By Anthony W. Ulwick, Chief Executive Officer, Strategyn
When companies were experiencing manufacturing yields as low as 10 percent just 35 years ago, they applied statistical process control (SPC) to help reduce process variability and over time achieved six-sigma, virtually eliminating process variability - and failures. The same thinking can be applied to the process of innovation. By identifying the steps that comprise the process and eliminating the causal factors that introduce process variability, it too can be refined to yield high success rates - and to dramatically reduce wasted development expense.
To begin this journey, innovation leaders in marketing, business development, R&D and other functions must first understand just what the innovation process is and know what steps are required to devise ideas and solutions that deliver customers new and significant value. Conceptually, the robust execution of the innovation process can be broken down into 3 steps in which companies should be trying to:
- Define the criteria customers use to measure the value of a solution.
- Define ideas and solutions that will potentially meet those criteria.
- Determine which solution best satisfies the criteria and delivers the most value.
To follow these steps, for example, a cell phone manufacturer should first determine how customers measure value. In doing so they may find that users, for example, want to minimize the number of calls that are dialed incorrectly; minimize the time it takes to locate a needed phone number or minimize the likelihood of a call being placed inadvertently. We call these criteria or measures of value the customers desired outcomes, as they describe what customers are trying to achieve while using a cell phone. [The concept of desired outcomes was first introduced in the January 2002 issue of the Harvard Business Review, Turn Customer Input Into Innovation.] Once it is known what 50 to 100 outcomes customers want to achieve, new ideas and technologies should be devised specifically to address those outcomes, e.g., new software or hardware solutions that make locating and dialing a number effortless. With dozens of ideas to consider and dozens of outcomes to satisfy, all possible combinations should then be evaluated for their ability to satisfy the underserved outcomes.
When framed in this manner, executing the innovation process is analogous to solving a complex simultaneous equation. In effect, companies must determine which combination of ideas and solutions will best satisfy the greatest number of important and currently unsatisfied outcomes. Solving this "innovation equation" requires structure and discipline - and this is where the traditional approach to innovation falls short, as it gets the process backwards. Rather than first defining the customers desired outcomes - and using them to guide the creation of valued solutions, most companies come up with ideas and solutions and then test them with customers to see if they will buy - without ever knowing how customers measure value. This trial-and-error approach is like guessing at the answer to a complex simultaneous equation - and the chances of getting it right are slim.
The innovation process, as defined by most companies, consists of six discreet activities: (1) obtaining customer inputs, (2) segmenting the market, (3) prioritizing opportunities, (4) defining the competitive position, (5) formulating concepts and (6) evaluating concepts. Over the past 15 years, I have studied how most companies perform these activities and identified the factors that introduce process variability - and cause the process to fail. Let's look at these activities in turn and explain what traditional practices have hindered management's ability to solve the innovation equation.
Step 1: Obtaining Customer Inputs
When solving the innovation equation, companies must capture two distinct types of information - (1) the customer's desired outcomes and (2) the ideas or solutions that will satisfy them. They should capture desired outcomes from customers and rely on trained engineers, technologists, marketers and other experts to devise valued solutions. In practice, it rarely works this way.
When companies talk with customers, they invariably try to gather ideas for new products and services or for new product features. Consequently, they are not only likely to get weak ideas but more importantly they fail to capture their customer's desired outcomes. A cell phone manufacturer for example, may hear from customers that they want voice activated dialing or raised buttons on the dial pad but fail to uncover the outcomes they desire, e.g., minimize the number of calls that are dialed incorrectly.
Innovation leaders know the output of the innovation process should be a big idea - so this is what they look for - and customers, who want to be helpful, are willing to offer their ideas. These leaders rarely attempt to capture the customer's desired outcomes because they do not know how critical they are to the successful execution of the innovation process and even when they do, they may not know how to capture them.
The lead-user process and most other Voice-of-the-Customer and requirements gathering methods are not focused on capturing desired outcomes. The information that is collected - solutions, vague statements and incomplete outcomes - introduces variability into the innovation process. Not surprisingly, if companies do not know how customers measure value, then creating it is a risky proposition.
Step 2: Segmenting the Market
Much of the innovation process is dependent on segmentation: identifying groups of customers in the market that are so similar that the same product or service will appeal to all members of the group. In an attempt to more effectively use resources, many companies segment their markets by product type, price point, business size, geography, age, or by other demographic or psychographic classifications. These segment classifications are convenient to use because data exists to size these segments, making it easy to collect, track and report customer data.
Unfortunately, these classifications rarely contain a homogeneous population and invalidate the basic tenets of solid segmentation theory, undermining the reasons for segmentation. In reality, these segments are simply classifications that companies impose on customers. They are phantom targets that misguide the application of company resources and introduce variability into the innovation process.
Through 15 years of study, I have found that customers can be more precisely segmented by what outcomes they are trying to achieve - forming what I like to call the market's "natural order" or segmentation. By using the customer's desired outcomes as the basis for segmentation a cell phone manufacturer, for example, may find one segment of users values speed of communication, while another segment values safety of operating the phone under different circumstances. Delivering products that are optimized around unique customer outcomes is far more efficient than designing products around different demographic groupings - an age-old practice that targets resources and products at customer targets that do not exist.
Step 3: Prioritizing Opportunities
Through dozens of studies, I have found that customers often consider over 50 desired outcomes when measuring the value of a solution. Innovation leaders must know which of those outcomes is most important and least satisfied in order to determine the best opportunities for improvement - but they rarely do.
A cell phone manufacturer, for example, may not know that the customer's desire to "minimize the number of call dialed incorrectly" is already well satisfied - and that additional improvements in this area will not be recognized as valuable. It may also be unaware that the desired outcome that is most important and least satisfied is to "minimize the number of seconds my eyes are diverted from the road when trying to call someone while driving". Without this knowledge, product development teams typically consider the solutions customers have requested and give them those they know how to create or those that are easy or inexpensive to create. As a result, they often miss the greatest opportunities for improvement.
Using what I call the "opportunity algorithm", [first introduced in the January 2002 issue of HBR, Turn Customer Input Into Innovation], companies are able to determine which desired outcomes are most important and least satisfied and to effectively prioritize which represent the greatest opportunity for improvement. With this knowledge, companies can focus their resources on the best opportunities for growth.
Step 4: Defining the Competitive Position
When formulating new product concepts, companies must ensure their offerings place them in a unique and valued competitive position. Given the strategic importance of achieving this objective, it is interesting to note that companies often perform the positioning activity after the product has already been designed - in hopes of finding the best way to position what already exists. This often requires the company to make claims about their products and services that may not be well supported, eventually leading to a decline in customer loyalty. This approach is again all backward.
When executing the innovation process, innovation leaders should define the desired competitive position before a concept is formulated - and then a solution should be devised to occupy that position. If a cell phone manufacturer, for example, knew that "minimizing the number of calls dialed incorrectly" and "minimizing the likelihood of inadvertently placing a call" were the two most important, least satisfied customer desired outcomes, then it would be advantageous to work hard to create a solution that would satisfy those outcomes, enabling them to successfully occupy the "precision calling" position - a competitive position that is unique from other companies and valued by customers. Customers will resonate with the message that communicates this position and the product will solidly connect with the target customers.
Step 5: Formulating Concepts
A critical activity in the innovation process is to devise solutions that will potentially satisfy the customer's desired outcomes. This requires creativity, which is abundant in most firms. Many innovation leaders in fact, complain they have too many ideas to consider. Although creativity is abundant, successes are rare because it is almost impossible to inform employees where that creativity should be focused. As a result, employees spend much of their time and effort thinking about ideas that deliver little customer value.
If a cell phone manufacturer does not know that "minimizing the number calls that are dialed incorrectly" is an important and unsatisfied outcome, then how can employees focus their creative energy in a way that will ensure value creation? It is this lack of insight that derails the innovation process, as companies often apply a shotgun approach to brainstorming and ideation activities. Employees think about product, distribution, pricing, service and advertising issues and generate hundreds of ideas across all disciplines, bogging down and already complex process to the point where inaction is commonplace.
The alternative is to know first where the opportunities for improvement lie. Then employees will be able to focus their energy with precision on the creation of value - leading to the systematic formulation of inventive - if not breakthrough solutions.
Step 6: Evaluating Concepts
With hundreds of ideas to consider, innovation leaders must be able to determine which ideas to pursue and which to forego. In situations where the customer's desired outcomes are known and prioritized, it is possible for marketing and development teams to determine the degree to which each idea satisfies the collective set of outcomes, thereby quantifying the amount of value delivered by each.
In most situations, however, this information is not available and as a result other methods are employed - most of which are riddled with error. For example, some teams simply choose to select ideas that have intuitive appeal, are easy to implement, fit the current business model or can be more easily justified from a financial perspective. This approach precludes the development of new competencies that may be the key to high-growth. In more extreme situations, politics and personal goals may be a driving force and an idea may be chosen not on its merits, but because it is backed by a powerful executive, an aggressive engineer or a convincing marketer who hopes to see his product go to market.
Companies cannot afford to pursue ideas that will ultimately fail, nor can they afford to miss the best opportunities for growth. By thinking differently about innovation, companies can systematically evaluate any proposed idea and accurately quantify the amount of value it will deliver - thus making it possible to predict its likely success or failure.
Closing
Solving the innovation equation is indeed a process - one that can be managed and controlled to produce predictable results. Over the coming years this view will become the norm as innovation leaders are forced to search for new ways in which to eliminate waste and ensure success. By identifying and eliminating the factors that contribute to process variability, they are able to act with conviction and confidence, knowing their resources are focused on the creation of customer value. Applying an outcome-driven approach to innovation gives the process structure and discipline - a foundation upon which to solve the innovation equation.
Outcome-Driven Innovation
| Conventional Wisdom | Outcome-Driven Innovation | Advantage | |
| The Innovation Process | Innovation is an art form whose output is random and unpredictable. | Innovation is a process that can be managed and controlled to produce predictable results. | High failure rates give way to high success rates - leading to increases in revenue and reductions in cost. |
| Step | Conventional Wisdom | Outcome-Driven Innovation | Advantage |
| Obtaining customer inputs | Companies gather product ideas from customers and give them what they request - listening closely to the "voice-of-the-customer". | Companies determine what outcomes customers want to achieve - and let qualified experts, not customers, devise the best solutions. | Marketing and development functions have the information they need to create solutions of significant value. |
| Segmenting the market | Customers are conveniently segmented into demographic or psychographic classifications such as product type, price point, age and business size. | Customers are segmented based on what outcomes they are trying to achieve. They are not placed into artificial, company-imposed segment classifications. | Companies target real rather than phantom targets enabling them to create products and services that connect solidly with their customers. |
| Prioritizing opportunities | Opportunities are defined as the solutions customers are requesting. They are prioritized based on what resources are available and what competencies are in place. | Opportunities are defined as desired outcomes that are both important and unsatisfied. They represent the greatest opportunity for improvement. | Innovation leaders are able to quantitatively prioritize the opportunities for improvement and avoid addressing outcomes that are already over-served. |
| Defining the competitive position | Products and services are positioned after they are designed. A message is devised to help the company achieve the most favorable competitive position. | Innovation leaders decide before a product is conceived what outcomes they want to satisfy and then create a product to occupy that desired position. | Innovation leaders are able to define and occupy a competitive position that is both unique and valued - rather than accepting a position that is hard to defend. |
| Generating concepts | Employees brainstorm without constraints, generating hundreds of ideas - with questionable value. Many ideas must be evaluated. | Employees brainstorm with constraints - they are focused on specific outcomes and generate a few ideas of significant value. | Employees do not waste their time generating ideas that do not add value, simplifying the process and increasing the chances of success. |
| Evaluating concepts | Customers apply subjective measures when evaluating the proposed ideas. Internal filtering methods often prevent the best ideas from surviving. | Company employees use the customer's desired outcomes as the objective set of measures against which to evaluate the proposed ideas. | Innovation leaders are able to accurately quantify the value of an idea. Only valued ideas are pursued and likely failures are avoided - eliminating wasted expense. |
Anthony W. Ulwick is the CEO of Strategyn. He regularly conducts seminars and workshops on managing innovation. Mr. Ulwick has authored Turn Customer Input Into Innovation, which was published in the January 2002 issue of the Harvard Business Review and recognized as one of the years best business ideas by HBR's editors in the March 2002 issue. Prior to Strategyn Anthony spent 11 years at IBM, started The Total Quality Group, and published a book - Business Strategy Formulation: Theory, Process and the Intellectual Revolution. To send Anthony article feedback, email: ulwick@strategyn.com.
