What Customer Wants Approaches to Identify Opportunity for Innovations Hamid Houshmand May 2011

Formulating Innovation Strategy Innovation on what / where in the value chain? – Product innovation – Service innovation – New market innovation – Operational innovation (production process, reducing cost or materials, reducing energy, reducing environmental damage, conformance to regulations) – Marketing innovation – Business model – Financing

Formulating Innovation Strategy Source of innovations – Research and development – Close vs. open innovation ( internal and external sources) – User innovation – Manufacturer innovation – Supply-pushed innovation – Demand-led innovation

Formulating Innovation Strategy What type of innovation is possible? – Incremental /evolutionary innovation – Breakthrough/radical/revolutionary/ discontinuous innovation – Disruptive innovation – Serendipity innovation (academic innovation)

Radical vs. Disruptive Innovation Disruptive innovation is a innovation that disrupts an existing market (value chain) A disruptive innovation may or may not represent a major technical breakthrough Breakthrough innovation, which is also called radical, may or may not be disruptive, while minor or incremental innovations can be massively disruptive.

Innovation Strategy _ What Growth Option Should be Considered Several options are available: customer-jobs matrix: Devise product or service innovations that help customers get more jobs done. For success here, job- related information from customers rather than outcomes Devise product or service innovations that help new customers do a job that nobody is doing yet; no product exists. The market does not exist. Thus a market analysis is necessary. Devise product or service innovations that help customers get a job done better. To succeed here, the customer’s underserved outcomes must be uncovered Devise product or service innovations that help new customers do a job that others are already doing. Current jobs New jobs Existing customer New customer

Innovation Strategy_ Where in the Chain Value Should We Focus to Maximize Value Creation Determine who in the value chain makes the most important judgements about value and go to that source directly rather than let their immediate customers provide the requirements The End user should also be considered

Formulating the Innovation Strategy Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Formulate an innovation strategy Focus on the core market, other growth strategy is considered too risky Multiple avenues for product, market, operational, and disruptive innovation are considered Attractive growth strategy that has high potential and a high probability for success

Causes for Failure in Innovation Common reason for failure in different organization – Poor leadership – Poor organization – Poor communication – Poor empowerment – Poor knowledge management Common causes of failure within the innovation process in most organisations: – Poor goal definition – Poor alignment of actions to goals – Poor participation in teams – Poor monitoring of results – Poor communication and access to information

Capturing Customer Inputs Voice of customers that include solutions, specifications, needs, and benefits statements are often vague and hinder to successful execution of innovations Gather data on: – Jobs (what jobs to be done by customers) – Outcomes (the outcomes they want to achieve) – Constraints (that prevents customers from doing the job) The desired outcome can be transferred as the metric statement into Six Sigma innovation process

Capturing Customer Inputs What method should be used to obtain customer data? – The method is not as important as the type of data – Personal interview – Observational research – Watching and quizzing customers helps to capture jobs, outcomes, and constraints

Capturing Customer Inputs Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Capture customer inputs Companies listen to the voice of the customer and struggle to make sense out of vague inputs in order to give customer the solutions they request Companies determine what outcomes customers want to achieve and let qualified experts, not customers, form the best solutions Marketing and development managers have the customer inputs they need to create solutions of significant value

Identifying Opportunities Don’t focus on what is easy to achieve Don’t focus on what can be done, but on what should be done Don’t focus on what an engineer find interesting Prioritize your opportunities effectively Determine what jobs, outcomes, and constraints represent the best opportunities for growth and innovation Discover where the market is underserved

Identifying Opportunities How to prioritize opportunities – Select a outcome that is both the most important and unsatisfied. – Use a quantitative research method – Prepare a survey instrument – Administer the survey to a statistically valid representation – Ask the team to rate the importance – Let the team to rate the degree of satisfaction – Determine the level of opportunity by putting the metrics together – The highest opportunity score represent the extreme area of opportunity

Identifying Opportunities Overserved markets identified – Efforts should be halted, as no additional value is created – Cost reduction efforts by taking out costly functions – If many overserved outcomes are discovered, consider disruptive innovation – E.g: by changeing the business model or by a low- end disruptive innovation

Identifying Opportunities Value migration: Opportunities migrate over time in a dynamic fashion Determine exactly where the opportunity in a market at any point of time and be first to address it. Do competitive analysis on offerings based on the criteria of customers to measure value rather than by analyzing the competitors’ product specifications

Identifying Opportunities Identify competitors’ strengths and weaknesses on the key opportubity Try to equal or excel on competitor’s best feature by taking that as the base line Knowing when to let a competitor go it alone, because the outcome is satisfied.

Identifying Opportunities Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Identify areas of opportuniti es Companies define opportunities as the solution customers say they want. They prioritize innovation initiatives based on available resources and existing core competencies. Companies define opportunities as the outcomes customers say are important and unsatisfied. They find the resources and build the competencies to address them. Managers know where to focus employee creativity to create customer value. Companies don’t waste time and effort on outcomes that are already overserved

Segmenting the Market The outcome-driven method is the best way to segment market for innovation Customer’s desired outcome is used for the segmentation Other methods can still be used for other purposes Other elder methods are: demographics, psychographics, purchase behaviour, needs-based Needs-based come close to getting it right, but there is no common agreement as to just what a need is.

Segmenting the Market How does outcome-based segmentation address product development – Identifying unique opportunities in mature markets – Identifying demanding customer segments that may be willing to pay more for more elaborate solutions – Identifying customer segments that are unattractive – Discovering overserved market segments that make attractive entry points for disruptive innovation – Determining the best way to enter an existing market as a new entrant – Discovering segment of high potential growth

Segmenting the Market Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Segmenting the market Customers are conveniently classified by product type, price point, age, risk aversion, and other demographic and psychographic characteristics Customers are segmented based on the outcomes they are trying to achieve. They are not placed into artificial, company- imposed classifications Managers are able to discover segments of opportunity in markets where few if any opportunities appear to exist, revealing new avenues of growth

Targeting Opportunities for Growth An effective targeting strategy requires that a company select the opportunities that it will pursue An effective targeting enable to add function and performance, but not necessarily cost An effective targeting enable a competitive positioning Targeting unrelated opportunities by a single breakthrough innovation is possible Some underserved outcomes in the market will require new technology, cost-reduced technology or reshaped technology. These opportunities become good long-term targets that can be explored by company’s R&D function.

Targeting Opportunities for Growth First tackle broad-market opportunities Second, identify opportunities that span multiple outcome-based segments Build a single platform for multiple segment- specific solutions Pursue the least-challenging segments of opportunity first Target segment that represent attractive price points

Targeting Opportunities for Growth Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Target opportunities for growth Companies pursue ideas that are intuitively attractive, easy to develop, or that fit within the firm’s core competencies Companies pursue underserved and overserved outcomes for improvement and cost reduction, respectively Companies proactively define a competitive position that is unique and valued and then arrange solutions to occupy that position

Positioning Current Products Prerequisites for an effective positioning – Be aware of the opportunities that exist-know which outcomes are underserved – Have a product that truly address the underserved outcomes – Recognize what product features specifically address the underserved outcomes – Determine if and where the current message is off – Create a message around a specific outcome – Out come-driven thinking provide a solid foundation for unique and powerful type of branding

Positioning Current Products Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Assess messaging and branding Companies are uncertain if their positioning and messaging is tied to the customers underserved outcomes Products and brands are tied directly to the emotional jobs or functional outcomes customers are trying to achieve Messaging connects solidly with customers and enhances the sales of existing and new products

Prioritizing Projects in the development Pipeline Issues when prioritizing projects – Difficulty determining which concepts will address market opportunities – Feel compelled to cover all bases so they do not get caught off guard – Find it hard to kill a project once it has been funded – Fail to assign the resources needed to get the projects to market quickly

Prioritizing Projects in the development Pipeline Evaluation of projects to identify winners and losers – Determine what projects to evaluate – Selecting a team to complete the evaluation – Evaluating the initiatives – Assessing the results

Prioritizing Projects in the development Pipeline What projects should get top priority – Projects that do the best job to address the targeted outcomes? – What projects fail to address to the targeted outcomes? – What projects address unimportant or overserved outcomes?

Prioritizing Projects in the development Pipeline Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Prioritizing projects in the development pipeline Managers are compelled to cover all bases. They initiate hundreds of development efforts, spread resources to thin, and are reluctant to kill projects already under way Companies evaluate products in the pipeline for their ability to address the customers’ underserved outcomes Companies know which initiatives will create the most value. They are able to create more winning products in less cost

Forming Breakthrough Concepts Traditional brainstorming often fail to produce products breakthrough idea Most brainstorming efforts yield poor and unactionable results for three key reasons: – Manager rarely know where to direct employees creativity – They are not focused on specific customer’s outcomes – Hundreds of useless ideas, but a few truly worthy to pursuit

Forming Breakthrough Concepts The mechanics behind focused brainstorming – Stay focused on the targets – Aim for breakthrough improvement – Constrain thinking to enhance creativity – Eliminate bad ideas quickly – Optimize the best idea for cost, effect, risk, and sustainability : Not add any product cost Require little effort to develop Present little technical risk Be difficult for a competitor to copy

Forming Breakthrough Concepts Stages of innovation Customer driven approach Outcome-driven approach Benefits of the outcome-driven approach Make breakthrough ideas Employees brainstorm without focus, generating hundreds of ideas with questionable value. Many ideas must be evaluated Employees use focused brainstorming to direct their energies toward specific underdeserved outcomes and generate a few ideas of significant value Employees don’t waste their time generating ideas that do not add value. They generate only ideas that are worthy of pursuit