By: Dave Farber
I recently spoke with the newly appointed Head of Product for the innovation lab at a large financial services company. Given that she had only been in the role for a few months, I wanted to talk about the challenges she was facing and what she was prioritizing early on. Her answer surprised me a bit.
Despite working in the innovation lab — arguably the fastest-moving part of the business — she worried that things moved too slowly. More specifically, she felt that those around her constantly worried about having all the answers and alleviating all the risks, to the point that they would endlessly conduct research and run tests without moving ideas to commercialization.
The more I thought about it, the more I realized that today’s focus on iterative design and test-and-learn loops can, if not implemented properly, create a hazard for organizations. Even companies with “agile mentalities” and well-constructed Stage-Gate innovation processes often find themselves getting stuck in endless loops of testing without moving forward. While I wholeheartedly advocate finding opportunities to mitigate risk with research and adopting a “fail fast” attitude, innovation is ultimately about commercializing new things.
My instinct was to create a tool that measured the risk of proceeding to launch based on whether certain categories of information had been gathered or whether certain types of risk had been mitigated. Before that, however, I think there’s a need for a more basic checklist that can be used either to ensure that innovation processes proceed through the right phases or to determine that at a certain gate enough has been evaluated to determine that a decision to proceed can be made. To that end, I focused on identifying five key types of analysis that need to be done prior to launching something new. Once you have sufficiently answered the question in each of those five areas, the incremental value achieved by digging deeper may well be outweighed by the costs of delay.
Customer Feedback — Validate that you are solving a real problem. I don’t want to undervalue the importance of market research. While the point of this article is to caution against falling into the analysis paralysis trap, there are plenty of questions that a business genuinely needs to answer. Good market research is at the core of any innovation initiative. You need to interact with real customers to understand what jobs they are trying to get done and under what circumstances they struggle to do so. Good ideas don’t lead to innovation success; that success comes from good ideas that respond to real market needs.
Beyond understanding the underlying jobs of your customers, how some segments of customers differ from others, and what may impede customers from trying new solutions, research can also be useful for vetting the ideas that you think will best meet those needs. There are flaws with traditional concept tests, for sure. Customers regularly overstate their purchase intent, and they may have trouble grasping ideas that are truly new. Swiffer, for example, failed its early concept tests as customers struggled to understand why they would want some sort of inferior mop. At the same time, these tests can help you determine what kinds of gut reactions customers will have to an idea, what questions they may have, and how they might use your product in unexpected ways. As you think about whether you’re ready to make a commercialization decision, make sure that you’ve conducted at least two rounds of customer research: one to understand customer needs and another to get their feedback on your idea.
Market Sizing — Determine that the problem you are solving affects a large enough population. No business should decide to launch something without understanding the financials underlying the new venture. Unfortunately, many companies go too far in the other direction, requiring detailed financial estimates that are laden with false precision. Particularly when it comes to Horizon 3 innovations, Superforecasts and Reverse Income Statements are likely to be more helpful for predicting financial success than a hyper-detailed financial plan for a business that still isn’t even fully understood.
For me, Scott Anthony’s 4 Ps model provides a great “quick and dirty” way to understand whether you are going to reach a big enough population. While your new idea may not have direct comparisons, you can use analogies and benchmarks to make broad assumptions about the solution’s price, the population that could be potential buyers, the penetration into that population that you can hope to achieve, and the purchase frequency. This also ties in with the customer research point that I made earlier, as your estimates around penetration should be heavily informed by primary research into customers’ jobs to be done. More to the point, you will want to understand what jobs your solution is satisfying, and how under-served those jobs are in the population you might be targeting.
While the 4 Ps approach may seem to over-simplify things, it actually allows for a fair bit of granularity as you dig into the details of each element, without having to feign confidence in an Excel model that will ultimately prove inaccurate. Rather than pretending that you know all the answers, this approach proudly highlights risky assumptions that you’ll need to test.
Strategic Fit — Decide whether your organization is the right one to solve the problem. Once you’ve developed and modeled a customer-centric idea, it’s important to figure out whether it will be a good fit for your organization. That’s a two-part test. The first step is to understand whether it fits with the company’s high-level strategic vision. For innovation efforts, that can be a struggle, especially within organizations that aren’t ambidextrous — that is to say, they’re not adept at managing core activities independently of growth activities. It will be important to understand early on how close to the core your initiative is, who owns the budget and headcount that will be supporting the initiative at scale, and how well the initiative aligns with the priorities of that budget owner. Failing to test for stakeholder buy-in early on is a surprisingly common reason that innovation efforts fail.
The second part of the test is more external facing. While your idea may be a good fit for your organization’s priorities, it’s still important to understand whether your organization has the right assets and market fit to create a sustainable competitive advantage. Would it be hard for competitors to undercut your play? Would doing so fit with their long-term strategy? Be sure to think through the unintended consequences of scaling your initiative, and remember to account for potential new entrants who may not be core competitors in today’s business.
Risk Analysis — Identify the risks you might encounter and create a plan to mitigate them. The next level of testing is to determine all of the risks and unknowns that might ultimately derail your project. The total deal-killers are often easier to recognize, but it’s also important to think about the smaller risks that can slowly siphon away profitability or lead you down the wrong executional path. While it can be hard to tear down an idea that you’ve worked hard on, it’s important to be as critical as possible. Think broadly about the different categories where risks may lurk — regulatory, customers, competitors, technical issues, partner or supply chain hazards, etc. — and develop a plan for how to test or mitigate each risk early on.
Business Model Viability — Ensure that the organization has the technical ability to create the solution and that doing so is financially viable. The final step in preparing for your “go” or “no go” decision is to put the pieces together and see if there’s a viable business model. You’ve done the research to determine desirability; you know there’s customer demand. But what about feasibility and viability? As you thought through the risks, did you make a determination about whether your organization has the technical capabilities to launch your new solution to a broad market of buyers? And what else is needed to support a full-scale launch? Be sure to think through your channel strategy, the necessary startup capital, where you will need to depend on outside partners, and other key aspects of the business to ensure that the project will ultimately be financially viable.
At this point, you will have run through the major tests. Assuming you don’t need to evaluate any other deal-killer risks at this stage, the question is simply whether these five boxes have been checked with satisfactory results. If so, it’s up to someone else to identify a truly compelling reason why the initiative shouldn’t move forward. Don’t simply do more research or modeling for its own sake. Get something out into the world.
Dave Farber is a strategy and innovation consultant at New Markets Advisors. He helps companies understand customer needs, build innovation capabilities, and develop plans for growth. He is a co-author of the award-winning book Jobs to be Done: A Roadmap for Customer-Centered Innovation.
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