Tuesday, July 3, 2012

How to Maximize Value in Innovative New Products

How to ensure that innovations create value for the Customer and to the Business ?

It doesn’t matter where scientific discoveries and breakthrough technologies originate—for national prosperity, the important thing is who commercializes them 

- Amar Bhide (McKinsey Quarterly, Feb 2009).

What does it take to successfully commercialize an innovative idea ? The Idea should create significant value both to the Customer and to the Company.

Value for Customer = Utility - Price
Value for Company = Price - Cost

Value = f (Utility, Price, Cost).

Here I wish to introduce my favourite TRIZ tool - IFR (Ideal Final Result) or Ideality - that handles this in an elegant way. When you are designing a product -  ask three fundamental questions - what are the useful functions that this product serves, what are the harmful functions (anything that is not useful, but users have to put up with) and finally what factors determine the cost. IFR is defined as the ratio of Useful functions to the sum of Harmful functions and Cost.

IFR = (Useful Functions) / (Harmful Functions + Cost)

To move towards the Ideal product, we need to maximize Useful Functions, minimize the Harmful Functions and minimize the Cost. If we are designing a mobile phone, then we could start by probing the primary useful function and follow it up by
(a) how to improve audio & video quality, how to improve user interface, extend battery life, 
(b) how to reduce dependence on network, avoid frequent battery charges, reduce radiation from the device
(c) how to reduce cost of display, battery, service provider cost, cost of manufacturing, cost of distribution, marketing, cost of disposal, reuse etc

Marginal Utility

Conventionally, the value is determined through the concept of marginal utility - to appreciate this concept, let us look at the paradox of water and diamond.

In the context of Innovation, we need to go beyond the conventional approach and ask how to create value to the Customer and Business in newer ways ?

(a) Creating Value for the Customer

Understanding the unmet needs of the Customers and using that insight to seed innovation constitutes Customer-driven Innovation. Asking "How to create value for customers" is synonymous to asking  "how to help customers get an important job done?". By job we mean a fundamental problem, in a given situation, that needs a solution. The best customer value proposition is an offering that gets that job–and only that job–done perfectly. The lower the price of the offering and the better the match between the offering and the job, the greater the overall value generated for the customer. 
The more important the job is to the customer, the higher the level of customer dissatisfaction with current options, and the better your solution is than your competitors’ at getting the job done, the greater the value for your company.
(b) Creating Value to the Business

Disruptive Innovations need new Business Models

There are Business-Model Innovations (BMI) that create Value to Business in new ways. Clayton Christensen cites the need for business model innovation as one of the core elements of a successful market disruption. In his book The Innovator’s Prescription  he and his co-authors define the role of BMI by stating that first, a simplifying technology is needed to spark the disruption, a new business model is then needed to maximize the reach of the technology and a comprehensive value network must finally evolve to support it.
Blue Ocean Strategy - More Differentiation, Less Cost

The authors of Blue Ocean Strategy define Value innovation as the simultaneous pursuit of differentiation and low cost. Value innovation focuses on making the competition irrelevant by creating a leap of value for buyers and for the company, thereby opening up new and uncontested market space. The Blue Ocean Strategy methodology can be adopted by managers to break the value-cost tradeoff by answering the following questions:
  • What factors can be eliminated that the industry has taken for granted?
  • What factors can be reduced well below the industry’s standard?
  • What factors can be raised well above the industry’s standard?
  • What factors can be created that the industry has never offered?

Key Takeaways

New Product Innovations should aim at

  • Maximizing Utility for the Customer - improving existing useful functions, adding more of related useful functions (pencil+eraser, phone+camera etc)
  • Optimizing the Price - gauge what price are my customers ready to pay and figure out what innovations do i need to meet this price
  • Minimizing the Cost - look at cost across the life cycle - cost of raw materials, cost of design, R&D, cost of manufacturing, cost of marketing, cost of installation, cost of usage, cost of repair, cost of disposal, cost of reuse, recycle etc

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