Frugal Discovery mode to decode Emerging markets

In general, companies take a linear approach to launch new products and services. First comes the market research, then the forecasts, then the product R&D followed by a big-bang launch. This approach works fine for existing markets. But when it comes to emerging markets, such approach fails to deliver. And history is replete with such examples:

• IBM PCjr (IBM much hyped PC for consumer market which failed on cost and features)
• Apple Newton (Big bang launch of a product ahead of its time. With features for which market was not ready then.)
• HP's Kitty Hawk (Designed for emerging PDA market which collapsed. Meanwhile, missed out on huge market of video gaming systems)
• Premier Smokeless Cigarettes (Launched when smoke was considered a major health risk, but the taste/flavor was rejected by the users)

The common thread in above and similar examples is that

1. Companies wade into uncharted territories solely based on their research & forecasts. Their efforts give them the confidence that they have figured out the unknowable/uncertain emerging market. 
2. And they put huge money, resources and execution capacity behind the launch. This big bet launch gives them little financial room later to turn back and correct course. The managers leading the launch also hurt their credibility.

For uncharted territories, the suggested approach is to use a Discovery mode for the first point above and combine it with Frugal approach to address the second point.

The framework below explains when the Frugal Discovery mode is relevant.

The Discovery mode is required when:

• Customers do not know what they want. The need is yet to be created/perceived.
• A company is not sure what customers want. Though the company may rely on its market forecasts. But the actual use may be out of their research radar.

It takes time for consumers to warm up to new product/service features. And to better understand their own needs w.r.t. to given product/service. Discovery mode allows exploration and learning to both company and its customers. 

And being Frugal in discovery mode helps to:

• Conserve resources for second or even third attempt at getting the product strategy right. Companies tend to do the opposite by opening the full tap and going gung-ho with full scale implementation in the first attempt.
• In discovery mode, iterations may happen even in commercialization phase on product design and manufacturing capacity. And since such iterations are later in product development lifecycle, they are going to be costly. Hence, it helps to be frugal from the beginning.

Be frugal, make limited prototypes, test market and iterate. Customers will also learn what they actually want and new customer segments might emerge. 

Many companies are now looking beyond their traditional markets towards emerging markets to drive growth. And to do that, they would need to move beyond the traditional approach of big bang launches with know-it-all attitude to a more humble, frugal and discoverer approach.  

Organisational-level Strategies towards New/Emerging markets & Disruptive products

In the last post, several organisational-level constraints were discussed which impede entering new/emerging markets and launch of disruptive products. In this post, the strategies to overcome these constraints are discussed. There is no one-size-fits-all and each strategy caters to specific conditions and challenges. These conditions and challenges can be both Market based or Operations based.

And the strategy would constitute designing an organisation which best fits the given Market & Operational conditions.

Strategy: Acquire & Maintain Autonomy

This strategy implies acquiring the target organisation (which offers a potential disruptive product for an emerging market). And to keep this organisation insulated from the influence of parent organisation's systems and processes. This strategy will be suitable in following conditions:

Market conditions:

• If the target customers are going to be different from existing customer base. 
• If the initial market size is going to be much lower than that of existing offerings.

Operational conditions: 

• If the cost structure are going to be different. Especially, if the margins are going to be lower.
• The technical inclination & competencies to develop the product are not available internally.
• The product development process is different from that of parent organisation.

Strategy: Spin-out and give Autonomy

This strategy is similar to above with a difference that the external organisation is a spin-out rather than an acquisition.

The market conditions for this strategy remains same as that mentioned for the previous acquisition strategy. An external autonomous organisation is suitable to address a different market size and customers.

With regards to operational aspects, this strategy is applicable if the disruptive product is being developed in-house. But the operational conditions required to deliver the product are in contrast with that of organisation's.

• The cost structure and margins are going to be different from that of existing products.
• The product development process needs to be different from that of parent organisation.

Strategy: Ring-fencing  to create an Unit inside Parent Organisation

This strategy implies creating a near-autonomous organisational unit in the parent organisation. This unit will derive its resources from parent organisation but will have operational independence.

The strategy works if the target market conditions are going to be a close match to that of parent's organisation.

• The target customers for the disruptive product are a close match to existing customer base. 
• The initial market size is not going to differ much from that of existing offerings.

Ring-fencing is required to address the differences in following operational conditions from that of parent organisation.

• The cost structure is going to be different. Especially when the margins are going to be lower.
• The required product development process is different from that of parent organisation.

It of less consequence whether the product idea is in-house or externally acquired.


Another variant of above strategy is Ring-fencing to create an Unit inside a Function

If there is not much difference in operational aspects, then creating a near-autonomous unit inside a function is good enough to address the difference in market conditions.

In case, if the disruptive product is an offshoot of core products of the organisation, has similar cost structure, but has a different target market. In such a case, creating a focused marketing and sales team will be enough to enter the new market.


Strategy: Acquire & Integrate

This strategy is safe to use if an external disruptive product idea requires similar operational conditions and market conditions as that of parent organisation.


Various strategies are summarized below in a framework.
The y-axis refers to Market aspects like Target customers, Market size etc.
The x-axis refers to Operational aspects like Cost Structures, Technical competencies, Product Development process etc..

Organisation-level constraints on entering New/Emerging markets & launching Disruptive products

An organisation may have several new disruptive product and service ideas. But what matters is how the organisation takes those ideas forward. There are examples where an organisation was first to come up with an idea. But it was some other company which recognized the potential and invested in its development and market launch. As you may be aware, the digital camera was first invented in Kodak!

Why does it happen that a successful organisation which has a great portfolio of products ideas, lose out to others who arrive late in market with similar products. Is it because of the people in that successful organisation or the processes or the culture or because of its customers?

__Existing product/service offerings defines an organisation in terms of the cost structure, profit margins, market size and customer segments. Any organisation cannot change its cost structure overnight, especially to one with lower overheads and thinner margins. Hence, there is a tendency to support product ideas which promise higher margins and are in line with existing cost structure.

__Similarly, when it comes to taking market feedback for product ideas, the sales and marketing personnel reach out to existing customer base. Though the product ideas may be more suitable for an entirely different and emerging market. Since, the existing offerings serve as a reference, an organisation expects the market size of a new idea to be at least as large as that of existing offerings. Smaller markets are not considered as they may not fulfill the desired growth rates of the organisation. 

Hence, when it comes to investing in new products/services, an organisation operates in confines of its cost structure, product margins and customer base. These are organisation level characteristics, independent of people working in it. Product/service ideas which serve existing customers and promise higher margins get support while other ideas starve for resources. 

However, there are ways to influence an organisation and to work-around (or break) its organisation level confines to launch disruptive products and enter new markets. Will discuss the same in upcoming posts. until then.. bye...

Delivering Breakthrough Innovation: Selecting customers for feedback and launch

The series of posts on "Delivering Breakthrough Innovation" are based on my experience. And in this post, I would like to talk about the challenge one finds in the marketplace when introducing innovative products/services. 

If you believe that overcoming organisation's internal skepticism & resistance for a breakthrough idea is all it takes to introduce an innovation in market. Wait, till you step in the market! One would find that the internal skepticism also reflects in external world. This shouldn't come as a surprise, because internal industry and market experts have the same mental map as the customers. And hence, they mirror the customer behavior and expectations. 

Customers too are engrossed in their day to day operations and would not imagine something disruptive in their way of working. In a B2B scenario, the customer like any another company, would have their silos, with each functional head expecting incremental improvements in their areas. Hence, level of internal resistance can be a good indicator of resistance to be expected in marketplace. 

So, one needs to be realist and not expect their innovative product/service to be an instant hit in market. At the same time, one should not get discouraged due to initial skepticism and kill the idea prematurely. Following are the pitfalls to be avoided when going to market:

___The management will insist on early feedback from customers before further investment in the idea. But all customers are not alike. Some are conservative and others are progressive, commonly know as 'Early Adopters' and 'Laggards'.

• If progressive customers are known, feedback should be taken from them. 
• If progressive customers are not identifiable, then customer feedback should come from a reasonable sample size. This lowers the risk of a conservative feedback. 
• Also, as mentioned in previous posts, a prototype helps to get objective customer feedback. Even a conservative customer though skeptical, would still be forced to be objective in evaluating it. 

___Some disruptive innovations may require customer trials for further improvement and benefit assessment. While selecting a launch customer for trials, it must be ensured that the customer has reasonable interest in the idea and will give necessary support during trials. Also, the customer can be incentivised in terms of foreground IP sharing or concessions rates going further.

For success of a disruptive innovation, managing externally (market feedback and launch) is as important as managing internally (internal buy-in and development).

Monitoring Shifts in Related Value Networks and Beyond

A value network constitutes the chain from suppliers to the ultimate customer which serve a specific set of customer needs. A simple example would be of value network of Flash memory sticks. The participants in this value network and their products serve low and portable memory storage needs of the customers. Another example would be value network of long range aircrafts which serve long distance mobility needs of people.

For a given value network there are related value networks which share some common traits. For instance, value networks related to Flash memory are portable computing, desktop computing and mainframe computing. A company may serve more than one value network by different product range.

A company tends to be occupied with shifts in its own value network to compete and survive in the marketplace. The shifts in related value networks and beyond get ignored. As a result, companies are caught off-guard when shifts in other value networks transform their own backyard.

Taking the popular disk drive example where the 3.5in drives in  mini-computers value network entered as game-changer in the desktop computing value network.

Taking the portable music player example which was serving mobile music value network. The portable music players were wiped out when the smartphones from mobile calling value network added multimedia capabilities.

In present times, a company needs to monitor shifts/changes in related value networks and beyond. For instance, an aircraft manufacturer can monitor shifts in value networks of regional, short haul, long haul, business, hobby, cargo and even beyond like space travel, surface transport etc.

While monitoring the various value networks, its important to investigate in various dimensions:

• Can a emerging product/technology in other value network impact my value network?
• Can a changing business model in other value network be applied to my value network?
• Can my product/service fit in other value network as well?

The investigation will reveal both threats and opportunities for a company outside its value network.

Delivering Breakthrough Innovation: Buy-in & Investment challenge

The last post dealt with execution challenge of an innovative idea. For execution, management buy-in and investment are required. The selection process for investment is a formalized process in many companies. And there lies the risk. Many innovative ideas slip through the cracks when they start their journey down this formalized process. It happens because the investment process is focused on delivering certainty. Innovative ideas are by nature have uncertainty associated with them. They struggle against the "certainty and no-risk" seeking comments like the following: 

Show me the money!: Revenues, cost estimates, business case, profitability, IRR are common in investment and capital budgeting decisions. Answering above questions is easy for a sustaining project which is based on existing technology, business model and market. But a disruptive idea can be different on all the three areas. Since there is no precedence, much of the time is lost in collecting data and figures. Due to uncertainty and non-precedence, the numbers are easy to challenge and hence more data is demanded. Instead of working to mature the idea, the team is caught is spiral of more data, more questions, hence more data. Some good ideas just die a slow death on a PowerPoint presentation.

My customers never mentioned about this problem!: Many companies institute a discipline of "listen to your customers". Customers are asked about their problems, a list is made based on the feedback and circulated to relevant internal departments for further action. If the innovative idea does not answer any problem in the list, then there is a slim chance of any support for the idea. One forgets that the list is just explicit needs of customers. Innovative ideas generally cater to implicit needs, or an unexplored opportunity.

It does not match with my yearly performance targets!: The investment process in general requires commitment from an internal customer who would industrialize/market the idea. An innovative idea will get blocked if it does not fit with the performance targets of the internal customer. In spite of obvious long term potential of an idea, the yearly targets influence the investment decisions. 

Not sure if it can work in real conditions!: As part of the formalized process, the experts will be called in, and questions will be raised on how a solution/idea would perform in actual operational conditions. And as one would expect, the disruptive idea/solution will not have all the answers. The formalized process in general do not provide room for "we will resolve the issues as we go along". Every issue needs to be resolved today! If not, come back with more information for the next meeting.

Formalized process for investment are important in an organisation to ensure that capital is efficiently allocated. Unfortunately, an organisation tend to use this formalized process as a single hammer for every type of nail.

Some organisations have woke up to the need of providing alternate channels for innovative and disruptive ideas, keeping them separate from the sustaining projects.

Delivering Breakthrough Innovation: The Execution Challenge

My earlier two posts dealt with zeroing on a potential break-through idea with the feedback from customers and experts. And believe me when I say that you have come just a quarter of the way. Still there is a long road ahead of execution and implementation. More disruptive the idea, more challenging is its execution.

But why is execution of a disruptive innovation so difficult, especially in established companies? The answer lies in organisation and processes of the company which is performance driven and focused on incremental growth in the boundaries set by the market conditions.

In other words, participating in execution of disruptive innovation is not part of any KPI of a manager and in many cases works against the existing KPIs. Consider following execution elements and the challenges: 

• Detail solution design and development: Any disruptive idea typically requires a cross-functional team and external expertise. However, R&D and Engineering team are busy with projects for improving existing product. They cannot spare the manpower. And working with external experts raises IP & confidentiality issues.
• Procurement of hardware/services for development: The procurement team is focused on cost reduction and applies the same process. The suppliers need to be registered and meet the criteria. They want competing quotes and negotiation for any procurement. Whereas you want to work with a designated supplier who is agile and understands your requirements without asking for a 50 page specification document. 
• Production: The production plan is frozen for the year. There is no availability of machines and skilled manpower to work on your product. 
• Customer discussion and feedback: Marketing team is busy with promoting existing products. Salesmen are busy with hitting their targets and have no time to discuss ideas with customers.

In nutshell, the organisational processes are designed for what they do best, to build on the past performance and efficiently earn the daily bread and butter for the company. Disruptive innovation is antithesis to what they are designed to do.

A certain organisational support is required to handle disruptive innovation. It would be wrong to rely just on an individual leadership and charisma.

The organisational support can come in following ways:

•        Empowered team for Innovation with access to top management.
•        Designated coordinators from each functional dept.
•        Faster procurement channels
•        Flexibility in pursuing external partnerships with start-ups, academics and other companies.
•        A dedicated budget and regular review via say roadshows.

With the organisational support in place, next comes the team. The team may constitute of persons from diverse industry backgrounds and in-house experts. The common behavioural aspects are self-driven, open to new ideas and ability to perform in uncertain environment.

The organisational support and a good team are the foundation to manage and execute disruptive innovation. However, there is no formula for the execution itself. It can be chaotic, iterative, going back and forth, working-around, re-work etc. At the same time it would require painstaking attention to detail, documenting experiment results and mundane project planning & management.

So do you still think Innovation is glamorous and exciting?? J