Innovation Methodology - Module 4

Fourth Module of Innovation Process: Launching Innovations

In the previous three modules, we talked about how one can become more innovative, how to handle market dynamics and technological changes and how innovation can be systematized to better serve the organizations or persons. This final module of innovation will focus on how the final step of launching innovation in the marketplace should be handled. Most companies focus on incremental changes over radical innovations. “Minor innovations make up 85% to 90% of companies’ development portfolios, on average, but they rarely generate the growth companies seek.”[1] (Page 3) To the determent of the promises radical innovation offers, “From 1990 to 2004 the percentage of major innovations in development portfolios dropped from 20.4 to 11.5-even as the number of growth initiatives rose. The result is internal traffic jams of safe, incremental innovations that delay all projects, stress organizations, and fail to achieve revenue goals.”[2] (Page 3) A study showed that, “only 14% of new-product launches were substantial innovations, but they accounted for 61% of all profit from innovations among the companies examined.”[3] (Page 3) Companies should pursue projects “that push the firm into adjacent markets or novel technologies and can generate the profits needed to close the gap between revenue forecasts and growth goals.”[4] (Page 3)

In the case studies I have read, TiVo and Herman Miller did a great job in launching their innovative products that satisfied market needs. TiVo introduced a product, which changed how people watch television. They studied the market and conducted focus groups to understand their market. After the product trial, “56 percent of participants indicated that they would definitely or most likely buy TiVo.”[5] (Page 4) TiVo’s management also understood what it took for a consumer to buy the product and how the market is divided. After conducting the research, conclusion was drawn that consumers “…relied heavily upon sales people, magazine articles, and word-of-mouth from family, friends and co-workers when making their selection.” [6](Page 4) Further focus groups proved that “…25 percent indicated that they would definitely or most likely buy TiVo.”[7] (Page 4) Herman Miller divided their consumers into four tiers and understood what each sector desired. All stages of the process, resources and support were examined to serve the consumer across the different realms.

Although the risk of failure increases as new innovations are pursued, being totally risk-averse will be detrimental to future growth of a company. “The solution is to pursue a disciplined, systematic process that will distribute your innovations more evenly across the spectrum of risk.”[8] (Page 3) Using two very helpful tools can break down this tall order: the risk matrix and the R-W-W screen. The first allows the user to graphically review risk “across an entire innovation portfolio.” [9] (Page 3) The second tool, R-W-W “can be used to evaluate individual projects.”[10] (Page 3)

“The less familiar the intended market (x axis) and the product or technology (y axis), the higher the risk.”[11] (Page 4) Channeling new markets with innovative products or technologies presents risks that can be determined by a few factors: target market behavior compared to current customers, brand relevance, and “how applicable its technology capabilities are to the new product.”[12] (Page 4) A competent management team will access all aspect of the risk; evaluate if the new product/technology fits the brand expectation from the customers point of view. Does the product or technology delivery timeline coincide with what customers are expecting? Is the product or technology vastly different than what customers expect? For example, the fast food company McDonald’s, attempted to add pizza to their existing menu but failed. This was due to customer expectations and the increased product delivery time. Quick service, coupled with standardized burgers did not accompany pizza well; the failure to deliver pizza less than one minute left was not favored by the market. To manage your project better than the example mentioned above, consider asking the following after the risk matrix is completed: are you able to manage the project(s) well? And, is “the distribution of Big I and little i innovations lopsided?”[13] (Page 4) (Big I innovation refers to radical innovations as little i innovations refers to ambidextrous innovations). The danger is to have a lopsided mix favoring incremental innovations. In most companies, majority of the R&D budget is drained by incremental innovation, which allows for steady sales and meeting short-term goals but ignoring the crucial long-term health of the company. The use of risk matrix gives a quick view of product portfolio but R-W-W screen provides “a simple but powerful tool built on a series of questions about the innovation concept or product, its potential market and the company’s capabilities and competition.”[14] (Page 4) The tool is not a magic bullet to kill bad innovations but it allows the user to see the “expose[d] faulty assumptions, gaps in knowledge, and potential sources of risk, and to ensure that every avenue for improvement has been explored.”[15] (Page 4)

The R-W-W screen model forces the development team and management to ask some key questions: “Is the market real? Is the product real? Can the product be competitive? Can our company be competitive? Will the product be profitable at an acceptable risk? Does launching the product make strategic sense?”[16] (Page 7) For most companies, a no answer to first five questions would allow for discontinue of the project but many overlook a no answer to ‘Does launching the product make strategic sense?’ It is my belief that a company should follow its strategic goals, if the product has strong support/promise, company’s strategic goals should be re-evaluated or altered. A good example of this would be Apple’s reach into the iPod and iPhone markets. To align Apple’s future aspiration, the company changed its strategic goals and even changed its name to Apple Inc from Apple Computers.

Let’s address the reasons for asking the above key questions. First, is the market real? “The robustness of a market is almost always less certain than the technological ability to make something.”[17] (Page 7) One of the key concepts of the risk matrix model states that, “product failure becomes greater when the market is unfamiliar to the company than when the product or technology is unfamiliar.”[18] (Page 7) A study by consumer product company Procter & Gamble found that 70% of product failures happen when the market is not correctly assessed and understood. It is always better to understand the market instead of doing costly technology pushes. This leads to my second point on why market should be well understood. Technology pushes can be costly and be detrimental to a company’s image and bottom line. It is important that problem solving focus should be on what “problems should be solved or what customer desires need to be satisfied.”[19] (Page 7) In the “Marketsoft” case study, Greg Erman followed the right steps to determine which problem needs to be solved while keeping in mind is there will be market for his future product. Erman conducted “twelve in-depth customer interviews to validate the product concept.”[20] (Page 5) The next goal is to ask: Is the market real? If the answer is yes, these four conditions should be satisfied: “The proposed product will clearly meet a need or solve a problem better than available alternatives; customers are able to buy it; the potential market is big enough to be worth pursuing; and customers are willing to buy the product.”[21] (Page 9) In the Marketsoft case study, the company used Language Processing (LP) Method to understand information from potential customer interviews. To make the process standard, the company divided the process into three steps: preparing the teamwork environment, create the physical environment to encourage teamwork. Making uniform quality language, as different people use different language styles, all communication is unified. Lastly, the data is structured from abstract to high levels. (a) Product desire can be assed by “observational, ethnographic [research] and other tools to explore customers’ behavior, desires, motivations, and frustrations.”[22] (Page 9) After this, (b) determine if consumers can buy it by studying barriers that might limit their abilities. Next ask, (c) is the market size adequate? If the market is too small, the product should not be produced. After all of this, the critical question is, (d) will the customer actually buy the product? Study their barrier to purchase, competitive products, substitutes, value proposition, cost, etc. The consumers might not be willing to give up the familiarity of the existing product thus refusing to purchase the new product. These are only some examples of variables to assess but the important point being that all aspects must be reviewed and discussed.

Can the product be competitive? Before the development starts, (a) ask if the product concept is clear. It’s crucial that everyone understands what is being developed. “As the project progresses and the team becomes immersed in market realities, the requirements should be clarified. This entails not only nailing down technical specifications but also evaluating the concept’s legal, social, and environmental acceptability.”[23] (Page 10) Once all of this is determined, (b) find if the product can be made. There are some key questions to evaluate: How will the product be made? Does it require new technology or can existing technology and materials can be used? Will it be profitable? Can it be produced cost-effectively and delivered without a loss? Will it meet consumer friendly price point? Will the technology/materials used create a barrier to entry for competitors or can they easily create the same product? There might be a market for it and the consumers might be willing to buy it, but if the product is a money loser, it doesn’t warrant its product. During the various stages of development, the product evolves. “Trade-offs are made in performance attributes; unforeseen technical, manufacturing, or systems problems arise; and features are modified.”[24] (Page 10) With each trade, the original concept erodes and the leftover product might fall short of original intentions. The inevitable erosion of original concept must be monitored as it might lead to a defunct final product.

Can we win? Can we defend the castle? Odds are that if there is an opportunity, you’re not the only one trying to utilize it. The establish market players will either copy your innovative product or create something even better. Three reasons for product failures are: ‘new product didn’t achieve its market-share goals, prices drop much faster than expected and market was small, or grew more slowly than expected.’[25] (Page 10-11) Keeping these in mind, I will discuss what managers should do to test product’s competitiveness. (a) Does the product have a competitive advantage? Research to find if the utility provided by the product is unique or can it be fulfilled by other offerings in the marketplace. Seek possible cheap alternatives and see “whether the product offers additional tangible advantages- such as lifetime cost savings, greater safety, higher quality, and lower maintenance or support needs- or intangible benefits, such as greater social acceptability….and the promise of reduced risk that is implicit in a trusted brand name.”[26] (Page 11) (b) If you do have the advantage, can the advantage be sustained? Although patent is the first line of defense, there are many other tactics one can use to lock in advantages. If your product is knowledge based, what insurances do you have that people with the knowledge wouldn’t leave and join/become competitors? “Can the company lock up scarce resources or enter into exclusive supply contracts?”[27] (Page 11) Although all of these tactics might seem harsh, seeking legal means to preserve ones competitive advantage is necessary for the product and company to be relevant in the marketplace. In certain industries, “products [are] relatively easy for…competitors to copy…but having an innovative business-model design isn’t something that’s so easy to replicate. The more layers there are to your competitive advantage, the better your chances of maintaining it.”[28] (Page 5) After employing all possible strategies to shore up your advantage, you must still question (c) how will competitors respond to your product. A competitor might never be able to challenge your product but management must have a strategy in place to deal with this threat. It is important to have a strategy in place to bare the effects of price drops.

If all the above are in place, a manager must now ask, can our company be competitive? “The team must determine whether or not the company’s resources, management, and market insight are better than those of the competition.”[29] (Page 11) If the answer is not yes to all, the company will have a difficult time holding back the competition and remaining competitive. (a) Superior resources refer to “superior engineering, service delivery, logistics, or brand equity can give a new product an edge by better meeting customers’ expectations.”[30] (Page 11) An old Indian proverb states, ‘only stretch your feet as far as your blanket can cover them’. A great product, accepting market, competition at bay but if you do not have enough resources to cover consumer expectations; you will be left in the cold. A good example is Herman Miller’s restructuring of its resources. The company determined that it is vitally important to “share innovative business practices, which necessitated moving human resources, product development, production resources, and ideas across the organization.”[31] (Page 6)(b) Appropriate management talent and support is needed for the project. “Success requires a passionate cheerleader who will energize the team, sell the vision to senior management, and overcome skepticism or adversity along the way.”[32] (Page 12) Although there must be a shared vision and passion, there must be room for constructive criticism so ideas can be refined. (c) Going back to importance of the market, a manager must ask ‘Can we understand and respond to the market?’ There are many methods to seek answers. Best way is to “repeatedly [seek] the feedback of potential customers to refine concepts, prototypes, and pricing ensures that products won’t have to be recycled through the development process to fix deficiencies.”[33] (Page 12) The goal is to understand the pricing point earlier in the process and adjusting the price to make it market friendly. It is safe to say, “As customer size increase[s], typically so [do] the volume sold, product complexity, product price, and length of time between order placement and order fulfillment.”[34] (Page 10) The processes and controls in place should be flexible enough to effectively take on the challenges as the market forces.

Being in-tune with the market at all stages of development process can help the product become a success upon launch. But we must still ask, ‘is it worth doing?’ (a) Will the product produce revenue or are the costs too great? If the forecast lacks profit, the product should be discontinued. Historically financial projects have failed to accurately predict launch financial performance. To gain a better perspective, management “should depend on rigorous answers to the prior questions in the screen for their conclusions about profitability.”[35] (Page 12) (b) Next, it is important to understand the risks: “How will small changes in the price, market share, and launch timing affect cash flows and breakeven points?”[36] (Page 12-13) The smallest change in any particular number can have an enormous impact on the financials, while over-looking any potential threats or competitors can be harmful. The company Herman Miller uses Economic Value Added (EVA) tool to drive innovative idea decision-making using financials. The leadership team used this tool to better distribute and allocate resources across the organization. “To make business decisions, projected impact on sales and cost of capital were evaluated, and those projects that resulted in a positive EVA evaluation would be then be accepted.”[37] (Page 5) Clear guidelines help employees clearly understand the idea evaluation process. EVA also spread business literacy across the organization and helped in performance evaluation.

As stated earlier, companies take on products without clearly evaluating how the product fits into over all corporate strategy. A good manager must ask, ‘does launching the product make strategic sense?’ The product can be a blockbuster product but it might cause harm to other products in the portfolio and alter brand image. Evaluate: (a) does the product fit our overall growth strategy? And (b) will top management support it? On the first point, how will the product contribute to “driving the expansion of manufacturing, logistics, or other functions? Will it have a positive or a negative impact on brand equity? Will it cannibalize or improve sales of the company’s existing products?”[38] (Page 13) A short-term spike in sales might not be worth negative impact on the company. The product might have negative reaction from other stakeholders and it might harm their businesses. In the E Ink case study, the company had a great technology push product but with little success at mass-market adoption. To sustain the cash flow, management decided to enter into the retail sign sector. In the end, the idea failed and the retail sign business flopped. The desperate move to provide liquidity; the company abandoned its core strategic goals. All spectrum of the impact of the new product must be evaluated. To the second point of management support; if the development team rigorously go through R-W-W screen, they will have an easier time gaining top management support.

Strengthening one’s product or suit of products can be done via steps listed about but additionally it can be accomplished by partnering with other firms and/or through M&A. In the case study “PTC: Launching an Entirely New Product Platform”, company considers launching a new product which might compete with its existing product. The new software, Windchill, challenges PTC on many fronts. Although the product has much potential, company cannot be competitive because it lacks sales force expertise and adequate customer support structure.

As the president of Mena Menswear Corporation I faced the challenge to revitalize the existing product line. I was fortunate enough to have a staff, which had deep understanding of what the market wanted. I was also fortunate enough to find vendors whom will produce and deliver the finished goods at every storefront. The only major challenge we faced was to determine what product to produce. There were a few key points that I focused on: price point, quality of product, and product design. The consumers demanded that price should be between $180-$225 per men’s suit. The consumers favored designer suits that were high in quality but cost $280. To save the revenue margins the stores could not sell the designer suits lower than $280 so I decided to produce an in-house brand, which produced equivalent or better quality products. I worked closely with vendors to produce classic and fashion forward styled suits that would save the current profit margin while allowing us to meet the desired consumer price point. In the end, we sold each suit for $200 ($80 below the equivalent designer suit) with overwhelming adoption from the market. The in-house brand went on to dominate the suit department and increased sales with increased profits. The innovation of the idea was to create an entire men’s suit line that appealed to the consumer taste and their pocket. By listening closely and keeping their need in mind, I introduced a product, which solved their problem. Ultimately, management must evaluate end-to-end steps and processes to solve problem(s) which the market seeks answers for. Each step must be carefully evaluated and worked out which serves the best interests of the company and the consumer.

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[1] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[2] Ibid

[3] Ibid

[4] Ibid

[5] Alice M. Tybout, Julie Hennessy, TiVo Kellogg School of Management, Northwestern University, 2004.

[6] Alice M. Tybout, Julie Hennessy, TiVo Kellogg School of Management, Northwestern University, 2004.

[7] Alice M. Tybout, Julie Hennessy, TiVo Kellogg School of Management, Northwestern University, 2004.

[8] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[9] Ibid

[10] Ibid

[11] Ibid

[12] Ibid

[13] Ibid

[14] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[15] Ibid

[16] Ibid

[17] Ibid

[18] Ibid

[19] Ibid

[20] Joseph B. Lassiter III, Diana S. Gardner, Marketsoft Boston: HBR, 2006.

[21] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[22] Ibid

[23] Ibid

[24] Ibid

[25] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[26] Ibid

[27] Ibid

[28] Sandra J. Sucher, Stacy E. McManus, Herman Miller(B) Creating Innovation Streams Boston: HBS, 2002.

[29] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[30] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[31] Sandra J. Sucher, Stacy E. McManus, Herman Miller(B) Creating Innovation Streams Boston: HBS, 2002.

[32] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[33] Ibid

[34] Sandra J. Sucher, Stacy E. McManus, Herman Miller(B) Creating Innovation Streams Boston: HBS, 2002.

[35] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.

[36] Ibid

[37] Sandra J. Sucher, Stacy E. McManus, Herman Miller(B) Creating Innovation Streams Boston: HBS, 2002.

[38] George S Day, Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio Boston: HBR, 2007.