Structured Innovation: A Proven Method for Improving New Product Success

There are many instances in today's business world where companies have failed to leverage their differentiation for increased profitability. Recently, Business Week's Chief Economist, Michael Mandel, wrote about this in his article, "Innovation, Interrupted—The Failed Promise of Innovation in the U.S." Mandel asserted that innovation efforts in the United States have failed to deliver their intended benefits over the last decade, with companies now suffering at the hands of lower cost producers. Incremental improvements, rather than true innovation, have been the norm. There are a number of reasons for this:

• Benefits are not clearly defined for the selling organization:
  
  • "Our business call goes through contracting and all they care about is the lowest price."
  • "The competition can do anything we can do."
• Product managers cannot effectively articulate the value proposition or provide effective selling tools.
• There is not much focus beyond commodity cost recovery.
• There is no price premium at higher performance levels for a product due to a focus on the bundle or "job" price.
• Pricing organizations cannot effectively mediate the disagreements, etc.

Root Cause Behind Why Innovation Has Failed to Become the Norm

An important root cause is lack of a systematic, repeatable process for evaluating innovation based not only on willingness to pay, but perceived performance improvements versus competition, and then subsequently establishing both selling processes, tools and collateral to ensure the company realizes those performance improvements as increased cash flow. Many companies have stage gate processes for new product development, Voice of the Customer, etc. However, surprisingly few businesses systematically address the question of value:

• What is the value of the innovation being delivered to the customer? Value here is defined as the net economic benefit for the customer: dollar benefits less cost of implementation.
• How differentiated is your perceived performance versus the next best competitive alternative? If the customer perceives that everyone can deliver positive net economic benefit the same way, then the innovation is more vulnerable.

Incorporating a Six Sigma Approach to Value Measurement into a Stage Gate Process

A Six Sigma approach to value measurement can be incorporated into a typical stage gate process to ensure only those innovations that will deliver improved benefits will advance successfully through each gate. This Six Sigma approach is an adaptation of a standard Quality Functional Deployment (QFD), enhanced with a pricing component. The process is organized into the following steps:

• Identify the conceptual need for the innovation
  
  • Who are the target customers?
  • What is the reference competition?
  • What is the basis of competition?
  • What are the targeted improvements to the next best competitive alternative?
• Identify those attributes that have the greatest importance to customers
• Define performance standards for those attributes
• Obtain customer perceived performance scores and competitive pricing
• Determine your proposed market position, based on an analysis of your competitive strengths and weaknesses
• Determine the change in value delivered to the customer and set pricing
• Determine the net financial benefit to the company

There are a number of tools utilized during this process: Value Maps, Head-To-Head Comparisons, Product Attribute Weightings and Implied Worth. The Value Map displays the benefit-vs.-price choice that customers face as they evaluate your products against competitors. Head-To-Head Comparisons detail the value of your offer delivers versus specific competition. Product Attribute Weightings identify the key benefits customers value most. Implied Worth details what customers are willing to pay for your offer.

Value Maps are a key tool as they quickly portray the perceived position of products in a marketplace. It is composed of the following components:

• Fair Value line
• Plot points
• Average selling price
• Average performance index
• Price/performance boundaries

(Click on diagram to enlarge.)

Products in the "Fair Deal" zone represent value neutral positions—customers get what they pay for. Products above this zone charge more than the value they deliver—a "Bad Deal." These products tend to lose share. Products below this zone deliver more value that what they charge—a "Good Deal." These products tend to gain share.

A Manufacturing Example

These processes and tools have been successfully applied by a number of industrial manufacturers to structure their innovation efforts and achieve stronger financial results. For example, a manufacturer wanted to launch an improved product in their portfolio. However, they were unsure if the resources committed to the project would achieve an acceptable ROI. There were differences of opinion among sales, marketing, R&D and senior management as to whether the improvements were merely incremental or represented true innovations to their customer base. The process began with an extensive Voice of the Customer (VOC) effort to identify the following:

• Key buying factors
• Reference competition
• Perceived performance
• Perceived price

This helped form a baseline for existing products. Customers identified the following attributes, along with their importance:

• Durability
• Reliability
• Programmable Options
• Sales/Technical Support
• Efficiency
• Filtration Performance
• Footprint
• Delivery
• Parts Availability

(Click on diagram to enlarge.)

Customers then established a perceived performance ranking, using a 1-10 scale for each manufacturer in the competitive reference set. Customers also identified perceived competitive pricing, yielding an industry value map for the product:



(Click on diagram to enlarge.)

In this case, the vendor of interest, was located in the "Bad Deal" zone, have too high a price for the benefits delivered. Based on what customers valued for Manufacturer A, the product had an implied worth of only $229 versus the asked for price of $300. In this case, the product had the poorest rated performance in the key area of efficiency, with a customer rating of 2, versus and average of 5.4. It also suffered across the board deficiencies in all other attributes. Management wanted to initiate a costly product improvement program to upgrade both capabilities and price. The main efforts were focused on improving efficiency to make the product the most efficient one in its class. In this case, customers evaluated a series of proposed improvements in performance specifications.



(Click on diagram to enlarge.)

The results were then summarized in a new product profile and value map position:



(Click on diagram to enlarge.)

In Conclusion of the Results

Surprisingly, customers now regard the "improved" Product A as an equal to the existing Manufacturer Product B. While efficiency gains were appreciated, they were not sufficient to differentiate Product A in the manner that management hoped for. Further, there was a strong possibility of igniting a price war as Product B share was cannibalized by the 'improved" Product A, leading to severe margin losses. In the end, proposed pricing was modified to align the proposed product with the value delivered. This lead to a more favorable position versus competition, improving share and dollar gains through launch.