auflage,

lnternationale StandardlehrbUcher der Wirtschafts- und Sozialwissenschaften,
Oldenbourg, Mrinchen
X ll
I lr CVA?I O N All il
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UNIV..FNOF. OR, CHf, I$TIAH RAilSAU€R
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2 PROnUST
CRHATNON
pRocH$$
1 ProductCreation............. 2
1.1 Goals of Product Creation 2
1.2 History of Product Creation 3
1.3 Effectivity and Efficiency in Product Creation 4

1.4 Strategic Product Planning.. 5
1.5 ProductDeveloPment 5
1.6 Production System Development....... 5
2 lntegrated Product Creation Processes 6
2.1 Human lntegration 7
2.2 Methodological lntegration..... 8
2.3 Organizational lntegration...... I

2.4 Selected Models of lntegrated Product Creation....................' 9
2.4.1 Concurrent / Simultaneous Engineering ........""' I

2.4.2 lntegrated Product and Process Development .14
2.4.3 Cooperative Product Engineering ........'..'. .17
1 Product Creation
1 Product Creation
In regard to the product creation process in general, and the integrated product
creation process in particular, a variety of terms are in use. In this document a
wide range of models, methods and processes are described. In the first step basic
terms are defined. Selected models and frameworks are introduced in the
following sections.
Product creation describes the whole process which takes place until a product is
used by the customer. Product creation is a part of the product life cycle and
describes the fundamental process from the product or business idea to the Start
of Production (SOP). This definition (see Figure r) is used in following sections.
Strategic Product Production

Product
System
Planning Development
PRODUCT Start of Production

Business ldea LIFECYCLE
Recycling Utilization Distribution Production
Figure '1 : Praduct Creation as part nf the product lifecyclel
1.1 Goals of Product Creation

The goal of the product creation process is to transform a system of goals (all goals
that a new product aims for) with a system of actions (e.g. companies with all
their available resources) into a suitable object system (e.g. simulation models,
prototypes, products that are ready for series production).
Actions are aimed at the achievement of goals. For example, in the case of
technical action, the creation of a safety system can be an objective. A system of
action, however, does not necessarily always pursue one goal, but a number of
interrelated goals. The target system includes the aggregated goals.
'Comp. Gausemeier et al. (zooo), p.3; Albers/Gausemeier (zorz), p.r9;
I hl NgVATlOl.l AN g NOUSTRIAL I'IAHA$E t{T

F( I
U'IIV..PROF. DR. 6HRISTIAI'I RAHS^UER
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2
1 Product Creation
A system of actions performs actions and includes structured activities that are
required to achieve the objectives of a functional system. It transforms certain
inputs, states and objectives, which characterize the initial situation, into states
and outputs of the final situation in such a way that the objectives are met.
The object-system is characterized by the fact, that it is man-made. With regard

to technolory, the object-system includes technical devices arising from the work
of engineers, technicians, etc. such as machines, machine parts, devices and
technical systems
Market
user
Target Action Object

user system system System
Figure 2: Targ*t System, Action $ystem and Object $ysicm2
1.2 History of Product Creation

Product creation is subject to constant change caused by changing conditions.
Until the end of the 19th century master craftsmen covered most of the knowledge
needed for product creation and the necessary work was covered fully by
craftsmen. The start of industrialization resulted in the separation of the planning
and the execution of tasks. This approach no longer meets the needs of today's
product creation process.
Examples for upcoming changes and challenges in product creation are shorter
product life cycles, increased complexity of products and production, increased
education of workers, the development from sales to buyer markets and also the
globalization of production and development.
Figure 3 illustrates the change from the concentrated competence of masters,

through the differentiation in specialized fields and their integration for example
into simultaneous engineering teams.
z Ehrlenspiel/Meerkamm (zor3), p.z6
0VATI
I t{ t'l O l{ A}l I il USTR}AL lt{AllAS
I }il EME NT
a( UI'{IV,-PSOF. DR. CHRISTIAII RA14$AIJER J
1 Product Creation
Up to 1900 {s00-1s80 today

Marketing
Sales
Finances
Design
Development Simultaneous
Engineering
Testing
Team
Master Production Preparation
Workman
Production Quali$
Management
Quality Management Team
Prod. Development
Materials
Ditrerentiation
*-*.-.||'!!
Shipping
*s-*gn
Service
Figure 3: The history ol product creation3
Unintegrated product creation often cannot meet today's needs. Problems caused
by unintegrated product creation are organizational issues, issues regarding the
product creation process and techno-economic issues.
1.3 Effectivity and Efficiency in Product Greation

Effectivity and efficiency are the two essential aspects for achieving successful
product innovation. Not only it is important to do the right project (effectivity)
but it is also important it is also important to do the project right (efficiency).
Effectivity is an evaluation criterion, which can be used to describe useful
measures to reach a set goal. For example, there is the potential to increase
effectivity by clearly regulating tasks, competences and responsibilities of the
persons involved and ensuring a clarity of goals to prevent conflicts. Other ways
to increase effectivity are the use of the right technology for the right products
and the right allocation of resources.
Efficiency is an evaluation criterion which can be used to describe useful

measures to reach a set goal in a defined manner. An essential criterion for
efficiency in the product development process is the temporal overlap of tasks
and the integration of all persons involved to ensure the required development
e Ehrlenspiel/Meerkamm (zor3), p. 2oo; eigene Darstellung
il IN NOVAT:OI* AHD I NIIUS?RIAL t'!A$tASFM E!{T

ur{v.-pRoF. 0fi . cuRtgriAN RAH$AUFR
4
1 Product Creation
time and quality. In product development efficiency requires optimized designs

for processes and structures to reach set goals with the fewest possible resources.
The essential task of efficiency management is to find the optimal relation

between reached output and necessary input resources. The baseline of an
efficient action is the consideration of basic economic principles - on one side the
minimum principle (realization of a set output with minimal resource usage)
and on the other side the maximum principle (realization of maximal output
with set input).
1.4 Strategic Product Planning

Strategic product development characterizes the process of identifyrng potential
future successes up to the development order and incorporates the tasks of
potential finding, product finding and business planning.
The framework of product planning desuibes the future possibilities of a

business by indicating and evaluating market needs, market segments and
potential as well as the technological and economic environment.
The evaluation of potential addresses the identification of future success potential

and the derivation of action options. Furthermore, the task of product finding is
the derivation of possible products and/or services and also describing them in
the form of specifications. Business planning deals with questions regarding
business and product strategies. The outcome of business planning is the basis
for the development order.
1.5 Product Development

Product development includes product conceptualization, technical designs and
the necessary preparation and also the integration of the output of individual
disciplines into a holistic solution.
The result of product development is the description and documentation of the

product. These include detailed and exact descriptions of the product with regard
to technical functions, quality and time and are the basis for the evaluation of
economic and technical feasibility.
1.6 Production System Development

Production system development starts with a conceptualization phase which
considers aspects of work flow planning, work equipment planning, work place
planning and production logistics. With reference to the implementation of the
t lilx*ytrf P}l*-**,:ilst'srnrAl
ilAr*AoEMF Nr q
2 lntegraied Product Creation Processes
product concept, the interdependencies between product and production system

have to be considered in the conceptualization phase. The implementation is
based on the concept, which is coordinated with the product conceptualization
and is divided into four aspects.
2 lntegrated Product Greation Processes

Integration means (re)combination to form a whole (from differentiated). An
integrated product creation process is characterized by close cooperation of all
people involved with common goals regarding quality, time and costs. Another
aspect is the parallelization of the required activities.
Materiaf Management
$ales Construction Production Preparation produclion
Costumer Waste Management Controlling

Construction Production
Deliverer Material Management
Sales Produclion
Preparation
P# R He6,
,1
r \
/\ l\ r*
'p Ll-. /\l\
/-\ *--"-*
F
*/_: F,
Better Together
Figur* 4: lntegrated Praduct Crealian 2A134
The future product manufacturing costs are set very early in the product creation
process. At a very early stage, at a point werc Syo of costs have actually been
incurred about Bo% of the costs are already set. Especially in this context, it must
+ Ehrlenspiel/Meerkamm zor3
t( IHHSVATIOI'I AHg lNIlUSTnlAt lr{AtlAOE

UiIIV,.PROF. OR. SHRiSTIAil TA}4SAUER
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f)
2 lntegrated Product Creaiion Processes
be clear that an integrated product creation process is essential to guarantee

efficiency and effectiveness in product creation.
a)
M,
o
t- Actually caused
u tr0sts
LL
F
u)
o
(J
\ rtr&'
lra* x
kick off planning realiiing
PRODUCTLIFE
CYCLE
Figure 5: Set and aclually caused costs in producl creation over time
Integration can be realized and applied in several forms in product creation.

Examples of this are human, methodical, organizational and technical
integration.
2.1 Human lntegration

The most important aspects are not methods or techniques, but rather that
humans wish to collaborate and enjoy doing so. Staff are successful if they have
freedom and if they are motivated by their work.
Only the human as a creative problem solver is able to generate knowledge and
apply it to structural problems, such as to develop an organizational structure,
find suitable solutions or apply the latest technology.
The integration of the individuals engaged in product creation, into a holistic
thinking unit is an essential step. This integration must be realized by cooperating
on an interdisciplinary basis within the company, and also working in
cooperation with customers and suppliers.
Human integration can be divided into integration of commitment, integration of
goals and integration of knowledge.
r{r
t{ llll Hyff | 9_il _* n,: illusr
n rA L }r A I'r Ao E r4 E
7
2 lntegrated Product Creation Processes
Integration of commitment is characterized by the shared desire and motivation

of the individuals involved to reach a common goal. The common goal affects
integration and specifies a joint direction of actions. Integrated knowledge can be
achieved by communication of knowledge to an overall system of specialists or by
the training of generalists. This can be supported by job rotation.
2.2 Methodological lntegration

The area of methodological integration encompasses the application of methods
to support the integrative idea in product development like Design for X-methods
(DFX-methods). Other key aspects of methodological integration are customer
integration and task integration. The integration of customers can be achieved by
their involvement in the product development process or by the cooperation of
pilot customers. Task integration is the integration of tasks in company areas
which were not previously responsible for these tasks.
2.3 Organizational lntegration

Integration from an
organizational perspective includes development
integration, process integration and spatial integration. Its objective is to
facilitate cooperative working and understanding across departments and
working groups. Development integration offers organizational structures in the
spirit of the integrational idea. Product-oriented organization (e.g. profit centers)
or realization of flat hierarchies are examples of this. Process integration takes
place by the application of integrative approaches such as simultaneous /
concurrent engineering or FMEA (Failure Mode and Effects Analysis). Spatial
integration can be implemented, for instance, by providing common work spaces
or the creation of development centers. It aims to shorten communication
channels.
Due to the dynamic nature of product development as a result of changing

conditions, expedient organizational integration is especially important. The
application of organizational integration can enable a dynamic network, which
adapts itself independently to any form of order processing.
Technological integration enables consistent digital development, production

and distribution, e. g. integration of data and integrative early quality detection.
Data integration can be achieved by the implementation of Product data
management-systems and the supply of common interfaces such as CAD-CAM-
interfaces. Integrative early quality detection can be provided by the use of
simulation or rapid prototyping.
il I }I H OVATIOT.I ANXI II{OU$?R!AL I{A}IASEM

uMv."PRoF. 0n. cHRt$ilAtl RA},ISAUFR
E NT
(}
Figure 6 summarizes the elements and methods of integrated product

development.
Figur* S: Types of lntegratians
2.4 Selected Models of lntegrated Product Creation

2.4.1 Goncurrent / Simultaneous Engineering
The term Simultaneous Engineering (SE) and Concurrent Engineering (CE) are
often used synonymously in literature. SE and CE are used for organizational
integration in the framework of product creation.
A possible, fundamental difference between SE and CE can be drawn based on
their focus. Concurrent Engineering primarily aims at the integration of
technological and organizational interfaces during the product development
process, whereas simultaneous engineering focuses on simultaneity of individual
steps in the product creation process.
s Comp. Ehrlenspiel/Meerkamm (zor3), p.zo9
I tl H0VATIOI.I AN9 l{$USTRf AL }jlA}lA*E

I ME HT
F( UIIIV.-PROF. OR. fHRISTiAN RAIII$AUTR 0
The use of SE aims for the optimization of the so-called "magical triangle" of
product creation - costs, time and quality. This optimization can be achieved
by shortening time-to-market processes, reducing development and production
costs as well as improving the product, process and planning quality.
*I
I
I
I
I
t
fiuality
I
Time Costs
Figure 7; Magical Triangle of Product ereation
Simultaneous Engineering is based on three essential principles:
a Parallelization: The focus of parallelization of the partial process in the

product creation process is the reduction of the overall time needed for
the whole process (see Figure B). Partial processes that are independent
of each other can be performed in a parallel manner. Dependencies
between partial processes often exist within the product creation process.
Dependent partial processes start parallelization with incomplete data
and information. This does not necessarily lead to inferior results quality
in the downstream process, because there is often no need for all results
of the upstream process at the beginning.
t( IN NOVA?IOH ANT' NDUSTNilL FIA}IASEMEI.IT

I
UNIV.-PROF. DR. gHRIST|AIi RAMSAUER
IU
In this case a significant contribution can be made by good communication

between the individuals involved and also the coordinated setting of
preliminary assumptions.
Convenlional
(sequential)
Simultanequs Reductionof I
Engineering ,il- --------Time-io-Mad<et

- ---- t
I
{parallel}
€ lnfonnaticn Flow
Figure 8: $ystematics of simultaneaus engineeritrgd
Parallelization of dependent partial processes leads to more frequent and

more complex decision situations, because of a greater need for
information and communication plus a partially uncertain and
incomplete data set. The parallel completion of individual partial
processes can offer a reduction in rework cost in later phases of the
product development process by more intense coordination of involved
parties. Additionally it leads to time savings.
a Integration: Integration aspects are described in chapters 2.1to 2.3
Standardization: Standardization can be reached by structuring of the

processes or by structuring ofthe product.
Aspects of standardization can be categorized into technical-structural

(modules, components and interfaces), processual (phases and process
organization) and organizational (interfaces of departments and
projects). Standardization supports the avoidance of rework and
unnecessarywork, and is the foundation for successful implementation of
parallelization and integration in the framework of SE by ensuring
transparency and stability.
6 Comp. Eversheim/Bochtler/Laufenberg (199s), p.z;
I l,l H 0VATlOl-l AX g N 9USTRIAL HAltlA$ EM El{T

u{ I
ur:tv.-pR0F. 08. sHft iST|Af.' RAl4gAUtR 11
An SE-approach in product creation always needs to be adapted to the

specific situation - there is no universal panacea.
Point-based Concurrent Engineering
The term point-based concurrent engineering relates to the traditional, iterative

approach of CE, which emerged from the sequential approach of product
creation.
"Point-based"-approaches are characterized by development from one
point/solution to the next point/solution in the solution space (Figure 9).
In a point based serial engineering approach solutions are developed in different
phases of the development process based on the solutions of previous phases in
sequence (Figure 9). Downstream processes do not influence upstream processes.
Wrong decisions can lead to long iteration loops across several phases in the
sequential process.
Paint-Based Serial Engineering
ProcEsEE
f tgttre Q: Poinl-based $eri*i f;ngine*ring7
Dor,rmstream processes can influence upstream activities based on the experience

in point-based concurrent engineering (PBCE) (Figurero). Feedback-loops in
early phases allow changes to be made with lower effort and less cost. Also, in
PBCE one solution is in process, which is improved step by step.
Foint-Based Coneurrenl Engineering Styling
f; ig r.i re 1 0 ; lsaint-b;.i ged f orrcu rrenl f; ng i n**ringa
z Comp. Sobek Ii/Ward/Liker (1999), p.69; eigene Darstellung

8 Comp. Sobek Ii/Ward/Liker (1999), p.69; eigene Darstellung
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Set-based Concurrent Engineering
A significant characteristic of set-based concurrent engineering (SBCE) is the

consideration of so-called sets of solutions
across several phases of the
development process and the late determination of the final solution.
The literature often recommends the use of SBCE at Toyota the "second Toyota
paradox" (the Toyota production system is considered as the first Toyota
paradox).
Figure illustrates the principle of SBCE with a simple example of the

rr
coordination of the disciplines of product design and production In a first step
the set of designs is compared to the set of producible designs. The overlap of
both sets limits the solution space possible for both sides. Further limitations are
set consecutively with the project process and according to the principles
described below. This leads to a restriction of the solution space over time until
the final design solution is found considering the needs of the disciplines
involved.
Sol
Dn*ign
Msnufacfurablt
Figure 1 1: Set-basecl Concurrent Hngineeringe
The basic principles of set based concurrent engineering are: 10
o Principle r: Map the design space

o Define feasible regions
o Explore trade-offs by designing multiple alternatives
s In reference to: Sobek Ii/Ward/Liker (rg9g),p.7o;

(1999), p.7g
'o Sobek IilWard/Liker
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o Communicate sets of possibilities
. Principle z: Integrate by Intersection
o Look for intersections of feasible sets
o Impose minimum constraint

o Seekconceptualrobustness
r Principle 3: Establish Feasibilitybefore Commitment
o Narrow sets gradually while increasing detail

o Stay within sets once committed
o Control by managing uncertainty at process gates

SBCE leads to more efficient communication
between the parties involved,
promotes parallelization of processes, supports early decisions based on data by
examining possible sets of solutions, assists inter-organizational learning and
leads to a deeper view of different solution variants in the project process.
2.4.2 lntegrated Product and Process Development

Eversheim/Schuh/Assmus divided their framework of integrated product and
process design into three main areas (see Figure 12):
o Organization and information management

o Integrated product definition and technology planning
o Integrated product and production process design
I ntegrated Produci Defi nition lntegrated Froductand

and Technology Planning Production Process Design
I .tl
Organization and lnformation Management
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The focus is on the early phase of product development, from collection of the
first information up to the planning of production of the developed product.
Organization and lnformation management
Organization and information management is the basis for the framework, which
describes the procedures of integrated product and process development. The
organization of development teams is essential in integrated products and
process design, and influences efficiency significantly. Risk management as part
of project management must ensure that project decisions are evaluated and
appropriate measures are taken with regard to time, costs and capacity.
Project management gains particular importance when there is external
involvement. The key aspects are the evaluation of potential partners and the
configuration of cooperation networks by planning and the design of cooperation
projects, planning of project contents, their allocation to different cooperation
partners and the specification of an organizational framework.
In particular, cross-company quality management systems, the introduction of

controlling systems and the evaluation of risks are recommended to ensure
appropriate cooperation outcomes.
Information management supports project management and is based on the

integrated product and process model as well as the communication system. The
integrated product and process model generates and stores information and data.
The communication system is responsible for the distribution of information and
data and the monitoring of its distribution to minimize waiting time and
generation time of information and data.
lntegrated Product Definition and Technology Planning
Integrated product definition and technolory planning serve the merger of

market/customer needs and technological innovations. Customer requirements
and environmental requirements have to be collected early and are translated
systematically into a product definition.
An early cletection system is used to identifii long term business trends and ensure
that the products is a correct fit to these trends. The system is responsible for
incorporating strategically relevant information from customers and the business
environment. Another essential aspect is the integrative quality planning system.
(zoo5), p.rr
'r Eversheim/Schuh/Assmus
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This serves as an early definition and protection of product characteristics, the

cost and environmental-orientated perspectives of the early phase of product
development and constitutes the connection between the definition of product
characteristics and construction.
The product definition includes the products-structure and the allocation of

features to individual product structural elements. This can lead to complex
dependencies and requires special effort regarding modeling and storage of data
to ensure consistency and availability within the company's network.
Innovation in the area of production technology must be integrated early into the
process of product development due to its significant influence on the product
structure and product design. Information regarding production technology can
be provided internally in the form of company specific knowledge or externally
by technology providers. The particular challenge in this context is to handle
uncertain information and decide on its interpretation. A technology
management system can be introduced in order to overcome that challenge.
Essential outputs of integrated product definition and technology planning are

the definition of product structure, the definition of element design with
descriptions of their parameters and relations, and also the possible production
technologies.
lntegrated Product and Production Process Design

Integrated product and production process design aims for early tuning of
products and production processes. The integrated design of product and
production processes can be supported by early detection of dependencies of both
areas.
Integrated product and production process design is a key-aspect in integrated

product creation as production costs are determined in the early phases of
product development. The following activities can be performed:
o planning of construction accompanying test processes and test

applications
. evaluation of production sequences
. evaluations of functions and prototype production
. labor and business organization in the early product design phases

o early design of a manufacturing guidance system.
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The planning of test processes and test applications is set to define tolerances, to
evaluate them on their necessity and to develop suited test strategies.
Unnecessary (narrow) tolerances might have a negative influence on the selection
options for production processes and the production cost of given production
processes.
In the evaluation of production sequences, different combinations of sequences

and production technologies are developed and assessed. The insights gained can
lead to an optimization of production with respect to time and costs by the
coordination of product design and production.
Rapid prototyping techniques support the function analysis process and can
accelerate the optimization process of materials and processes. Processes and
structural organization are influenced in the product development process by the
use of new products and production technologies. This influence must be
monitored and evaluated to set necessary actions in the work organization.
Revolutionary leaps in product and/or production technologies can require
massive adaptations to existing processes. An early adjustment of the
manufacturing guidance system should support a smooth production start.
2.4.3 Cooperative Product Engineering

Gausmeier et al. combine the areas of strategic business planning, product
development, process development and also their content and time related links
into the term product engineering. The purpose of cooperative product
engineering is the efficient and timely creation of products and services according
to the future needs of the market.
Cooperative engineering aims for three goals:P
o Early identification of products and services for the future market

(strategic business planning)
o Development of new problem solutions for novel products or
improvement of the price-performance ratio of today's products by
integration of technologies (e.g. mechatronics) and new technologies like
miniaturization (product innovation and product development)
o Ensuring product success and increasing of implementation rate by early
inclusion of all aspects of, and key personnel in, the product life cycle
The goals can be reached by the integration of the disciplines involved.

Cooperative product engineering is based on behavior and process innovations.
', Gausemeier et al. (zooo), p.zf.
IIANASE H F NT
h( HXNYffi I?#,**,:ilOUS?R:AL 17
Behavior innovations build the skills of creative thinking and acting and also goal-
oriented efficient cooperation across disciplines, departments and business. This
forms an essential prerequisite for product innovation and implementation
strength. Process innovation strengthens method competences. Behavior and
process innovation can be significant unique selling points in comparison to
competitors, because they are less tangible and imitable when compared to
product innovation.
Product creation is part of the product life cycle and describes the general process
from product orbusiness idea to series production and is structured into the main
elements of strategic product planning, product development and production
system development.l3
The subareas of product creation described are not understood as definite,

consecutive phases, but are rather to be considered as a big picture. The
integration of the phases results in the integration areas strategic product
development, strategic production system development, integrated product and
production system development and also systems engineering as a cooperation
core (see Figure 4).
Strategic Strategic
Product Froductisn System
Development Develaprnent
lntegrated Product
and Productisn
Systenn
Deve[oprnent CooperationCore
Figur* 13: lntegration area af the theme innovatisn process & product developmentra
's Albers/Gausemeier (zorz), p.rB

'+ Comp. Gausemeier et al. (zooo), p.r8; Comp. Albers/Gausemeier (zoro), p.2SU
I{NOVATIOH ANB 0USTNIAL II{AITIASEMENT

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Strategic Product DeveloPment

The subject of this intersection of strategic product planning and product
development is the development of products and complementing services
according to a business plan based on business success potential.
Strategic Production System Development

The goal of strategic production system development is a long-term, goal-
oriented formation and development of technical core competences in
production. Therefore, the development of the technical potential of production
is considered, business goals have to be adapted and if required an expansion of
process abilities has to be initiated.
lntegrated Product and Production System Development
Integrated product and production system development aims for structural

integrated solutions for development tasks in cross-department and cross-
company project teams. An exchange of information, technical and technological
requirements and potential takes place to ensure proactive development of
products and processes.
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0 References
References
Albers, A. and J. Gausemeier, J. (20121: Von der fachdisziplinorientierten
Produ ktentwicklung zu r Vorausschauenden u nd Systemorientierten
Produktentstehung, in: Anderl, R. et al. (Hrsg.): Smart Engineering -
lnterdisziplindre Produktentstehung (acatech DISKUSSION), Heidelberg u.a., S.
17-29.
Albers, A. and J. Gausemeier (2010): Von der fachdisziplinorientierten zur
vorausschauenden und systemorientierten Produktentstehung, in: Ruprecht, R.
(Hrsg.): Produktion in Deutschland hat Zukunft - "Forschung fUr die Produktion
von morgen" - Zusammenfassung der Beitr-ige zum BMBF-Kongress "10'
Karlsruher Arbeitsgesprdche Produktionsforschun g 2010" Karlsruhe, S. 248-
256.
Berndes, S. and A. Stanke (1996): A Concept for Revitalisation of Product
Development, in: Bullinger, H.-J. et al. (Hrsg.): Concurrent Simultaneous
Engineering Systems, London, S. 7-56.
Cooper, R. G. (2010): Top oder Flop in der Produktentwicklung -
Erfolgsstrategien: Von der ldee zum Launch, Weinheim.
Ehrlenspiel, K. (2003): lntegrierte Produktentwicklung - Denkabldufe,
Methodeneinsatz, Zusammenarbeit, 2. Auflage, MUnchenAffien.
Ehrlenspiel, K. (2013): Meerkamm, H.: lntegrierte Produktentwicklung -
Denkablaiufe, Methodeneinsatz, Zusammenarbeit, 5. Auflage, MUnchen/Wien.
Ehrlenspiel, K. and Meerkamm, H. (2013): lntegrierte Produktentwicklung -
Denkablaiufe, Methodenei nsatz, Zusammenarbeit, 5. Aufl age, MU nchenAffien.
Eversheim,W., W. Bochtler and L. Laufenberg (1995): Simultaneous
engineering - Erfahrungen aus der lndustrie fUr die lndustrie, Berlin/Heidelberg.
Eversheim, W. and G. Schuh (2005): lntegrierte Produkt- und
Prozessgestaltu ng, Berlin/Heidel berg.
Eversheim, W., G.Schuh and D. Assmus (2005): lntegrierte Produkt- und
Prozessgestaltung, in: Eversheim, W. et al. (Hrsg.): lntegrierte Produkt- und
Prozessgestaltung, Berlin/Heidelberg, S. 5-20'
Gausemeier, J. et al. (2000): Kooperatives Produktengineering - ein neues
Selbstverstdindnis des ingenieurmdBigen Wirkens, Paderborn.
Hab, G. and R. Wagner (2013): Projektmanagement in der Automobilindustrie -
effizientes Management von Fahrzeugprojekten entlang der
Wertschopfu ngskette, 4. Auflage, Wiesbaden.
Sobek ll, D. K., A. Ward and J. Liker (199): Toyota's Principles of Set-Based
Concurrent Engineering, in: Sloan Management Review Winter 1999, S' 67-83
Vajna, S. et al. (2009): CAx fUr lngenieure - Eine praxisbezogene EinfUhrung,
2. Aufl age, Berlin/Heidelberg.
OVATIO$ Ail g !NOUSTRIAL !{AT.IASE ME }.IT

il{ IiT H
urltv.-pRoF. 0[. cllRl$TlAu,{AM$AU8R
41
LI
0 References
Ward, A. C. et al. (1995): The second Toyota Paradoxon: How Delaying

Decisions Can Make Better Cars Faster, in: Sloan Management Review Spring
s. 43-61.
X IililOVATIOI{ AHO I NDU$IRI,AL }IANABE IIEf{T

uxtv.*PnoF. 0n. 6ilRts?tAt't RAXSAUEn
22
3 ilNNU$TRilAL
INNOVATION
3 Types of lnnovation 5
4 lnnovation Management 6
4.1 lnnovationSystem.... 7
4.2 Complexity of lnnovation........ 7
4.3 Resistance against lnnovation 7
4.4 Actors in lnnovation 8
4.5 Drivers for Product 1nnovation............... 8
4.6 Success Factors for Product lnnovation I
5.1 Categories of New Products ....... ......... 1 1
5.2 Portfolio Management.......... .........15

5.3 The Ansoff Matrix .........17
6 lnnovation Process .........20

6.1 lnnovation Process by Thom.. .........21
6.2 Stage Gate Process bY CooPer 22
6.2.1 Layout of the Stage Gate process ....23
6.2.2 Function of Stages .23
6.2.3 Function of Gates.. .24
6.3 Design Thinking by |DEO... .25
7 lnnovation and Entrepreneurship ...'......28
References........... ........... 35
1 Definiticns and Terms
1 Definitions and Terms

There is a general agreement in modern economic theories that new products and
services are important factors for economic growth. Among the first economists
who pointed out the importance of innovation was Joseph A. Schumpeter
(r88S - 1950). One of his basic ideas states that competition imposed by new
products is more significant than marginal changes to prices in existing products.
He thus counted innovation to the classical production factors of capital and
work, as used by Marx. The macro view of innovation based on Schumpeter's
concepts describes innovation as a cyclical process, also knovyn as long-wave
theory of innovation.
lnnovation and lnvention

Schumpeter defined important terms concerning innovation as follows:'
. "... innouation, that is the process offinding economic applicationfor the
inuentions..."
. "... inuentionis the obuiousfirst step touards anA new product or process
lt
o "...imitation, that rs the process by uhich innouation is diffused

throughout industry or the economy ..."
Innovation is a complex process that is individual in two ways. First, different
companies organize the process of innovation differently. The innovation
capability of an organization depends on its internal structures, which evolved
over time, and its relationship to suppliers, consumers, competitors and so on.
Second, product innovation is largely influenced by the individuals involved. For
this reason, product innovation will always be a matter of chance to some degree
as the role of individual people is difficult to predict and generalize.It is none the
less reasonable to develop theories and models for innovation processes.
It is important to distinguish between innovation and invention as many people

tend to confuse these terms. The following definition of innovation is commonly
used in economic sciences: "Innouation is concerned with the commercial and
practical application of ideas or inuentions.",
The procedure of converting ideas into new products is an intrinsic attribute of
any innovation. However, the innovation process does not end with the
development of a new product. It also includes the economic exploitation of new
products. Thus, innovation is a complete process including all phases of new
l SCHUMPETER [rggZ]
2 TROTT
[zooS]
IXFIOVATION AHD INOUSTNHL ilAHAgEMEilT

F( UN}V..PROF. OR, Cfi RISTIAN EAI''SAU€R 2
1 Definitians and Terms
product development from the idea to the introduction of a new product into the
market-place. The above notions are best covered by the following
comprehensive definition of innovation:3 "Innouation is the manqgement of oll
the actiuities inuolued in the process of idea generation, technology
deuelopment, manufacturing and marketing of a netu (or improued) product or
manufqcturing process or equipmenf." Furthermore' Steve Jobs made the
following statement: "Innouation distinguishes betuseen a leader and a
follower".
Four Factors that lead to successful innovation
Four areas are described which are important for a successful product innovation:
o A product innovation and technology strategy to focus on the right areas:

Develop an innovation strategy that focuses your business on the right
strategic arenas that will be your engines of growth.
o A positive climate, culture, organization and leadership: Foster a climate,

culture, and organization that promote bolder innovation.
r Create big ideas and execute them with an effective idea-to-launch system:
Create big ideas for product-service solutions. Then drive these concepts
to market quickly via an idea-tolaunch system designed for major
innovations.
r Resources, meaning to make the right investment decisions via effective

portfolio management: Pick the winner via effective portfolio
management. Many businesses have lots of good new product ideas, but a
lack of solid business cases.
Modification
Modification, in contrast to innovation, is not the creation of a new product, but

the alteration or extension of an existing one. This can include the improvement
of quality and a change of configuration or appearance.
Product modifications can prolong the last phase of the product life cycle, but
cannot prevent its demise in the long-term. The distinction between modification
and innovation is that the former has lower risk and often lower investment costs.
Sony, for example, has introduced a new version of the PlayStation Portable
(pSP). The new version is termed "PSP - Slim and Light" and is smaller, has less
weight and more computing power. This is a clear example of modification.
3 TROT'I [zooS]
}rr
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3
2 Dimensinns of lnnovation
lmitation
In this case, the innovation was made by somebody else and a replica which is
often lower in quality is created. These replications are usually based on
successful products. If you manage to implement these replications in your or,rm
products or processes and potentially even improve on them, it is possible to have
economic success even without making any innovation.
2 Dimensions of Innovation
There are different dimensions of innovation. To clarify these dimensions, five
criteria are distinguished as follows: +
The content-related dimension: What is new?
This dimension considers the different types of innovation and answers the
question "what is new?". Literature distinguishes between product innovation,
process innovation, system innovation, innovation beyond technology and
postindustrial system innovation. The different types of innovation are described
in more detail in the next subchapter.
The intensity dimension: How new?
The scope of nevvness can be defined mainly in two different ways. First, the
intensity is based on facts, judged by experts (e.g.: patent office) and secondly,
the intensity is based on a grade. Referring to the latter, there are different
categories to grade the innovation and compare it to the current state:
o dichotomy, e.g. major or minor, radical or incremental

r ordinal scale, e.g. totally new or distinct improved product
. scoring, e.g. multilevel ordinal scales
. multidimensional approaches, i.e. evaluation and analysis of different

factors
The subjective dimension: New to whom?
The assessment of the qualitative differences of an innovation compared to the
initial situation is subjective. The innovation is thus what it is taken for. Different
groups may view the innovation differently, for example experts or top
management. Other groups that can have different opinions about the newness
4 HAUSCHILDT (zorr)
Ii'IHOVATION Ailn ll,l gU$TnnL ilAHAGEMENT

F( UNIV".FROF, DR, CHRiSTIAN RAMSAU*R 4
3 Types of lnnovation
are different business sectorsor different nations. The most resolute example
would be if something is experienced by mankind for the very first time.
The process dimension: Starting and ending where?

Innovation is more than an invention and invention itself is not necessarily the
first step of the innovation process. The previous steps can be an idea, discoveries
or observations, research, developments, the application approach or an ongoing
monitoring. That allows us to differentiate innovation by in- or excluding more
or fewer of this steps. Anyhow, ultimately the innovation project must be dealt
with on a daily routine basis and at this point it becomes the task of the innovation
manager.
The normative dimension: Is new equal to success?

Mirow said: "The transformatiue factor of money into knowledge is research,
and the transformatiue factor of knowledge into moneA fs innouatton."
Sometimes it is only termed innovation if the process led to an improvement
compared to the initial situation, in which case it would be goal oriented. The
scale for such judgments could e.g. be the realized profit. However, it should be
noted that innovation managers work with estimated innovation success and not
with the innovation success as actually realized, which is why this dimension is
not decisive for the definition of innovation.
3 Types of lnnovation
As already mentioned in the last subchapter, there are different types of
innovation. The major types of innovation are described in the following:s
Product innovation: Product innovation is the development of a new or
improved product and focuses on the benefit to the customer. The objective of
this innovation type is to create effectiveness. This is a market-oriented
application of product innovation. In industry product innovation progressively
requires process innovation. This script focuses mainly on product innovation.
Process innovation: Process innovation is the development of a new

manufacturing process which focuses on faster, higher quality, safer and/or more
cost-effective manufacturing. The objective of this innovation is to increase
efficiency. Implementation of process innovation is mainly internal to an
organization.
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System innovation: The view on innovation can be expanded through

considering the number and correlation of product and process innovations in a
system theoretical manner. There are three different parts to system innovation:
the innovative system components, the innovative system itself and the
innovative system linkage. The system-oriented view of innovation allows the
definition of position and object of the innovation itself in a more differentiated
way than the classical distinction of product and process innovation.
Innovation beyond technology: Schumpeter sees the essence of innovation

in the enforcement of new combinations which do not occur continuously but
rather discontinuously. Innovation is thus not only a problem of science and
technology, but also a problem of economics and of management. That allows to
distinguish innovations regarding the functional areas they are in, like sales,
procurement, logistics, manufacturing, financial, human resources and social
innovation.
Postindustrial system innovation: Current views show that innovation does
not necessarily focus on industrial companies or internal decision problems. It is
also about innovation in non-industrial companies like e.g. banks, insurance
companies, trading companies or public administration. Some specific examples
are credit cards,leasing, bar codes or e-business.
Derived from innovations beyond technologr and in contrast to the previously

named dimensions, innovation can alternatively be separated in the following
dimensions:
o Technical innovation: products, processes and technical knowledge
. Organizational innovation: structures, cultures, systems and
management innovations
o Relation to business innovation: reformation of the business model,

structure of the relevant branch of industry, market structures or market
borders
4 lnnovation Management
Two perspectives on innovation management are provided by literature. On the
one hand innovation management means to define and follow a strategr and
objectives, to arrive at a decision, to determine and influence information flows,
to create social relationships and to implement these decisions. This view is
mainly process oriented. It places the decisions and enforcement aspects at the
center of consideration. For this reason, innovation management is a
configuration of innovation processes.
I,|ANAGE n Enr
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On the other side, there is a view from the perspective of systems theory. This
defines innovation management as a distinct configuration of the innovation
system, not only of certain processes, but also of institutions in which the
processes are running.
Innovation management should be clearly distinguished from management of

research and development (R&D). R&D is evidently a part of innovation but this
does not necessarily count the other way around. R&D projects refer to science
and technology, while innovations also include administrative processes.
4.1 lnnovation System

The position and competence structure along with the communication and
interaction structure contribute to a company's innovation system. A system
consists of elements which are connected in a certain way. In innovation these
elements are primarily persons, and secondarily materials and machines. The
innovation system includes all persons who contribute actively to the
accomplishment of an innovation, but also all persons who are affected passively.
4.2 Complexity of lnnovation

Innovation is not an isolated action. Innovation comprises enormous and
complex changes in different areas of a company. For the implementation of an
innovation management system within a company the consideration of
complexity plays a major role.
Innovation is a sequence of different activities, decisions and executions which
proceed chronologically linearly as well as non-linearly. Sometimes individual
activities run parallel and sometimes in sequence, but back coupling and
resumption of an already completed activity is also possible.
4.3 Resistance against lnnovation

In case of doubt innovation is not welcomed. Openness to innovation is not a
reality because innovation involves a significant change in the existing way of
working. Innovation is often perceived as a nuisance, a radical change or a
senseless shake-up. Accordingly, innovation must consider resistance and this is
not only true for older companies, but also for modern companies. The history of
innovation is an endless story of the resistance it has faced.
There are three main ways in which resistance affects an innovation project.
Firstly, through prevention, €.8. a radical resistance to stop the innovation;
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4 innov*tion Management
secondlythrough delay - a reason to stop the project in its later stages; and thirdly
through deformation, e.g. a last ditched attempt to resist the innovation project.
4.4 Actors in lnnovation

In literature different promoter models are given for innovation. In innovation
management, a special combination of entrepreneurial, managerial, and
technological skills is required. For instance, three promoters can be described:
technolog;r, power, and process promoters. The technology promoters have the
knowledge to solve a problem; they procure or create the required information.
The power promoters have the influence to promote the innovation; they use
leadership instruments to overcome the resistance and allocate tangible and
intangible incentives to support the innovation. The process promoters are
responsible for the administration and organization; they establish relevant
connections and support the interaction of the participants.
4.5 Drivers for Product lnnovation

In fact, new products push corporate revenues, market shares, bottom lines and
even share prices. It is obvious that new products are a potential option to achieve
superior performance - the goal of each CEO. For this reason, there should be an
internal drive towards new product development to achieve this goal. However,
the main drivers for product innovation come from the marketplace itself. Cooper
identified four major factors driving product innovation:6
1. Technological progress
The world's knowledge base increases exponentially. The enormous gain in know-
how enables new technical solutions which are sources for innovative new
products.
z. Changing customer demands

Customer needs are changing rapidly in the world of today. The customer quickly
recognizes what is possible and available on the market and thus wants to have
it. Even large and successful companies strive to keep pace with new
developments on the marketplace and become vulnerable to mergers and
takeovers if they do not manage to adapt to the market.
6 Cf. COOPER [zoor], p.B
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3. Shortening product life cycles

As an immediate consequence of technological change coupled with changing
market demands new products no longer have lifetimes of five to ten years. After
a short time on the market, they are superseded by competitive products.
4. Global competition
International markets are merging today. This means that on the one hand
companies have access to new markets, but on the other hand, foreign
competitors are pushing into the local markets. Consequently, innovative product
developers face advantages on a global scale as they can access global markets
with their new product and also have competitive advantages on the domestic
market.
4.6 Success Factors for Product lnnovation

Placing a new product successfully on the market, however, is not an easy task.
Even the best and most innovative global players can fail. Many studies
performed over the past few years show that the most important precondition for
a successful new product introduction is a "unique and superior product". Most
product launches fail due to one of the following reasons:7
o There is no need for the product on the market
o There is a need for the new product on the market, but the new product
does not meet that need
o The product does not offer the user a sufficient value added relative to the
costs of purchasing and use
In contrast, seven critical success factors for product innovation can be named:B
o A unique superior product: A differentiated product that delivers
unique benefits and a compelling value proposition to the customer or
user. This is the number one driver of new-product profitability.
o Market orientation, focusing on customer demands: A market-driven

and customer-focused new-product is critical to success.
z Cf. CRAWFORD, DI BENEDETTO [zoo6]

8 Cf. COOPER fzoor]
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5 lnnavati*n & $trategy
a Doing the homework and front-end loading of the product is the key
to success. Due diligence carried out before product development gets
under way pays off.
o Getting a sharp and early product definition: Avoiding scope creep
and unstable specs means higher success rates as also a faster time-to-
market.
a Spiral development - build, test, get feedback, and revise - putting
something in front of the customer as early as possible often helps to get
the product right.
a Awell-conceived, properly executed launch is central to product success.

Based on that a solid marketing plan should be readybefore the date of the
launch.
a Speed counts! There are many good ways to accelerate development
projects, but none of these are at the expense of implementation quality.
5 lnnovation & Strategy

Strategies are tools to achieve a certain company objective. Innovation strategies
describe and design the paths how these objectives are achieved. The planned
costs and given time is taken in account. Normally - depending on the objectives-
strategies involve a period of five to ten years and take the following points into
account:
1. The current state of the procurement and sales rnarkets, the market
potential and the growth rate
2. Technical developments of the relevant production methods
3. The possible strategies of competitors concerning the market
4. The system of social relations in which the company fits
5. The level of productivity of the company and the critical resources which
are available
6. The possible impact of new products on the existing product portfolio

within the company, the potential customers and their requirements
An innovation strategy can be defined through dealing with the following three
questions:
o Where are we now? (initial situation)
o Where do we want to go? (objectives)
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a How do we get there? (strategy decision)
The following table gives an outline and examples of possible forms of innovation
strategies:
Dominating competition factor Cost leadership, differentiation

(quality, technology), focus strategy
Competition strategy Aggressive strategy, adjustment

strategy
Market scope Globalization strategy, focus strategy,

niche strategy
Market area Local, regional, national,

international, worldwide strategy
Time orientation First-to-Market, Second-to-Market,

follower strategy
Division of work Solo run, cooperation strategy
Direction of growth Market penetration, market

development, product development,
diversification
Strategic key factor Performance-oriented, cost-oriented,

market-oriented, time-oriented
Table 1: $trategic decisinn for a cnmpany
5.1 Categories of New Products

This course primarily deals with new product innovations. It is thus necessary to
clarify what is meant by a "new product". It is very difficult to provide a
comprehensive definition of a new product, as people with different backgrounds
(e.g. marketing experts, engineers) might have a differing understanding of what
is new about a new product. A researcher or development engineer will most
likely regard a new product as a product bringing some sort of scientific or
engineering novelty. A scientific breakthrough is an important feature of new
products in that sense. A marketing specialist on the other hand will most likely
argue that any product that is new to the market is a new product even if the
product is simply a repackaged version of an already existing product. This is
reasonable, since from the marketing point of view, meeting consumer needs and
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5 lnnovation & $trategy
generating innovative products that are accepted on the market is at least as

important as scientificbreakthroughs or engineering refinements. Such examples
indicate that it is tricky to establish a general definition of what a new product is.
However, from a scientific point of view, it is essential to have such a definition
in order to generate statistical data on new products. Without a clear
understanding of what a new product is, it is impossible to analyze and evaluate
current trends in product development and to generate reliable models.
For the purpose of this course new products can be defined in two senses:
o Newto the company, in the sense that the companyhas never made or sold
this product before, but other companies might have
o New to the market or "innovative"; the product is the first of its kind on
the market
This very general definition can be refined. A frequently used classification of new
products was suggested by Booz-Allan & Hamilton. The categories of their
classification are shown in Figure r. The classification contains six types of new
products. The individual types are arranged in a two-dimensional array with the
coordinate axis representing the two aspects of the definition above. The abscissa
represents the newness to the market and the ordinate represents the newness to
the company. The six categories of new products have been discussed by several
authors and are summarized in the following paragraphs.
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High
st
35
?o
0l th
qlA
Low
Low Newness ts High
Market
Figure 1: Categaries of new products$
Category r: New-to-the-world products

These new products are the first of their kind and create an entirely new market.
They are innovations that usually contain a significant development in
technology, or manipulate existing technology in a very different way,leading to
revolutionary new designs. Examples include the Sony Walkman, 3M's Post It
notes or Kodak's digital camera. This category only represents to% ofthe entire
market of new products.
Category z: New product lines
These products are new to a particular company but they are not new to the
market. Such products enable a company to enter an already established market.
This category covers about zo% of the new products market. Examples include
Canon, who were not the first to introduce an office version of a laser printer; this
accolade went to Hewlett-Packard with the LaserJet printer. Other examples are
Samsung, LG and Sony, who did not introduce cell phones for the first time;
g Cf. COOPER [zoor], p.r6
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S lnnovation & $trategy
Nokia and Motorola did. However, these companies are now market leaders in
the cell phone business.
Category 3: Additions to existing product lines

Products of this category are new to the company. However, they do fit into an
already existing product line of the company. This means that the product is
significantly different from the present product offering (it may also be a fairly
new product to the marketplace itself) but it is not so different that it creates a
new product line. Approximately z6% of all new product launches fit into this
category. Examples include the Hewlett-Packard Color inkjet printer which was
an addition to the already existing line of inkjet printers.
Category 4: Improvements and revisions to existing products

This category includes products that are primarily replacements of existing
products in a company's product line. Such products are "not-so-new" an)rmore
compared to those of the above categories. However, the products feature
improved performance or an additional value over the "old" products. This
category represents a significant percentage of z6% of all new product launches.
Examples include the Hewlett-Packard inkjet printer, which has received a lot of
revisions and improvements over time. Product refinement in this category is
very often a response to changing customer requirements or competitive threats.
Category 5: Repositioning
Repositioning is mainly a matter of finding new applications for "old" products.
In fact, activities in this category aim at retargeting already existing products to
new market segments or different applications. The focus is therefore on user
perception and branding rather than technical development. An example of a
successful repositioning is Aspirin: after being displaced from the headache
market by newer and safer compounds, it is nowadays sold as a preventer of blood
clots, strokes and heart attacks. Repositioning contributes to all new product
releases a relatively low percentag e of 7%.
Category 6: Cost reductions

Finally, there is the group of "neu/' products that provide the same feafures and
performance as existing products except that they are cheaper. In this sense they
are the least "new" products in this classification. They are certainly not new from
a marketing point of view; cost reduction is often achieved by means of
technological changes, e.g. in production processes, which can of course be new
to a company. This category makes tp Ltyo of all new product launches.
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5.2 Portfolio Management

Portfolio management is a powerful but also complex tool for the selection and
prioritization of new products. It also helps with the allocation of resources to
projects to achieve the business goals and it gives a good overview of the whole
set of projects, products or business units in general. In the book "Porfolio
Management for New Products", the following explanation for portfolio
management is given:lo
"Portfolio mcrno.g ement for new pr o ducfs is a dy namic decision pr o c es s in which

the list of actiue neu products and R&D projects is constantly reuised. In this
process, new products are eualuated, selected, andprioritized. Existing projects
may be accelerated, killed or deprioritized and resources are allocated and
reallocated to the actiue projects."
A very common and often used representation in portfolio management is the
bubble diagram. In the bubble diagram, appropriate parameters are chosen to
categorize the products and these parameters are then represented in a two
dimensional X-Y plot. Possible parameters can be:
o Fitting with business or corporate strategr

o Inventive merit
o Strategic importance to the business
o Durability of the competitive advantage

r R&D costs to completion
o Time to completion
In the plot the products are placed as bubbles and the size, shape, color and
shading of the bubble can be used to provide additional information about the
project. The size for example can give information about the resources needed
and the color can categorize the project to a certain product line. Moreover, the
summarized size of all bubbles in a chart must be constant. In other words, when
a new one is added, the existing ones must be reduced accordingly.
'O
COOPER, EDGETT IZOOI]
MAHASE Eilr
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high
Pearls Bread and Butter
Probability of
Technological
Success
Oysters White Elephants
low
hieh Reward low
(NPVI
NPV .., Net Present Value
Tigure 2. Pelrtfi:lia M*nagernent for new prrductsll
The Boston Consulting Group uses the expressions Stars, Problem Child (or
Question Marks), Cash Cows and Dogs. The newer literature refers to them as
pearls, oysters, bread and butter and white elephant projects, as shown in Figure
z. The original portfolio uses business strength and market attractiveness as
descriptions for the axis, whereas newer risk-reward diagrams use reward or the
NPV (net present value) and the probability of technological success. This NPV is
the future stream of earnings (cash flow) from the product, less all remaining
development, capital and launch costs.
1. Pearls: with great potential for success. For this

These are products
reason, they should be encouraged in such a way that a potentially high
reward can be collected from them. These are often very new products
which should become the future stars but also need some cash to develop.
2. Bread and Butter: Projects including updating, modification or
extension of existing products are part of this category. They have a very
high probability of success but the achievable reward is relatively low.
" COOPER, EDGETT lzoorl,p.77
IH NOVATISN AT'I D I il $USTRIAL IIAHAGEMEilT

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g. Oysters: These projects have a high expected payoff, like pearls but the
technological basis is missing. Only through new technology
breakthroughs can these products become successful and turn into pearls.
4. White Elephants: They might have begun as promising new projects but
over time became continuously less attractive. They have a low chance of
success and also a low chance of reward. If possible these projects should
be killed as quickly as possible.
Factors in product decisions
Certain project characteristics have been identified that consistently separate

winners from losers and should be used as criteria in scorecard format for product
development selection and prioritization:
o Strategic: How well the product aligns with business strategy, and how
strategically important it is.
o Competitive and product advantage: Whether the product is

differentiated, offers unique customer benefits, and represents a
compelling value proposition to the user.
o Market attractiveness: How large and growing the market is, and
whether the competitive situation is positive (not intense, few and weak
competitors).
r Leverage: Whether the product leverages the business core competencies
such as marketing, technology, and manufacturing.
o Technical feasibility: The likelihood of being able to develop and

manufacture the product.
. Risk and return: The financial prospects for the product (for example,
net present value, return on investment, payback period) versus the risks.
5.3 The Ansoff Matrix

The Ansoff Matrix, as a selected method in innovation management, contrasts
two major variables responsible for the growth of a business; markets and
products. The results of this analysis are four different strategy options which
refer to the possible product-market combinations, as shown in Figure 3.
E]rr
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Current New
products products
Market Product
Current
penetration development
markets
strategy strategy
Market
New Diversification
development
Markets strategy
strategy
Figur* 3; Ansaff rnalrixl?-
The advantages of the Ansoff Matrix are its future orientation and the fact that
when the current situation of the company is noted in the matrix, only one of the
four fields will be filled out, hence creating a positive psychological incentive for
the introduction of further measures. The criticism has been leveled, however,
that it shows an environment which assumes that there is a lot of potential for
growth, which might not be the reality. Therefore, it is also important to take
options such as retrenchments into consideration. Moreover, the results should
not be seen as a panacea but as suggestions in case of strategic thinking
In the following section, the four strategies will be explained in brief:

1. Market penetration stratery: This focuses on increasing sales in
existing markets with existing products. By extensive usage of the
marketing mix, an attempt is made to increase the market share of the
product. An example for such a strategy is the Kellogg company, which
increased the consumption of cornflakes by promoting them as a snack
which is not only eaten for breakfast.
2. Market development strategy: This strategy makes the products
available for new markets and open new segments. For example,
Mercedes, which had for a long time concentrated only on the luxury
market segment for cars, decided to enter the small car market. Also,
1, TROTT [zoo5], p.387
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opening up new geographical areas through exports might be a suitable

option here.
3. Product development strategy: This is becoming more important in

innovation management because it deals with the creation of new or
improved products - but to existing markets. For almost all companies
this is a permanently ongoing activity, and it is important to keep on
developing new products to remain competitive.
4. Diversification strategy: It does not suffice to consider new products

as opportunities for business growth but this strategy also looks for new
markets. Some companies try to utilize their existing knowledge base and
technical skills for diversification and others combine it with acquisition.
In the UK privatized electricity companies have also bought privatized
water companies and were even able to use their experience in the
provision of utility services, to give one example of diversification through
acquisition.
Different kinds of diversification are distinguished:
o Vertical diversification usually extends the production depth and can
be further distinguished by forward and backward integration.
Forward integration means to infiltrate areas of the previous
customers. (e.g. opening a retail outlet) An example for backr,rrard
integration is a manufacturer who starts to produce components which
they previously purchased from an external provider.
o Horizontal diversification extends the existing production program

with new products which are somehow connected to the existing ones.
o Lateral diversification extends the existing production program with
new products not related to current market or customer. (often leading
to mergers)
Of course the newer the market and the product, the bigger the risk and effort,
and the lower the number of synergy effects that can be gained. That is why
diversification always bears the greatest risk and market penetration the
least. Nevertheless, it is a good tool to identify possible strategies for new
products.
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6 lnnovation Frocess
6 lnnovation Process
If an innovative idea is created through realizing an unsatisfied demand in the
market, then this is termed Demand Pull. It is the force of an individual or the
society on the company to be innovative.
By contrast, the Technology Push creates innovation on the basis of new

technical knowledge. These idea sources represent only a small percentage of all
ideas, but are mainly responsible for radical and further reaching changes, as
shown in Figure 4.
Technology push
Rc*earch &
*
Frnductisn
*
Mark*ting
t Need?
Market pull {demand pull}

R**esrch &
I Fraductisn
i Mark*ting
*
f;xpressed
l*lsrket lleed
Figure 4: Technology push and denrarrrd pullr3
it is necessary to answer the question:

Before explaining the innovation process,
"How to get innovative ideas?" Thom considered this point as the innovation
impulse in a project and Cooper included it as the initial stage of "Discovery". This
is a very important step because without a good idea the whole process is
worthless.
Modern approaches, like Design Thinking by the company IDEO, include the user
more and more in the generation of ideas or work with the so-called lead users'
method, developed by Eric von Hippel, to identify unarticulated needs. But
various elements can be sources for ideas and they can be divided into internal
and external sources of ideas.
rnternal sources can be: research and development (R&D), sales, marketing,
planning and production department, or other company executives.
13 Cf. MARTIN [rgg+], p.++
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Ar,l OUSTR|AL FlA HAgEl4
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UNIV.-FFOF. OR. CI.{RISTIAN NAM$AUER
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S lnn*vation Process
External sources are: customers and prospects, sales staff, contract research
organizations and consultants, technical publications, competitors, universities
and research institutions,literature review and statistics and many more.
Identifying possible sources for new product ideas also helps a lot in the search
for good ideas. Normally, internal sources are looked at first, but good new
product ideas can also come from external sources, such as the customers.
6.1 lnnovation Process by Thom

Figure b represents the innovation process introducedbyThom in the r98os. The
main phases of this innovation process are divided into specific steps. Also, the
role of environmental influence and corporate planning is considered.
Environmental influences can be society, politics, ecology/economy and
technology. This means that changes in these fields can have an influence on
corporate planning and therefore on the development and innovation of new
products in general.
Another important aspect in this process is the innovation impulse which is also
a common part of all innovation processes. Impulses or sources for ideas can
derive from different directions.
Thom's three main phases of the innovation process are listed as follows:
1. Idea generation
a. Definition of the search field
b. Idea selection
c. Ideaproposal
z. Ideaacceptance
a. Idea evaluation
b. Preparation of innovation Plan

c. Decision for one implementation plan
3. Idea realization
a. Realization of the new idea
b. Sale of the new idea to target customers
c. Check on accePtance
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Environment
Corporate planning
lnnovation ldea
ldea generation ldea acceptance
implementation
ldea evaluation
Realisalion of the
Preparation of
Definition of the innovaiion
new idea
search field plans Sale of the new
ldea selection Decisions on idea totarget
ldea proposal
customer
one
Check on
implementation
plan
acceptance
f igure 5: lnncvatian procc$$ rlf Thomla
6.2 Stage Gate Process by Cooper

The so-called Stage Gate process is another common methodology to describe
innovation processes. The Stage Gate process was extensively discussed by R.G.
Cooper to describe the new product development process. 15 A Stage Gate system
is a systematic process including critical success factors and best practices for
moving a new product project through the various stages and steps from idea to
launch. The Stage Gate process can thus be considered as a blueprint for
managing the product innovation process to improve effectiveness and efficiency.
Cooper discusses the innovation process as a sequence of what he calls stages and
gates. Cooper puts a special emphasis on the links between two phases of the
development process (e.g. the stages) and the criteria to progress from one stage
to the next (e.g. the gates).
The process is fully cross-functional. This means that a specific stage is not o\ med
by one specific department. Also the gates are cross-functional. Focus of the
process is put on the front end with stronger customer input. Finally, the process
considers best practices and builds in parallel processing. Many companies have
adopted innovation management processes of this kind.
14 THOM [rg8o]
15 Cf. COOPER [1999], p.rr5
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6.2.1 Layout of the Stage Gate process

The layout of the Stage Gate process is depicted in Figure 6. Its characteristic
structure is obtained bybreaking the innovation process into a predetermined set
ofstages, each stage consisting ofa set ofprescribed, cross-functional and parallel
activities with gates being the entrance to each stage. These gates control the
process and serve as the quality control and go/kill checkpoints. This stage and
gate format leads to the name Stage Gate process.
s Second
screen
Go to
derrebtrnent
Go to
tes{ing
Go lo
hunch
$tape't
Scoping
&
BuiH
s Derrelopment
s $tag* 4
Testing &
-e $ta$e $
Launch
business case Validetion
Pgtjaunch
Review
Figure 6: The typical $tage Gate Moclel - from di*covery to launchle
6.2.2 Function of Stages

A Stage Gate system typically includes four to six stages. The purpose of each
stage is to gather information required for the next stage or decision point. It is
typical that each stage is more expensive than the preceding one as the process
evolves. The Stage Gate process is an incremental commitment process. The
characteristic feature of a stage is cross-functionality and parallel processing. The
six key stages represent the following aspects of the innovation process:17
o Discoveryt Stage where ideas are generated and oppoltunities

discovered
o Scoping: Preliminary investigation of the project (quick work)
16 cooPER [zoor], p.go

17 COOPER fzoor], p.13r
23
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. Building the Business Case: More detailed investigation of the project;

leading to a business case (product and project definition, project
justification and project plan)
r Development: Actual design and development of the new product

o Testing and Validation: Tests or trials in the marketplace, lab and
plant; the aim is validation of the proposed new product
o Launch: Beginning of full production, marketing and selling; also termed

"commercialization"
6.2.3 Function of Gates

Each stage is preceded by a characteristic gate. Gates represent checkpoints
where gof or kill decisions are made. The entire newproduct team comes together
at the gates and discusses all the information obtained so far. They also serve as
quality check points. Each gate has the same basic structure which is shown in
Figure 7.
DeIive.ra,bles
Figure 7: Common fcrmat of a gatel8
The three characteristic features of a gate are:re
a A set of required deliverables: This is what the project leaders and the
team must bring to the decision point. These deliverables are visible, based
on a standardized process for each gate and decided at the output ofthe
previous gate. Management's expectations for the project teams are thus
made very clear.
a criteria against which the project is judged: These criteria include

"must-meet" or "knock-out" questions (a checHist) designed to sort out
misfit projects quickly. There are also "should-meet" criteria or desirable
factors, which are scored (a point count) and used to prioritize projects.
18 CooPER [zoor], p.r3z

1e COOPER fzoor], p.4r
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S lnncvation Prccess
o Defined ouQuts: These include a decision (go/kill/hold/recycle), an

approved action plan for the next stage (complete with planning of people
required, budget and an agreed time line) and a list of deliverables and
date for the next gate.
Gates are usually administered by senior managers from different functions, who
control the resource required by the project leader and team for the next stage. 20
6.3 Design Thinking by IDEO

Design Thinking is one application of the human-centered innovation process
elaborated and over the years successfully applied by the company IDEO, a global
design firm founded in r99r. The first Apple mouse or the Palm V are outstanding
innovations by IDEO and the proof of the success of the company and its
methods.
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Figure fi: Five st*ps rnethodrlr:gy cf Design Thinking!1
Discovery: Understanding the user (in the case of education, students, parents,
teachers, etc.) is the foundation for generating ideas. Discovery is the phase where
empathy is gained to get inspired to create solutions.
Interpretation: Merely collecting data and gaining empathy for the user will
not result in a defined challenge. Before starting with brainstorming sessions and
generating ideas it is necessary to analyze the acquired knowledge and define a
meaningful challenge. When going through the collected material a better
understanding of the topic will be gained. The design thinking toolkit from IDEO
suggests some small steps to ease navigation through the interpretation process.
Ideation: Before the start of generating ideas some preparation is needed.

Brainstorming sessions should be used to create possible solutions for a specific
problem. Defining which problem should be attacked must thus be decided before
20 COOPER
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21 KELLEY, LITTMAN (zoo+)
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FI UNIV.-PAOF. OR. CHRiSIIAN RAM$AUf R
25
starting the session. A good selection of "How might we...?" questions about the
problem helps in ideation. An appropriate space and a certain time should be
scheduled for a brainstorming session (IDEO suggest 45 to 6o minutes). One key
factor is a diverse group of people because having different fields of expertise
means having different views on the topic. This generates various answers to the
questions posed.
Experimentation: The ideas developed in the last phase are now realized with
prototypes. This step is necessary to show and explain the main concepts and get
feedback on them. A prototype is something that the user can interact with and
get a feeling of what the idea will look like. With the feedback of the users the
ideas can be further developed and refined. A prototype is not inevitably a first
working version of a serial product. There are several ways to prototype in order
to test an idea.
Evaluation: After finishing the final prototype the project does not stop. In this
stage, it is necessary to define the next steps.
Literature describes those phases as a linear approach. However, the order, the
sequence or the iteration of the process phases is not considered. They differ in
any variation depending on the project. Each of the phases can be performed
parallel to another and the order changes according to the outcome of a phase.
Testing the concepts can be refined by several iteration cycles and the more
refinement is done the better the results will be.
Besides the process itself there are other factors that play a crucial part in Design
Thinking. One of those is the setting of a Design Thinking project - the physical
environment and the project team.
The physical space in which a project is carried out has an influence on the project
team and on the process of innovation. Kelley suggests having as few rules as
possible for designing a space, a task which should not be done by architects but
rather by the project team itself. As in the whole process of Design Thinking the
working area should also evolve over the course of the project. At IDEO the offices
look like a neighborhood with personalized working places which can be easily
transformed into meeting areas. A dedicated room is reserved for the project
where all information is gathered and essential data is made visible to the whole
team or even outsiders.
Although Design Thinking is described as a skill for an individual it is performed

in groups. Due to the complexity in different fields a team should include
members who have experience in more than one field, like mechanical
engineering and civil engineering. Forming this team with the right mix is not
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6 lnnovation Proeess
easy but the goal is to have as diverse a team as possible in terms of expertise and
personality. The difference of a well-working group comprising such individuals
to a bad group is that the former has a clear goal, deadlines and passion and also
a high level of trust among the members.
There are three factors in Design Thinking that play a significant role in its
success: First, the right mindset of the project team members, second the focus
on human values and users and finally rules and a framework in which the team
can work. Each team member should understand, accept and agree to certain
values which give the team a greater chance of success.
One of the mindsets is the focus on human values which is pointed out and
described in detail: As the whole process builds on the input and feedback of
customers and users this could be defined as the core of the method. In each step
of the process the team can or should consider the users and their opinions. This
human centered approach allows the project team to come up with solutions and
designs that are important to the users. This can lead to innovations.
In every project and team certain regulations should be defined in order to have
a clear framework and boundaries in which the team members can work. Besides
the internal team rules that are defined and agreed by the team, Design Thinking
suggests rules and guidelines for different steps in the process. The most essential
ones are the rules for brainstorming:
1. Thou shalt not judge. As ideas begin to flow, you must do everything in
your power to let them flow. No one should be allowed to offer any
judgment of any idea.
2. Thou shalt not comment. Even if the person next to you throws out the
stupidest idea you've ever heard, let the process continue. The slightest
comment or criticism will change the mood in the room, and the group will
start to clam up.
3. Thou shalt not edit. Do not let your inner editor join the session. When
you're brainstorming, it doesn't matter where the comma Soes in the
sentence, or howbest to word something.
4. Ttrou shalt not execute. The second an idea hits the whiteboard, you
can easily become distracted by thinking about execution. You'll wonder
how the idea would come to life. What would it cost? Who would run it?
What would the project plan look like? What would the financial
implications be? Where would the work take place? When would we begin?
Those are great questions for later.
5. Thou shalt not worry. Fear is the single biggest blocker of creativity.
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7 lnnovati*n and Hntreprcneurship
6. Thou shalt not look backward. Holding back an idea because we tried
it once before and it didn't work out so well is highly limiting. An idea today
comes into a world with an entirely new set of circumstances, market
conditions, technologies and customer tastes.
7. Thou shalt not lose focus. Idea sessions can easily dissolve into
wandering. To solve this, keep a parking lot list. When unrelated topics
come up, put them on the parking lot list to be discussed another time.
This will keep the group focused on the task at hand while still making sure
that important concepts are remembered and can get attention later.
B. Thou shalt not compare. comparing ideas is an insidious form of
criticism that needs to be checked at the door with all other left-brain
habits. Comparing usually contains an implicit criticism.
g. Thou shalt not make fun at others' e:qrense. Brainstorming can
become quite jolly, and the temptation to start joking about what comes
up can be hard to resist. Laughter at the expense of an idea is a fast way to
kill it.
7 lnnovation and Entrepreneurship

Entrepreneurship is a sub-discipline of economic science and is concerned with
the start-up activity or the creation of new organizations as a reaction to identified
opportunities and as an expression of specific founder personalities. However,
entrepreneurship is more than business creation and efficient use of resources, it
includes creative elements such as the identification of market opportunities,
finding newbusiness ideas and their implementation in the form of newbusiness
models. Entrepreneurship is not necessarily connected with the ownership
function. This means that entrepreneurship also maybe practiced within existing
businesses by non-owners (Intrapreneurship).
The following chart gives an overview of two main entrepreneurship types -

sME: small and Medium size Enterprise; rDE: rnnovation-driven
Enterprise - and explains the differences:
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lnnovation is nst necessaryto SME The company is based on some soJt of

establishrientand growth, nor is campetilive innovation {tech, process, business model) and
advantage, potenlial competitive advantage.
Most o{ten farnily buqinessesor businesses More diverse ownership base including wide
with very liftle external caPital. anay of extelnal capital providers-
SME Revenue, Cash IDE Revenue, Cash

Flow Jobs over Time Flow Jobs over Time
Revenue I
Revenue /
Cash Flow /
Jobs Cash Flow /
Jobs
time time
lt:tisl* 2: ili{fe reni lypev a{ *ntr*pr*wurship22
Background
The entrepreneurship concept reaches back to the work of Richard Cantillon and
Adam Smith in the late rlh and early t8th centuries. For Smith the entrepreneur
was the central character who balances supply and demand. In the rgth and up to
the beginning of the zoth century the social role of the entrepreneur was largely
neglected due to the development of large corporations. Only in the last 3o to 4o
years has the subject of entrepreneurship experienced a renaissance and
theoretical deepening.
The modern understanding of entrepreneurship is largely influenced by the work
of Austrian economists, especially by that of Joseph Schumpeter, Carl Menger,
Ludwig Von Mises and Friedrich Von Hayek. For Schumpeter an entrepreneur is
22AULET (zo16)
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7 lnnovation and *ntreprener:rship
a person who is willing and able to implement new ideas or inventions into
successful innovations. The entrepreneur is the cause of changes that lead away
from the old equilibrium. The entrepreneur is not primarily an inventor but an
innovator who takes up and intersperses new ideas, combines tangible and
intangible "productive forces" creatively, and displaces and destroys existing
structures and creates new ones.
Entrepreneurial activity
Entrepreneurial activity consists of following four components:
1. Discovering opportunities: An entrepreneur must be able to generate,
evaluate and select business ideas systematically, and also to perceive and
implement personal opportunities.
2. Enforcing innovations: New business ideas need to be developed,
implemented in models and prototypes, and finally marketed. This also
applies to processes, services and complete business models.
3. Development and use of resources: The entrepreneur must be able

to identify key resources and to tap, to combine and to use them in an
appropriate manner.
4. Bearing risk: The entrepreneur must be willing to assess risks for their
business activities and to take over if necessary.
Additionally, entrepreneurship includes continuing an existing business,

involving reacting to crises, changes and competitors, observing the
environment, assessing external business ideas, models and processes, and
borrowing these under certain circumstances in an adapted manner. Of course,
entrepreneurial activity also means recognizing one's own mistakes as early as
possible and to correct them or quit.
Start-up
A start-up is a company, a partnership or temporary organization designed to
search for a repeatable and scalable business model. These companies, generally
newly created, are in a phase of development and research for markets. Such an
enterprise is not yet established in the marketplace and must justify its existence.
These tasks are closely linked to the entrepreneur, who needs to do a lot of
convincing at this early stage.
Entrepreneurship process
The entrepreneurship process can be divided into three main stages: detection
phase, development phase, and implementation phase as shown in Figure 9.
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7 lnnnvaticn and f;ntrepren*urship
Entrepreneurial
Market potential Business idea
opportunity
SWOT, etc Businessplan Pre-seed
Foundation Growth Stabilisation
Figur* 9: f; nlrcpreneurship Pr*ceso23
During the detection phase it is important that a potential founder detects a

possible market potential. There must thus be an imbalance between an expected
market demand and the current market demand. In this case, market demand
refers to the demand of a potential client within a given market. This imbalance
is the basis for every further step in the entrepreneurship process.
When an entrepreneurial opportunity is detected, the entrepreneur tries to

exploit the existing potential through the development and implementation of a
suitable business idea. In most cases the first three steps of the entrepreneurship
process occur within a very short period of time. Often, market potential is
detected indirectly by experiencing an unsatisfactory situation ("accidental
discovery"). The solution idea to the unsatisfactory situation represents the
potential in such cases. Finally, the developed business idea is the solution to
one's own problem, but other people with the same problem will also be helped.
In the development phase the feasibility of the business idea is tested. The idea
of the entrepreneur is checked for profitability through estimation of a realistic
level of effort, costs, sales and profit. However, to examine a specific idea in detail,
a business plan is created in which the entrepreneur considers different
perspectives (skills, market environment and competition, etc.) and evaluates
whether the business idea is feasible. In addition, the business plan is required by
institutions such as banks or start-up consultants to get a clear picture of the
expectations of the potential founder.
If the business plan assessment is positive, the entrepreneur can start with the
pre-seeding work, which is the last step before the actual founding of the
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7 lnnovation and Hntrepren*urship
company. During pre-seeding, eny entrepreneur should establish the necessary

conditions to ensure that the business can run smoothly right from the beginning.
These include issues such as the choice of an appropriate legal form, organization
of the company, completing a possible partnership agreement as well as gaining
the necessary knowledge on labor law, marketing, sales, accounting, pricing of
products, etc.
If all decisive founding preparations have been successfully completed, the actual
foundation can be performed in the implementation phase. This involves the
formal institutionalization of the desired company. Depending on the legal form,
different requirements need to be fulfilled. While for sole traders a business
registration will often suffice, corporations need a notarized partnership
agreement and possible further formal requirements.
After the company foundation, two other phases, which are individually
dependent on the company, follow in the entrepreneurship process: the growth
and the stabilization phase. Every business owner has different goals with their
own company. Some wish to establish a small sized company; others have the
ambition of growing into a national and international company. However, it is
important that during these phases clear structures and a good organization are
implemented and maintained in the company.
Personality traits and attitudes of entrepreneurs

For successful entrepreneurship specific personality traits, behaviors and
attitudes are required:z+
o Motivation: the entrepreneur has a vision that inspires. The vision is the
driving force for a company and the entrepreneur is willing to tackle tasks
and challenge their own abilities. High motivation is necessary for
entrepreneurial activities.
o Initiative and desire for independence: The entrepreneur develops
strategies with perseverance and determination in order to achieve his or
her vision. The entrepreneur strives for self-sufficiency and independence
and trusts in his or her or,rm abilities.
a Realism and ability to collaborate: The entrepreneur has precise

knowledge of the limits that are faced and is able to identify potential
partners and build up partnerships. In particular, the entrepreneur is fully
aware of the business environment, which is essential to avoid any
redundant developments.
,4 Cf. FALLGATTER, M. (zooz)
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7 lnnovation and f;ntrepreneurship
o Creativity: an entrepreneur is a creative thinker and a decisive person who

is associative in his or her ideas and also vivid in their imagination.
. Perseverance: a high level of creativity can lead to changes in strategies too

often and too early.
. Risk taking: entrepreneurial tasks provide opportunities and risks. The
entrepreneur must assess these and take assessable risks by evaluating
costs, markets and customer needs. The entrepreneur bears the
responsibility for leading the business idea to success.
o Emotional stability, assertiveness and empathy: An entrepreneur is able to

handle failures quickly and to keep a clear mind in critical situations.
Additionally, the entrepreneur is cooperative and understands team
members, investors and customers to achieve great success in cooperation
with them.
o Problem-solving ability: Many tasks of entrepreneurs are not routine
tasks. An entrepreneur is able to operate in an unknown field and find
ways to remain capable of acting.
o Ability to deal with uncertainty: the entrepreneur is able to deal with large
informational uncertainty and ill-defined situations.
o Entrepreneurial expected self-efficacy: the expectation
the of
entrepreneur that his or her own actions have a decisive influence on the
success of the start-up and that the entrepreneur is not dependent on third
parties.
All of these skills and talents are rarelyfound in one person. In addition, attitudes
and skills that promote business creation are not always appropriate to ensure
their sustainability. This applies, for example, to a high willingness to take risks,
which increases the willingness to start a business but does not necessarily
support long-term success. Therefore, different attitudes and skills are required
at different stages of the business life cycle.
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0 Ref*renc*s
References
Aulet, B. (2016): Startup mit System, O'Reilly, Heidelberg.
Chesbrough H. (2006): Open lnnovation - The New lmperative for Creating and
Profiting from Technology, Harvard Business School Press, MA
Christensen G. (2006): The lnnovator's Dilemma, New York'
Ghurchill, J., E. Von Hippel and M. Sonnak (2009): Lead User Project
Handbook: A practical guide for lead user project teams.
Cooper, R. and S. Edgett (2001): Portfolio Management for New Products,
Second Edition, Basic Books, New York.
Gooper, R.G. (1990): Stage Gate systems: A new tool for managing new
products; in: Business Horizons, Vol. 33(3), 1990.
Cooper, R.G. (2001): Winning at New Products - Accelerating the Process from
idea to Launch; Third Edition, Basic Books, New York.
Crawford, M. and A. Di Benedetto (2006): New Products Management; Eighth
Edition, McGraw-Hill, lrwin.
Fallgatter, M. (2007): Junge Unternehmen: Charakteristika, Potentiale,
Dynamik, W. Kohlhammer Verlag, Stuttgart.
Hauschild, J. and S. Salomo (2011): lnnovationsmanagement, Vahlen,
MUnchen.
Keltey, T. and J. Littmann (2004): The Art of lnnovation, London Profile Books.
Little, A. (1988): lnnovation als FUhrungsaufgabe, Frankfurt.
Olschowy, W. (1990): Externe EinfluBfaktoren im strategischen
Innovationsmanagement, Berlin.
Porter, M. E. (1999): Wettbewerbsstrategie -
Methoden zur Analyse von
Branchen und Konkurrenten, Frankfurt, 10. Auflage, New York'
Pott O. und A. Pott (20121= Entrepreneurship - Unternehmensgrundung,
unternehmerisches Handeln und rechtliche Aspekte, Springer, Berlin Heidelberg.
Schumpeter J.A. (1997): Theorie der wirtschaftlichen Entwicklung, 9. Aufl.,
Duncker & Humblot, Berlin
Schumpeter, J.A. (9a21: Capitalism, Socialism, and Democracy, New York.
Schumpeter, J.A. (1987): Theorie der wirtschaftlichen Entwicklung, 7. Auflage,
Berlin.
Thom, N. (1980): Grundlagen des betrieblichen lnnovationsmanagements, 2.
Auflage, Kon igstein/Ts.
Trott, P. (2005): lnnovation Management and New Product Development,
Pearson Education.
Von Hippel, E. (2005): Democratizing lnnovation, London'
Von Hippel, E. (1988): The Sources of lnnovations, New York
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1 lntroduction to operations management. 2
1.1 Strategic aspects of operations management 4

1.2 Production systems 4
1.2.1 Process types 4
1.2.2 Layout Design 7
1.3 Objectives of operations management....,' 11
1.4 Key performance indicators in operations management 12
1.5 Production theory.. 17
2 Tasks of operations management -.-......20

2.1 Sales planning ...21
2.2 Production program Planning 22
2.3 Materials requirements planning...... 25
2.3.1 Materials 27
2.3.2 lnventorydilemma... 28
2.4 Time- and capacity p|annin9............ 30
2.4.1 Time planning 30
2.4.2 Capacity planning 31
2.4.3 Mastering time- and capacity planning". 34

2.5 Realization and control of production.........." 35
2.5.1 Trigger and monitor production............'. 38
1 lntrod*etian to *perations managenr*nt
1 Introduction to operations management

The main function of operations management is optimization
the of
transformation process which provides customers with products or services. The
main task is to manage processes to deliver goods and services.
Operations management is also relevant for society, because it can:
o increaseproductivity
o provide better quality of goods and services
. improve working conditions

The operations manager is responsible for operation management. They manage
the resources involved in the process.
Basic terms in operations management are:
. Throughput rate or production capacity is the rate at which units emerge

from the process, i.e. the number of units passing through the process per
unit of time.
o Throughput time is the average elapsed time taken for inputs to move
through the process and become outputs.
. The number of units in the process (also called the 'work in process' or in-
process inventory), is given as an average over a period of time.
o The utilization of process resources is the proportion of available time that

the resources within the process are performing useful work.
Operations management can be seen as the design, control and development of

production systems. The main elements of a production system are
manufacturing and assembly, which are coordinated by production planning, and
control. Production logistics can be seen as an interface to the material
management.
The main aspect of this is to manage the transformation of an organization's

input into finished goods by combining production resources (see Figure r).
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Figure 1: The production transformaiion process
a Resources for the input are:
o Facilities, such as buildings, equipment and process technology
o Staff, all the people involved in the operation process
a The transformed resources are:
o Materials, which can be transformed either physically (for example

manufactured), by location (for example transportation), by
ownership (for example retail), or by storage (for example
warehousing)
o Information, which can be transformed by property (for example by

accountants), by possession (for example market research), or by
location (for example telecommunication)
An overview of the general elements of a production system are shown in Figure

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1.1 Strategic aspects of operations management

The concern of operations management is not only day-to-day business on the
operational level. Operations management also has an important strategic role in
bringing a company closer to its long-term goals. Operational strategies can be
separated in two main directions:
o Market-based operations strategy: The company makes a decision

regarding the market and the customers. This market position is then
translated into the requirements for operations. For example, fast delivery.
o Resource-based operations strategy: This strategy works from the

inside of the company out, rather than from outside-in as in the market-
based approach. Here, an assessment of the resources (tangible and
intangible) and processes lead to certain operational capabilities.
1.2 Production systems

Production systems are socio-technical systems where people (workers) and
equipment interact to transform inputs, such as, materials, to outputs (products
or services). A production system can be defined by its process type and its layout
design. These two categories are described in the next two sub-chapters.
1.2.1 Process types

The choice of the right process type mainly depends on the volume and the
number of variants in production. In general companies provide their customers
with a range from low-variety and high-volume products, to a combination of
high-variety and low-volume products. This chapter provides possible process
designs, often referred to as process types for different volume and variety
combinations.
In production five different process types are considered. They are first listed here
and then further described in the next paragraphs:
o Project process
o Jobbing process
o Batch process
o Mass process
o Continuous process
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Choosing the right process type is a strategic decision. The challenge is that while
setting up the production takes time, effort and money and needs to be a long-
term decision. often the market needs and the competition can change really fast.
Also when a company is growing and the demand is increasing, a change to the
process type will be necessary. Therefore, it is necessary to understand the market
and to decide on the right process type. If costs are an important factor for
customers, it could make sense to decrease variety, use mass production and
therefore reduce costs through economies of scale.
Combinations of process types also exist, for example jobbing and batch
processes. This is also shown in the figure above.
Project process
Processes that produce high-variety and low-volume products are called project
processes. Project processing often used to produce one specific product based on
exact customer specifications. It is that the product is stationary.This means that
staff, equipment and materials are brought to the product. Often it requires the
coordination of many individuals and activities. The timescale is an important
performance measure, because each project is unique. Examples are a
construction site or custom built furniture.
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Jobbing process
Processes that produce high-variety and a little higher volume are called jobbing
processes. They are used for one product or low volumes to specific customer
specifications. In contrast to project processes, the product moves to the location
of the transforming resources, such as equipment. The staff and equipment can
be shared between many products. It is important to have a highly skilled
workforce to deal with the customization (variety) demanded by the customers
and the usage of general purpose equipment to share between products. The
utilization of machines is low due to a high number of machine setups when
moving from one product to another. Examples are precision engineering and
bespoke tailors.
Batch
Processes that produce medium variety and medium volume are called batch
processes. They cover a wide range of volume and variety combinations. Products
are grouped to batches, where the batch sizes can range from 2 to some hundreds.
The product moves to the equipment as described for jobbing processes.
Therefore, the machines are used for different products. Instead of having setup
time between each product like in the jobbing process, the setup times just occur
between batches and lead to a greater utilization of equipment. Examples are
vehicle component production, the clothing industry, bakeries andbookprinting.
Mass process
Processes that produce high volume and lowvariety are call mass processes. Even
if there are some variants in the design, the production process is pretty similar
for each product. Because of the high volume it makes sense to use specialist labor
and equipment to be cost-efficient. An important factor is that the movement of
the product is often automated with a conveyer system and the production
process is separated into a number of small and simple tasks. To ensure a smooth
production, the process time should be similar at each working station. This is
realized with line balancing. Because of the low variety, setup times are low and
the utilization of equipment can be kept high. Examples are car production and
computer or television assemblies.
Continuous process
Processesthat operate continually to produce a very high volume of a standard
products without any variety are called continuous processes. The products
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gas, or steel. Alarge amount of specialist equipment is used for just one product.
To make it cost-efficient the production process often operates z4 hours a day.
The role of workers is mainly to monitor and control the process. Examples are
oil refinery, electricity production and steel making.
1.2.2 Layout Design

Layout design deals with the physical location of resources such as equipment,
labor and storage. It aims to ensure an efficient flow of materials through a
production site. Layout design is important because it strongly influences the
efficiency and therefore also the costs of production. There are four basic layout
designs for production processes. These are:
o Fixed position layout
o Process or functional layout
o Cell layout
r Productlayout
Based on the selection of the process type from the last sub-chapter, it is
necessary to choose the right layout for the production process. It should be noted
that there are often more choices of layouts for one specific process type. The
variety demanded and the costs of production are important factors in the
decision.
Continuous
proces$es
Mass processes
Batch processes
Jobbing
processes
Process Project
types process
Figure 4: Process and layout types
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Fixed position layout
The fixed position layout is used when the product cannot be moved or only
moved with significant effort and therefore, the transformation process needs to
take place at the location of the product. AII resources for producing the product,
such as equipment and labor must move to the production site. The main
challenges are the scheduling and coordination of all resources. The space on the
site may also constrain the amount of work which can be done simultaneously.
With the fixed position layout, the preferred process type is a project process.
Examples are large ship or airplane production.
I
Staff Material
Q
t
lnformation
Figure 5: Fixed positicn layout
Process or functional layout
For process layouts, also called functional layouts, production machines with
similar functions are grouped together. Process layouts are used for high variety
products where it is not feasible to dedicate facilities to one specific product
group. The advantage is that the product range can easilybe extended, as long as
the resources are sufficient. An important issue is to manage the flow of products.
One disadvantage of process layouts could be a longer transportation time and
higher costs for transportation of products between the groups of machines.
Because it is difficult to predict when a specific product will move to the next
resource group, queuing could also be a problem. In particular, queuing can
prolong the throughput time in production. The connected process types for
process or functional layouts are jobbing and batch production. Component
manufacturers are examples of a process layout.
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Gell layout
A cell layout tries to combine the efficiency of a product layout with the flexibility
of the process layout. A cell layout groups all relevant equipment together to
produce a specific product or group of products (called a product family). The
transportation is faster and cheaper because the ways are shorter between the
machines. Grouping the products into families and using the cell layout will
reduce the product throughput time. A disadvantage could be the higher number
of machines needed. A cell layout is connected to batch and mass process types.
Cell layouts are often used at custom manufacturers.
Product Froduct GroupC
',Product
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Product or line layout
Product layouts, also called line layouts, describe a situation where resources are
arranged in a line where a product runs efficiently through the production. The
line can be automated and people may be assigned to one or more stations. This
layout is used for high volume production of standard products. The product
flows from one station to the next station. A key point is that the station in the
line are balanced, which means the time at each station should be nearly the
same. The advantage can be lower costs and short throughput times. The
disadvantages of this layout are the lack of flexibility compared to process layouts,
and the fact that only one standard product can be produced. Another issue is
that if problems at one station occur (equipment failure or worker illness), the
whole line has to stop. An alternative to the straight line is to use a U-shaped line.
The advantage is that workers can be assigned to more than one work station
without losing time to move to another station. The line layout is connected to
process types like mass and continuous processes. An examples is car assembly.
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UNIV..PFOF. OR" CHRiSTIAN RAM$AUER
DU$TNNL },TAHAGEME]'IT
10
1 lntroductian to operatians managem*nt
1.3 Objectives of operations management

There are different objectives for operations management which depend on the
industry, the competition and the company itself. Some general objectives which
are often mentioned and should be considered are:
o Short lead-times: The time from when a customer orders a product until
the customer receives the Product
o On-time delivery: Customers expect order to be delivered on time

. High utilization of equipment
o Low capital commitment
o High flexibility
o Planning security and acceptable effort for production planning and
control
The objectives above cannot all be met in the same way, because they are partly
contradictory. Therefore, operations management aims to deal with trade-off
decisions and tries to harmonize the competing objectives.
Examples of ways to reduce lead-times are:
o Avoid bottlenecks and variances
o Flow principles in production
o Reduce setup times
o Remove specific processes (elimination)
o Shorten times of processes (compression)
o Operate processes in parallel (concurrency)
One dilemma in operations management is the requirement to shorten the lead-

time and to increase equipment utilization. Operations management needs to
deal with this dilemma and to find the right level for each objective.
Dilemmain
operations
management
Figure $: Operations management djlenrma
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1.4 Key performance indicators in operations management

Key performance indicators are used to assess the process or the output of
production. The key performance indicators in operations management are:
o Quality
t Speed
o Dependability
o Flexibility
o Costs
They are described in further detail in the next sub-chapters.
(}peratien*
:*anagevnent
KPI*
Figure 10: Operations managemeni key perfcrrnance indicators {KPls}
Quality
Quality covers not only the quality of the product, but also the quality of the
process that is needed to produce the product.
In the view of the customer, product quality can be described in different ways.
Each customer will have different needs and requirements and therefore different
quality expectations. Some factors relating to the quality of a product are:
II{ OVATIO}'I AT{ D ITUS?RIAL }iIANAGE ENT

FI H I N
lJNlv.-FR0F. SR. CHRISTIAN RAl,,lSAir€R
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'1 intraduction to op*raticns managen'lent
o Per{ormance
o Features
o Conformance
o Reliability
. Durability
o Aesthetics of a product.
In some markets quality will be connected to superior performance, whereas in

other markets it wilt be connected to the reliability of a product. Therefore,
different companies can focus on different quality aspects to gain a competitive
advantage. For a company it is relevant to understand the quality required by
customers to set their quality strategy. This means understanding which aspects
of quality are required and also to what degree. If the quality is not sufficient for
the customer, the products wilt be seen as product with bad quality and nobody
will buy them. If the quality is too high, customer will not be willing to pay a
higher price. This could be for example additional features which have high costs
to produce, but are not necessary for customers who then do not accept a higher
price.
In the view of operations which focuses on the processes, quality can be seen as
how well production meets the specifications of a product defined by the product
development department. This could be measured with scrap rates, which
measure the proportion of parts and material that have been damaged by
movement or manufacturing and cannot be reused after rework. Another
measure is the defect rate for parts that fail to meet design specifications. Fewer
problems due to poor quality means a more reliable production process and this
leads to reduced costs.
Some methodologies for quality management are:
o Total Quality Management (TQM) is a philosophy that aims for high

quality throughout the whole company. All employees are responsible for
the high quality of the products. Customers define the quality and their
needs must be met. Also, a continuous improvements culture should be in
place.
. Six Sigma Quatrty is a quality improvement initiative to achieve high

quality levels. It aims to reduce costs through high process efficiency, and
therefore increase the profit of a company through lower sales prices and
higher customer satisfaction.
IHNOVATI0II Aff D lt{ OUSTfi|AL MATASEI'iE}|T

F{ U}IIV..PBOF, OR, CHRICTIATI RAI'{$AUER
13
1 lntraduction to cperations management
o Statistical Process Control (sPC) is an operationally oriented

technique for quality improvement. It can be seen as a quality check for
processes rather than for product design and is based on the inherent
variability of processes.
Speed
Speed is described by the time between when a customer orders a product and
the time the customer receives that product. This time is called lead-time. The
lead-time depends on whether a make-to-stock or make-to-order system is in
place. This system depends on the demanded time (DT) of a customer for
receiving a product and on the total throughput time (TPT) needed for producing
and delivering this product.
By using a make-to-stock system, the products are already produced and can be
shipped directly to the customer. Therefore, the lead time is low and customers
receive their products earlier. When using a make-to-order system, the customer
needs to wait until the company has purchased raw materials, produced the
product and delivered the product. Therefore, the lead-time is higher. If speed is
important for customers, a make-to-stock system is often preferred.
Nevertheless, there are also disadvantages of a make-to-stock system. If a
company provides a high number of different variants of a product, it won't be
clear in advance which variants will be ordered by the customers. Therefore, there
is a risk of having obsolete products in inventory. The second disadvantage of
having an inventory are the costs of the inventory. In a make-to-order system the
inventory costs are relatively low. In the end, a company decides if the shorter
lead-time received through make-to-stockjustifies the higher inventory costs and
makes it still possible to deal efficientlywith a high number of variants.
There is also a middle way of using a hybrid make-to-stock and make-to-order

system. This involves separating the value chain through a decoupling point,
where an inventory is held. Semi-finished parts are produced with a make-to-
stock system and the decoupling points are used as a buffer. Downstream a make-
to-order system is applied to enable a high number of variants to be produced.
Therefore, the lead-time is reduced through the make-to-stock system upstream,
the inventory costs are reduced through a semi-finished and not a finished parts
inventory, but still a high number of variants can be produced through the make-
to-order system downstream.
Ifi HOVATION Ail B I il DU$TNNL ilANASE},TE]'IT

FI UNIV.-FBOF, OR" CI{RISTIAI{ RAMSATJ€R 14
Rsw Manufacturing
Distribution Custorner
Material /Assembly
'Buy-t+orde/
"Make-to-ordef
'Assembly-to-order"
"Make-to-stock"
"Shipto-stock"
Decoupling point
frffi Make-to-stock
I Make-to-order
Figure 11: ilecoupling points
Dependability
Dependability refers to the consistent meeting of promised delivery times.

Increased speed will not lead to higher customer satisfaction if the higher speed
cannot be guaranteed constantly. Dependability can be measured by the
percentage of customers receiving a product on time. It can lead to higher
customer satisfaction if the customer can trust in on time delivery for each
product. Dependability can also lead to lower costs because it forces a company
to improve its production processes. Key activities are the operation of planning
and control mechanism to ensure early detection of problems, and the
monitoring of dependability as a key performance indicator.
Flexibility
Flexibility means that a company is able to react to changing customer needs. It
is necessary to provide different variants of products or start to produce a new
product. Flexibility can also be seen as a competitive advantage in certain
markets, especially concerning the trend to more individual products for each
customer. There are different types of flexibility:
o Product flexibility - to be able to react fast to changing customer needs

with new products.
o Mix flexibility - to be able to provide a wide range of products or variants.
x llHp,ytrf ?*l-*j: n,:*ousrn

nL l'! ANAGE rq E Hr 15
1 lnlr*rlur:t.t*n to *pereltions management
a Volume flexibility - to be able to increase or decrease the output of

production due to changing customer demand. It can also be needed for
seasonal changes.
o Delivery flexibility - to react to changing timing for delivery. This would

also mean to be able to change priorities between orders and still deliver
on time.
Flexibility can be measured in terms of range (the amount of change) and in terms
of response (the time for the change).
Product flexibility The range of

product The time to develop a
which the company has product until the new
capabilities to produce. product is produced
(time-to-market).
Mix flexibility The range of products The time to adjust the
which a company can mix of products being
deliver within a given delivered.
time period.
Volume flexibility The total output which The time to change the
the company can achieve total level of output.
for a given product mix.
Delivery flexibility The extent to
which The time to reorganize
delivery dates can be the delivery system for a
changed. new date.
Table '1: Types *f Fiexibility
Flexibility is integrated in the production system. This means flexibility is

measured by the reaction of an existing production system. There is also the
concept of agility. In operations it is called agile production. Agile production
means to proactively prepare for uncertainty and to react to changes in order to
optimize the economic situation of a company by using the entire value chain.
The differences to flexibility are proactive preparation, the usage of the whole
value chain and the focus on profitability. This topic is further discussed in
lectures in the master program.
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If a companyis competing on price it needs to have lower costs than competitors.

Then it will either make more profit, if price is equal to competition, or gain more
market share, if the price is lower. The major categories for costs are:
o Staff
o Facilities
o Material
Costs depend on the volume and variety of output. Increased volume means that
the costs per unit will decrease, because fixed costs can be allocated to a higher
number of units. But this economies of scale effect can also be reduced if there is
too much complexity in production when increasing volume. Variety of output
can also increase complexity and therefore can increase costs. The complexity can
be reduced through design simplifications and standardizations, or by increasing
mix flexibility.
Finally, costs also depend on otherperformance objectives. For example, ahigher
quality produced can increase costs. But in general, improvements in all
performance objectives can lead to a reduction of costs.
1.5 Production theory

Production theory is the study of production by using mathematical correlations,
called production functions. A production function shows the relationship
between the capacity of a production process (physical output) and the input
needed therefor. A given set of inputs can produce different quantities of output
and the production function allows this problem to be expressed in mathematical
terms. In general this is done by describing the relationship between the output
quantities Q and the input quantities xi, (i=1,...,n) as can be seen in the following
equation
Q = f(xr, Xz, ... Xn) Q: Quantity of output

Xtt Xn Input factors (labor, material, capital,..)
A production model is a numerical description of a production process and it is

based on the inputs and outputs of production. There are two main approaches
to operationalize the concept of production functions, which are mathematical
formulas (macroeconomics) and arithmetical models (microeconomics).
MAilAsEt"r ENr
H lllI3_H[f f_T_f* *,|]ot!srnnl 17
1 lntraducti*n tn operations m*nagement
Production models can be classified into different categories and characteristics.

(see Table z).
Category Characteristics
Factor relations Imitational factor relation
Substitutional factor relation
Consideration of time Static production model
D5mamic production model
Consistency of environmental influences Deterministic production model
Stochastic production model
Number of different production/variants One-product production model
More-product production model

Stages ofproduction Single stage production model
Multi stage production model
Table 2: Pr*ductian models
The performance of production can be formulated with an objective function.

Therefore, an objective to be maximized or minimized has to be defined.
Afterwards, other variables are seen as constraints. The most common is the
profit maximization fu nction.
Two kinds of growth in production can be identified These are growth caused by
productivity increases and growth caused by increases in input volume.
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Output
volume
Growth caused by
increased productivity
Growth caused by I
increase of input volume
i
lnput
volume
Figure 12: Grcwth in productians
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F{ UNIV..FNOF, TR. CI{RIgIIAN RAIi,I$AUER
19
2Tasks of operations managernent
2 Tasks of operations management

The tasks of operations management are defined within the production planning
process. The target is to set the day-to-daytasks that run a company's operations
on an ongoing basis. Planning is the systematic search for and setting of targets,
as well as the preparation of tasks and resources, the implementation of which is
necessaryto achieve the objectives (the target state). Goal planning covers, above
all, economic, human and organizational objectives and is defined within the
framework of strategic capacity planning.
Production planning (Figure 13) deals in the broadest sense with all planning
parameters and resources required for the planning and execution of all
production activities of a company. The overall target of production planning is
to minimize production costs per unit.
Production planning process
Production Production
realization control
Production program Production
Procurement
Order
placement
Figure 13: Production planning
The production planning process covers the following main aspects:
o Consideration of the results from sales planning, production quantities for

the planning period are specified (production program planning)
e Determination and procurement of material requirements (QuantiU

planning for procurement and production)
o Planning and determination necessary capacities to realize the

of
production plan. Coordination of order quantities and process times with
available capacities (scheduling and capacity planning)
X INHOIIATION AND lt'l OUSTRIAL UANAGEMENT

UNIV..FNOF. UR. OHRIgTIAN FAI',ISAUER 20
2 Tasks af operations manage ment
The following tasks of operations management are investigated further in this

chapter:
. Sales planning
o Production program planning

o Material requirement planning
o Time and capacity planning

o Realization and control of production
2.1 Sales planning

The target of sales planning is to gain insights about future developments of
products sold and therefore to enable short-, medium- and long term planning in
operations. Sales planning is usuallywithin the responsibility of the marketing or
sales department. However, it is a crucial input factor for operations decisions.
Without information on future demand effective capacity planning in production
is not possible.
Therefore, a basic understanding of forecasting methods is relevant. In general,

two main approaches to forecasting exist, qualitative and quantitative methods.
o Qualitative methods arebased on former experiences, opinions or even
estimations. The collection of such qualitative inputs and a judgement
based on these inputs are necessary to make a prediction. Examples for
qualitative forecasting techniques are e.g. the Delphi method (for expert
assessments) or scenario planning (for tasks with greater uncertainties).
o Quantitative methods can be classified into time series analysis (Figure

14 a) and causal modelling (Figure 14b). Time series analyses are based
on plots of a variable over time (e.g. units sold per year) to predict future
behavior. Whereas causal modelling tries to understand relationships and
the impact of different variables on each other (e.g. the influence of
temperature on ice cream sold) to predict future sales.
il lHNOVATIOI'| Al{O lNOt

UHIV..PROF. OR, CHRI$'f IAN RAI'{SAUEft
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2 Tasks af operations m*nagemeni
demand demand
a) t b)
c
t a
t a I t ri
a aa t t I
a
rl o a r|
*
I I I I
I
a a a
a
t
time variable
{igure 14. Vxemplary eif a tinre*serie$ anaiysis (a) and a causal modei {b)
Forecast models are necessary in industry to support management decision

making. However, the performance of most forecasts is not as good as needed. A
newapproach to forecasting is Big Data and DataAnalytics. Recent developments
enable the analysis of non-causal correlations within a high volume and variety
of different data sets. This approach makes forecasts more accurate and precise
and increases the quality of management decisions.
An instrument to balance customer demand and operational capacity is the sales

& operations planning (S&OP) process. The target is to align the business strategy
and operational planning. The core mechanism is to coordinate the external
perspective (customer demand/marketing or sales) with the internal perspective
(product development and production planning).
The outcome of sales planning is the basis of subsequent production program

determination, material and labor resource decisions as well as for the fixed time-
, capacity- and allocation planning.
lnput Output
l
Experience / Expert opinions Customer demand
Historical sales data Price structure
figure 15; $ales pianning
2.2 Production program planning

Based on sales planning results, the question to answer in detail is which product
types in which quantities are going to be produced in the actual planning horizon
(e.g. next fiscal year). A production program is, therefore, characterized by (r) a
qualitative component (Which types of products), (z) a quantitative component
(How many products) and (g) a time based component (allocation of product
types and quantities within the planning horizon). Information inputs are
H M NOVATION At't D I
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I'l 0USTilIAL ilAl'lAgE I'l E NT
22
2 Tasks cf operations mattagement
furthermore elements of corporate strategy especially in the contest of the

expected demand, expected sales price structures, production costs per unit and
production capacity needs per unit.
lnput Output
Sales planning Product fields
Capacity planning Target unit quantities
Costs per unil Capacity utilization
Figure 1S: Froduction prssram pla*ning
To define the production program, the planning process is separated into three
main problem areas:
o Strategic program planning: Determination of product fields in
principle. These product fields characterize the general operation field of
the company.
o Tactical program planning: Definition of specifics of the individual

product fields. Strategic product fields require consideration of:
o Production program range: Definition of different product groups,

types and variants (differences in e.g. color, quality or dimension).
o Production program depth: Different production steps performed

within a company's operation are fixed. Decisions to be made are
which products or product parts are produced by the company itself
or are rather externally assigned to partner companies ("make-or-
buy" decision).
In Figure 17: Product field an example for the structure of the product field
"shoes" is shown.
Froduct field $hoes
Produet group $ports Men'* shoea Children's shoes
Product type Boots Sneakers
black brown
Variant€
35 36 37
Figure 17; Product fisld
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23
2Ta*k* of operaticns managem*nt
o Operational program planning: Concerning constraints from either,

strategic and tactical considerations, operational program planning has
the task to determine the detailed production plan ("Master production
schedule") for the actual (short-term) time horizon (e.g. for one month).
The operational program defines which products, in which quantities are
produced in a certain timeframe.
Further, in the context of production program planning the following two major
cases are distinguished:
o Customer oriented production program: The production program

corresponds to the actual orders received. Therefore, uncertainty
concerning the real sales volume does not exist.
o Market oriented production program: In this case, program

planning is based on forecasts and therefore on assumptions. To deal with
the related uncertainty the sales volume should be relatively constant (to
improve the accuracy of the forecasts), a high grade of standardization
exists within the within the production field. Market oriented production
is appropriate when the customer is sensitive to delivery times.
In reality, a mixture of both cases is usual. This means companies very often offer
standardized products as well as individual (order specific) products to their
customers. In both cases the production program planning must consider
existing constraints: capacity and demand.
To operate an organization at its maximum processing capacity effective
production program planning, and production planning in general, is crucial. The
task for short- and medium term planning (tactical and operational aspects) is to
aggregate demand and capacity for overall, broad management decisions
concerning operations. In this context, "aggregate" means to bundle different
products together in order to get a broad view of demand and capacity. This
approach might need some degree of approximation. Nevertheless, as a first step
this is necessary to get expected data in terms of profit and costs of different
production program variants.
A production program is ultimately assessed by the potential success for the

company. The different production program variants are evaluated and
compared. As a simplified picture of reality, models are used to determine the
best outcome for the company. In general, the target function to be maximized is
the profit contribution.
lH HOVATION At{ D lil OUSTilIAL MANAGEIII El,lT

F( ulilv.-FnoF. 0R" tgRtsTtAil RAMSAUfR 24
Profit contribution
= Eproductr(pri'ce per unit - variable costs per unit)
x planned product untts per time horizon
In Figure 18 the determination of the profit-optimized production program with

two variables (products) is shown as an example.
Product 2
Capacity limit
product 1
Constrainl 1
Constraint 2 Capacity limit

product 2
Product 1
f,igure 18: f;xemplary aptinrization of a production prflglam
The result of the production program delivers the planned quantities of the
different products and the production steps to be processed for a specific period.
2.3 Materials requirements planning

To get from the production program to the actual production on the shopfloor,l
end products must be split-up into assemblies and components. Based on the bill
of materials required materials are identified. The bill of materials defines the
number of components (each part that is externally procured) as well as
assemblies (components that are assembled in production) to produce one unit
of a product.
II'INOVA1OX AHD IH TTUSTNNL HAI{ASEMEilT 25

F|l IJNIV.-FROF, [R. CHRIS1IAN EAM$AUER
2 Tasks of clperations m*:ragement
o A product is a workable object made by production; It consists of a number

of parts and / or groups and is the final production result (DIN r99, part
z)
o An assembly is an object consisting of two or more parts and/or assemblies

of lower order (DIN tgg,parlz)
o A single component or part is an object r,vhich cannot be taken apart

without destruction (DIN r99, part z)
o The raw material is the starting material for a component or single part
To illustrate the bill of materials a so-called "Gozintograph" can be drawn (see

Figure r9).
0. Production stage Product A
1. Production stage
2. Production stage P5 P6 P7
3. Production stage P1 P2 P3 P4
P....Part A....Assembly
figure 19: Gorintograph
Once the required outcome of the production program is known, the materials
for operations can be determined. The outcome of the material requirement
planning is the optimal material supply for each production process concerning
timing, quality and cost efficiency.
lnput Output
Production programme Material supply
Product parts list - On time

- ln good quality
- Cost efficient
Yigure 20: Material requircment planning
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2Ta*k* of aperations manag*m*nt
2.3.1 Materials
In general, three classes of materials exist (see Figure zr).
Classes of material
Operating
Material Auxiliary materials
materials
Raw
Parts
material
Tigure 21: Materis! classes
o Material is directly required to manufacture a component, an assembly

group or product. Material can be either in unchanged or modified form.
a
Material may be raw material which is further processed; or it may be a
semi-finished or purchased part of a certain type and dimension.
r Auxiliary materials are only required indirectly for the production of

components, an assembly group or a product. Auxiliary materials are only
present in products in insignificant quantities (e.g. adhesives, welding
filler).
. Operating materials are required to maintain operations (utilization of
production equipment). Operating materials do not merge with the
product itself. (e.g. electrical energy, water, lubricants).
The material requirement characterizes the type and quantity of material

required for the production of products or the supply of the sales market. In
general, three different types of demand are distinguished (see Figure 22):
o The primary requirement is the need for products and parts which
leave a company in a viable state. It is also called "market demand".
o Dependent requirement is the demand for materials (assemblies,

components, raw material) required for the production of primary
requirements.
o Tertiary requirement is the need for auxiliary materials to produce the
primary demand.
X lHNOVATl0ll At'l D lH nUSTA|AL

UNIV.-Fn0F. SR. CHRISTIAII FAI'4SAUER
illAilAGEltlEl{T It
?^ T a*k* tsl *ys*r aiusr:* n:anage ment
Requirements of Requirements of Requirements for

products in a salable parts and raw auxiliary and
state (market material needed for operating materials
demand) fulfilling the market
demand
Period-related Gross requirements

requirements of less the actual
primary-, secondary- available stock
and tefiiary material
requirement
figure 2?: li"4a{*rial requiremenls
In addition, taking inventories into account, a distinction is made between:

o Gross requirementr Period-related requirement for material without
consideration of inventories
o Net requirement: This is the difference between gross supply and the
available stock at a certain date
2.3.2 lnventory dilemma

Inventories are discussed frequently in operations management. In principle,
inventories serve as a security policy in uncertain environments and enable
companies to react quicker to customer demand fluctuations. However, they are
costly, tyrng up a signirlcant amount of working capital and need a lot of space in
operations. The, in many cases, necessity of inventories is based on the non-
conformity of supply and demand.
Whenever more than one item is on stock, some of the items are more important
for the operation. The most important items will have a very high usage rate and
if not on stock, would cause delivery problems. Other items probably have a high
value and a large safety stock would be expensive. Therefore, a common way to
t( !HHOVATIO}T AF{O Iil*USTRIAL MAruAGFMEI{T

UNIV..FFOF. DR" CHRI$TIAN RAM$AIJFR
2A
2Task* *f operations management
assess different stock items is to classify them by the usage value (usage rate
multiplied by the value). Items with a high usage value are controlled carefully,
whereas low usage value items do not need to be so rigorously controlled. One
method to classify items according to their usage rate is the so-called "Pareto lau/'
or the "8of zo rule'. The phenomena behind the Pareto law is that typically zo %
of all items are responsible for Bo % of an operations sales volume (see Figure
23).
o Class A items are those zo %" with a high usage value that accounts for
around Bo % of the total operation usage value.
o Class B items are medium usage value items (typically the next go %)
which account for around to % of the total stock usage value.
o Class C items are low usage value items (the remaining 5o % of all items)
responsible for only about to %" the total usage value.
Value share [%]
{{ls
ffi
Technological products
ffi
Manufacturing industry
tl
\Mrolesale
#|
Retail
a$
_e_l
e$ & ss ss {fif*
Quantity share [%]
Figure 23:ABC Analysis
As mentioned above, inventories serve to smoothen the discrepancy between

demand and supply. Thus, inventory management and especially the question
il IHHOI,ATIOId Al{D I}I OUSTNHL UAI{AGEMEI{T

UNIV..FPI]F. TR. CTIRI$TIAN RAfi SAI,ER
29
2Ta*ks of *peraiions managern*nt
"when to place which order" is important. First, unpredictability of demand and

necessary order time complicate the material supply. Second, interrelated
variables like order costs, order frequency or item class (A, B, C) are challenges
in inventory management. Therefore, different approaches to identifying an
optimal order size and order placement exist and are part of in-depth master
courses.
To support managers in operations

material requirements systems (MRP-
Systems) exist. These systems help to make volume and timing calculations.
However, the planning in operations expands beyond "materials" and comprises
amongst others time-, capacity -, and allocation planning.
2.4 Time- and capacity planning

The time-, and capacity planning of work orders consists of the definition of start
and end dates for the execution of tasks in operations considering the given
constraint of available capacities. The target is to perform the overall task (meet
the customer demand) within the given time period.
lnput Output
l
Production programme Start- and End dates for all
all work orders
Material req uirements planning
Figure 24: Time- anci capacity planning
2.4.1 Time planning

Time planning or scheduling is the process in which the temporal assignment of
work tasks to be performed is planned. The result of the scheduling is the order-
related and production facility related production plan. The determination of
manufacturing dates concerning assemblies, production of parts and products is
made taking into account the material and capacity requirements for specified
order quantities and delivery dates. The production plan is to be seen as the
"target state" for operators and the production facility. The actual state varies in
many cases because of disturbances.
Main drivers for scheduling are:

. Tylre, quantity, dates and quality of the orders
. Staff and machine capacities
o Planned throughput times
IHNOVATION AH3 IN CIUSTRIAL ]ilANAgEi'TET'IT

F{ UNIV..FFOF. OR- Ci{RISTIAII IAMSATER
30
2 Tasks of aperations manag*ment
The most important disturbances which influence the scheduling are:
r Changes within the production program and orders
o Unplanned scrap and rework
. Missing staff (e.g. illness) or machine breakdowns

o Inaccuracy of the planning method
The dependencies of scheduling are shor,vn in Figure 25.
Sales planning
Production program
Feedback
year
t
t
Program allocation
Middle-term scheduling - - _ -Bp-qg_rr-rsnei-Ylir.s -*
Feedback
Order dispatching
Short-term scheduling
Feedback
Change period: 1 week
(e.9. daily, per order)
Material supply /
uction schedule
figure 2$: $cheduling dependencies
2.4.2 Gapacity planning

The tasks of capacity planning are (r) determination of actual available capacity,
(z) capacity requirements planning and (g) capacity coordination.
o Actual available capacity: Defines the actual available capacity to

process work orders in terms of quality and quantity.A distinction is being
made on the one hand between theoretical and effective capacity and on
the other hand between:
o single capacity (employees or other operating means)
o group capacity (cost centre, department, division...)
o overall capacity (production)
II{ HOVATION AH O I il NUSTRIAL T-IAI{AOEIT E}.IT

FI UNlv. -PnoF. 0R. CHRISf lAil RAI'i$AtJgR
31
2 Tasks rs'f *pwratians management
Ifuowledge of the actual available capacity enables the planning of the

capacity needed concerning quality and quantity of employees and
operating means for medium- and long-term periods.
a Capacity requirements planning: Capacity requirements are aligned

to the qualitative and quantitative requirements of single orders, which are
bundled to production plans. Further, it is aligned to the middle- and long-
term production program.
a Capacity planning: The objective of capacity planning is to ensure a
permanent matching of capacity requirements to the actual available
capacity. Thus, the capacity alignment ensures (optimal) capacity
utilization. Capacity alignment depends on the time horizon.
o Long- and medium-term discrepancies between available capacity
and capacity requirements result in an alignment of operating
means (investment/capacity reduction), in hiring-, or in reduction
of employees.
o Short-term capacity adjustment focuses especially on balancing

with start-, end-, or operating times of orders or relocation of
production steps to different operating means. Short-term
adjustments can only be achieved by increasing or reducing the
available work time (overtime, extra shift, idle time).
lllHovATloN At't 0 I il Du$TnnL ],iANAGEl,tEltT

FI UNIV..PFOF. OR. CHRISTIAN R{M$AUER 32
?- Task* rsl *6s*riet.its*$, ntaznag*nt&rf:
Capacify a{ignment Capacrty ad}uslm**t

Alignment of Adjustment of
available capacity to capacity
capacity requirements to
requirements available capacity
-Expand operating Time-based Technological

means adjustment adjustment
-New employees
-Leasing of employees
-Overlapping -Marketing
-Overtime
-Make-to-stock -Rationalization
-short-time work
-Contract -Shift production
-Fire employees
Manufacturing
FiEtre 26: Capacity 5.rii:nning
Overall equipment effectiveness
As mentioned before, there is a difference between effective and theoretical

capacity. Due to various reasons, the theoretical capacity cannot always be
achieved in practice (e.g. maintenance). The remaining capacity is called the
effective capacity. Few standardized methods to measure effective capacity exist
in industry. However, the idea of the overall equipment efficiency (Onf; is often
pointed out as a useful way of measuring capacity effectiveness. The OEE is a
performance indicator of the effectiveness of operations equipment. It is based
on (r.) the available operating time, (z) the produced quality and (g) the speed or
the throughput rate. To increase the effective capacity an operating mean has to
achieve high levels of performance within all of these three dimensions.
I${ruAVATI$$ AT'iN I il IXJSTNIAL MANAGEM EI.IT

FT utfi v.-FR0F. gR. tHRlslrAil RAM$AU€R
33
Not worked
nplanned)
(u
Availability rate
Se!up and
Total operatrfig ttm€ total aperetirtg thtrc
changeovers
Ioetling tinv
Breakdown
failure
Equipment
"idling"
Pe]formance rate
Net operating trme
net.rperali:ng tine
r totdl opetattn.q tinte
Slow running
equipment
Quality rate
Valualrle operattng Quality
trme losses vuhtab le op er ot in g1 timt:
net operati:nll tinv
Figure 27: Overall equipmeni elfectiveness
}EE = avtalabiltty rate x perf ormance rate * qua,Ii.ty rqte

The OEE therefore represents the valuable operating time as a percentage of the
theoretical capacity.
2.4.3 Mastering time- and capacity planning

To manage demand, capacity and the information needed for them and gained
from operations under consideration of constraints such as actual capacity or
delivery dates so-called "enterprise resource planning (ERP)" systems are in use.
ERP is a company-wide information system that comprises information from
relevant functions needed for planning and further, for controlling, operational
activities. The most important advantage is the transparency of the ERP database.
t( lllHOVATI$N AHO I il OU$TR|AL l-lAHAgEt l El.lT

UNIV..FROF. UR. CHRISTIAN FAM$AUER
34
2Tasks of cperaiions managem*nt
Senior management and Stakeholders
lRtegr,ated
$uppliers Customers
dabb€se
Employees
Figur*, ?8: llnterprise resource pianning
ERP systems are a further development of MRP systems that have been in use
since the r97os to support material requirements planning. Due to the high level
of integration of company functions, ERP systems have the potential to
significantly improve the performance of many organizations. Well-knor,rn
companies offering ERP systems are e.g. SAP and Oracle.
2.5 Realization and control of production

Planning and control is in many cases not separable in theory nor in practice. In
general, planning is the formalization of what might happen in the future. These
plans are based on e.g. forecasts and assumptions and depend on manyvariables
as described in previous chapters. Control on the other hand is the process of
adjusting plans to changes in these variables. The boundaries between planning
and control change along the time horizon (see Figure 2g).
I}IHSVATISN AHD INDU$TNNI MANACEHEruT 35

FT U}IIV..FEOF. SR- C1{RI$TIAN RAI.($AUFR
2Ta*k* *f aperation.* rcanag*ment
Significance of planning and control
a Long-term planning and control

(u
o . Uses aggregated demand
forecasts
a
-c . Determines resources in
c aggregated form
o
. Objectives set in largely
financialterms
a Medium-term planning
-c . Uses partially disaggregated
o demand forecasts
EE
o\
.Na
. Determines resources
Ll<
Oo)
EO
' Objectives set in both financial
and operations terms
oE
c\ (n
,= Short term planning and
F> (II
o control
. Uses totally disaggregated
forecasts or actual demand
a Control .
o Makes interventions to
! resources to correct deviations
a from plan
L
f
o . Ad hoc consideration of
I operations objectives
FiEure ?-.9'. Planning and conlrol over time
In this chapter the focus is on short-term control. The target is to (r) trigger, (z)
monitor (actual situation) and (g) secure the task execution with regard to
quantity, deadlines, quality, costs and working conditions (see Figure 3o).
IHHOVATION AH D H DU$TNNL HAT.IAGFFIE}IT

F{ I
UNIV.-F8OF. OR. CHRISTIAN RAI'{SAIJ{R Jb
2 Task* of operations management
Define production program and work orders

E
o
Determine material and capacity requirements $
L
(U
o-
Provide material and capacity q)
L
o-
L
Trigger Scheduling and capacity planning o
EL
Create work documents
o
Allocate material and capacity
Production Execute work distibution

control
o
Measure actual data #L
co
Msnitcr o
Comparing actual- and target data g
o
o
Evaluate actualltarget vari ances o-
o
E
a
ldentify failure reason
Seeure
lnterfere the production process
Cause change of plans
Figur* 30: Froduction csntrol
Securing the task execution involves reacting in the form of (t) interfering by
adapting the actual state to the target state and (z) adapting the plan by updating
the target state with actual information. Thus, a closed control loop results.
Plan
Secure production Target production
considering a change quantity output
of plan due to a
actualJtarget
variances
Monitor variances of actual- and
target production quantities
Trigger Secure production

material considering an actual
supply interferences due to a
actual-/target variances
Manufacturing and Assembly Actual production

quantity output
Single parts
Material supply (execution) Measure actual
production
quantity output
Material derectxf\Xraohine failure
Figure 31: Froducticn control ioop
x 1lixr_Hlf_ll*ff Rj|:s$sranl
ilANAGE]tEr'rr JI
2T*sks of op*raiions management
2.5.1 Trigger and monitor production

Triggering and monitoring of production processes comprise the following
aspects:
o Provision of materials, work documents, personnel and equipment at the

workplace. The provision can be made according to a push-, a pull- or a
combined system.
o Work distribution: updating the planned order quantities as well as the

order deadlines and reconciling with the current capacity load of
production, that means to relocate orders. Subsequently trigger (release)
the production orders by forwarding the work documents.
. Order monitoring: Recording of faults as well as all feedback data from

production. Monitoring of quantities, quality and initial and final dates of
the production orders. Subsequently, this data is used to update and
monitor the customer orders or production programs.
o Production data acquisition / machine data acquisition: "Operation data"
means all the actual data generated during the production processes. It
comprises mainly data that describes the state of the operation and the
order processing associated with the process of production. This data
covers the areas of design, production planning, part production,
assembly, warehousing and quality management. The most important
types of production data are explained in Table .
Production output quantity, scheduling, delivery dates
Presence/Absence of employees, allocation of worker and work order,

time recording
Operating time, downtimes, downtime reasons, resource capacities
Usage and inventory of raw-, auxiliary- and operating materials, type

and condition of assemblies, single parts and products on stock
e.g. temperature, pressure or speed, quality statement (of the
manufacturing process)
Scrap quantity, reasons for scrap, analytical values
T*ble 3: Types of productian data
t( IHHCVATIOI'I AFI O I f'I

uNtv.-pnoF. 0R. cfiRigTtAil RAi'{$AugR
gUSTnlAL UANAGEH EllT
3B
2 Taeks *f *p*ralrans managernent
PHRS*f'CA[- el#Yffi$ Af\* * SKtTCh€ffiS
lt{t{CVATISN Al'l S lH f USTfiIAL lilANAgEMEilT

a( uNtv.^pnor. 0R. cHRisrrAN ftAr,4sAUER 3g
0 Relerences
References
Abele E., Meyer T., Ndher U., Strube G., Sykes R. (2008): Global Production.
A handbook for strategy and implementation.
Gorsten H., G6ssinger R. (2012): Produktionswirtschaft. EinfUrhung in das
industrielle Produtkionsmangement
Dyckhoff H. (2006): Produktionstheorie GrundzUge industrieller
P rodzu ktionswi rtschaft.
Greasley A. (2009): Operations Management.
Ramsauer et al. (20171 Erfolgsfaktor Agilitiit - Chancen fUr Unternehmen in
einem volatilen Marktumfeld.
Slack N.; Lewis M. (2015): Operations Strategy (4th edition)
Slack, N., Ghambers S., and Johnston R (2010): Operations Management

(6a. Ed.)
Voigt K.l. (2012): ndustrielles Management. lndustriebetriebslehre aus
I
prozessorientierter Sicht.
Wohinz (2003): lndustrielles Management - Das Grazer Modell, Wien Graz,
Neuer Wissenschaftlicher Verlag.
Zdptel G. (2000) : Strateg isches P rod u ktionsma n age ment.
Zdptel G. (2000): Taktisches Produktionsmanagement.
It{ NOVATIOI'I AH D I H OU$TnnL F,tAt{AgE M EilT 4*

FT UNIV..PROF, OR. CHRISTIAN FAMSAU*R
INSTITUTI OF
lNl'l0VATION
41,10 lH IIUSTRIAL
].{AHAG EM T ilT
lload sf ln*titr*t*
Christian Ramsauer
Univ.-Prof. 0ipl.-lng. *r.t*chn
Graz Universlty of Tachnofogy

lnstitut* of lnnovation
and lndustrial Management
Kopernikusgasse ?4/li
8010 Graz, Austria
Phone +433168737291
Fax +433168737V*1
F-tVlail iim@tugraz.at
Web iim.tugraz.a{
nvH 0800 1833

|.Jtn AT{J 57477 92V

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TU

X INNOVATION AND INDUSTRIAL MANAGEMENT

Phone +43 316 8737291

DVR 0800 1833

0rsel6 rOe url-NlM

HSnVSTUVH hlvll$lHHS'NH33l'Ufl '*Nl-'ldlfl 'J$ud-'nlNn

' .-\;:-,. .,, , l'

W;trI^-, CHRISTIAN RAMSAUER

Courses within the topic of Innovation Management:

o Product Innovation Project

Courses within the topic of Industrial Management:

Courses within tle topic of Social Economics:

*Lectures offered in German

o Which products are we going to develop in order to serve our cus-

Targets of this lecture are:

Providing the students with basic knowledge of the value creation

2 lndustrial management as prerequisite of corporate productivity......' 4

3 Historical development of industry 9

4 Economic importance of industry........... ..'........... 13

5 Delimitation of industrial management in the context of economic

1 Innovation as the key to corporate survival and

Innovation is an essential means by which organizations survive and thrive.l

o StrateSy of overall cost leadership

'Dodgson et al. zor4, p. 3

IH HCVATICIN A}IO H DI.ISTNNL ilAT.TAGEME}IT

Figure 1: Three generic strategies companies can pursues

Figure 2: Most innovative companies in 20166

2 lndustrial management as prerequisite of corporate

z MacFarland zo13, http://www.huffingtonpost.com/scott-macfarland/why-innovation-

t{ I}INOVATION AilO OUSTN$L MAHA€E}II EilT

Figure 3: Diffcrentiation belween workshops and industrial companies

lndustrial lndustrial $ervice ,pure"

Figure 4: Differentiaiion between industrial and service ccmpanies

2.1 Terms and definitions

An industry is characterized by the commercial production of goods within a

il il O1iATIO ]'l AH D I t{ D iISTR IAL },IAHACE t't E l{T ,i

An industrial company is a technical, social, economic and environment-

Production company Households

Provider of tangible Provider of services

Agricultural Workshop Trading lnsurance Transportation

Figure 5: lndustrial ccmpanics as economic entities

Management means the coordination of activities within a company aimed at

Malik defines three dimensions of management: the functional dimension which

2.2 Functions in industrial management

IHHOVATIOI{ AH N IN OU$TNNL ]4ANAGEI{EHT

o Development and initiation of change processes

Figure 6: Fun*ticns *f industrial managementlc

Figur* 7: *ilttrwa in *;:eralir:r:s rnanag*menl

Productivity is one of the most commonly used performance indicators in

h{ ltr$p_y,*f g#_*ff n j*Br.rsrn nt $AruAGF ilr M E

Economic efficiency assesses the generated performance on a monetary basis.

Profitabi,litv = capital Tofit

Profitability is calculated as the ratio between the profit of a certain financial

In economic sciences liquidity expresses the ability of an entity to meet its

3 Historical development of industry

Of course, such revolutions always have an impact on society. Employment in

industrialization. There was child labor; four-year-olds worked hard in the

The second Industrial Revolution is often described as an organization driven

Figure 6: Funticns f industrial managementlc

Figur* 7: ilttrwa in ;:eralir:r:s rnanag*menl

h{ ltr$p_y,f g#_ff n j*Br.rsrn nt $AruAGF ilr M E

Li** +r ?'ifrSt i i:'sghs# .{ Shsrs 0 Ctt&ils

s**uslos n:r;ou$ff jo lxslu#J oql rll truslilsfreuetu lsli;$npu, ,o llfiltr;l*lllsfl S