Problem, Opportunity, Trend or Threat

Like all good management consultants I live in awe of those who can simplify all problems down to a two by two matrix or a short acronym. That's why the title of today's post is Problem, Opportunity, Trend or Threat (POTT). These are the reasons why most firms innovate.

If you think about it, most new products or services come about because someone wants to solve an existing PROBLEM. In fact, many of the best innovations solve problems that many of us have recognized but simply put up with for years. Solving a problem can make it a lot easier to identify the customer base, the potential market acceptance of your innovation and will generally make it easier to communicate your value proposition.

Identifying an OPPORTUNITY means seeing something that others fail to see or identifying a gap or hole in the market that others have failed to take advantage of. An innovation that is targeted to an opportunity is more difficult to quantify, since there are few if any competitors and customers may not even be aware that they have this unmet need.

Identifying TRENDS is probably one of the best ways to "Get there first" and have leading edge products or disruptive products and services. Many firms identify trends but few do a good job of synthesizing and analyzing trends and converting that knowledge into new products and services. Innovating around trends can be risky as well - anyone remember the downside of the "pet rock"? After the initial euphoria, a lot of people realized that they were spending good money for a rock with a face painted on it. Maybe we should separate "fads" from trends.

Finally, innovating around a THREAT is fairly reactive in nature - but often necessary. The threat indicates that your team has found itself behind a competitor or that a new solution has emerged that threatens your products or services. Innovating around a threat is what seems to happen most often, since it is hard to convince people to pay attention to innovation in the absence of a threat.

All of these are viable reasons for innovation, but each represents a very different place on the proactive/reactive spectrum, and demonstrates the firm's willingness to take on risk. Will the firm proactively innovate in new spaces (OPPORTUNITY) or react to what others do (THREAT)? Will it solve a problem (INCREMENTAL) or create something new and disruptive (TREND)? How do you classify your ideas?

Replenishment Theory

I've been thinking recently about the connection between the "front end" of innovation and the "back end" or executional aspects of product development and product launch. Much emphasis lately has been placed on the importance of improving the "front end" of innovation - that is the creation and sponsorship of new ideas - without a thorough examination of the challenges inherent in the transition.

There are at least three scenarios that play out in most firms:

• One big bet
• Lots of small bets
• Episodic innovation

Let's look at these and the problems they create.

In the first instance, which happens in many firms, we have the "one big bet" approach. In a product group or line of business, the organizations marshalls resources around one idea that it hopes will make a dramatic change in the business. Other ideas are discarded or rejected so that the one big idea can be nurtured. This approach is fine if your organization has perfect insight - but what if your idea turns out to be not so important to your customers? Then it's back to the drawing board for another swing and 18 to 24 months before a new product offering is available.

In the second instance, the flurry of small bets, a firm will create extensions to a number of products that add slightly different features or services to existing products. This is more of a classic product extension strategy, and while not differentiating, is less risky to define and achieve.

The third scenario is episodic innovation. That is, every so often someone will examine the state of ideas and products and pronounce the well to be dry. Then, it's all hands on deck to generate some new ideas. At which point those ideas work themselves through the funnel and the urgency to create new ideas diminishes, until the next pronouncement about a dry well.

If each of these is problematic, what's the appropriate response? Replenishment theory.

Firms should have a steady stream of good ideas that enter an innovation process and move through the process to become new products or services, or get rejected along the way. What's important is to understand the demand for new products and services and the timespan necessary to move from a poorly defined idea to a fully described product concept. That time frame should be compared to the average product development and launch timeframe, and rationalized within the firm so that ideas are presented as the product development process requires them.

Our rule of thumb suggests that it should take about 20% of the product development lifecycle for a new idea to move from initial capture to fully defined product concept. So if your product development and launch timeframes are 8 months, then your front end timeframes should be two months or less.

Second, you want to determine whether or not you need to time your innovation pipeline to a fixed planning and approval process or if your ideas can be produced at any time and considered for approval and funding at any time during the year. Many firms have a once a year planning cycle and don't set money aside for projects that aren't approved. If this is the case, you may want to tailor your innovation pipeline to the approval process, or make a case for a budget to develop and evaluate ideas not necessarily associated with the annual planning process.

Third, you want to hedge your bets. According to the strategy of your firm in its industry and positioning, your team should be bringing ideas to life that are disruptive and incremental every year, and several of each kind per year. As an idea leaves the front end, there are still many reasons why it may fail during product development, piloting and launch. Too much emphasis on too few ideas will frequently leave the organization with nothing new to introduce.

How carefully considered is the transition in your organization between ideation and innovation and product development? What's the appropriate replenishment process and how should it be timed? Do you have to wait for the annual planning process to fund new ideas?

Givens and Assumptions

Working on a brainstorm recently with a client, we asked the question "What would happen to our industry if our givens became assumptions and our assumptions became givens?" For example, what would happen if we took for granted that each business or homeowner would generate their own electricity rather than purchase it from a utility? Suppose we went back to the past and placed a windmill or some other generation device at each home or place of business. Now, what changes about the business landscape?

Well, for one, the people who own the transmission equipment had better figure out how to stay in business - probably buying excess electricity from people who can generate more than they need and distributing it to people who can't generate enough. Except in certain circumstances, large generation plants become a thing of the past, since small generation facilities powered by the sun, or wind, or natural gas, can be established at the home. Perhaps we'll even move from AC to DC?

One of the challenges in looking forward and trying to create new ideas is the concept that we have a hard time shaking our assumptions. These tend to get carried along and become barriers to our thinking, so we project a future that is only slightly different from the present. In some cases, those assumptions may be true, but in other cases the assumptions are totally wrong. There are several famous pronouncements from those who probably should have known better about the future of the PC. The head of DEC once said that no one needed a personal computer, and Bill Gates is on the record in the early 80s wondering why anyone would need more than 1MB of memory in a PC. These guys and plenty of others never forced themselves to turn their assumptions and givens inside out and look at the world in that light.

In your business right now, what are the "givens" that you operate on? Perhaps a technological constraint, or legal or regulatory constraint, or some cost constraint. What are your assumptions? What would happen if the "givens" were somehow overturned? How would that change your market or industry? You can bank on the fact that sometime in your working life, one or two of the "givens" you held dear will be overturned. Whether it is something like open source or Software as a Service versus licensed software, or some dramatic change in federal regulations, or the introduction of an automobile engine based on something other than internal combustion, it will happen. The question will be whether or not you've considered the possibilities and how you react to the changes.

If you have an innovation team, they should be doing this exercise every year. What givens do we hold as sacred? If they were repealed or overturned, what would happen to our business? Someone, somewhere is working to overcome your givens. Some competitor somewhere sees your givens as assumptions that can be violated or changed. Will your firm be ready when the change comes?

Reactive or Proactive Innovation?

By now, certainly you know that when someone asks an either/or question, the best answer is simply "Yes". I'd like to spend a few minutes today thinking about the benefits and rationales of innovation that is reactive, and innovation that is proactive.

Most companies have opportunities for both reactive and proactive innovation, so let's start by defining terms. Reactive innovation is innovation that waits for a good idea to be presented. The classic reactive innovation technique is a suggestion box or an email address. In "reactive" innovation, the firm expects ideas to be sent in and then reacts to those it considers good ideas. Proactive innovation is an approach that constantly seeks to find great ideas and to sponsor ideas. Proactive innovation means that the firm is constantly defining new opportunities and challenges and using the ideas generated to attempt to create new products and services based on those challenges. So, which is the "right" approach?

For a firm just starting on an innovation path, we strongly suggest starting with a "proactive" approach. This means creating a few well-defined problems, challenges or opportunities and creating a brainstorm or other method to submit ideas based on these defined challenges. Creating a context for your team and directing their thinking as they begin to innovate is important. The context helps them understand what kind of ideas your firm needs, draws bright lines to help direct scope and thinking, and demonstrates how the ideas will be used - showing that they have value. Actively seeking ideas early in the process demonstrates commitment to the innovation process as well.

Once these programs are up and running, the firm has set an expectation for innovation and demonstrated how those ideas are used. At that point a suggestion box (which is more "reactive" than proactive) can make sense. A suggestion box allows individuals to report and capture ideas of any form or type, without management's direction to solve a specific challenge or opportunity. This means that in a reactive mode, ideas will vary widely and will need more time for review and contemplation. A suggestion box is best used once the firm has some experience with proactive innovation techniques, so the organization begins to understand how to generate and submit ideas.

Clearly there are other aspects of proactive versus reactive innovation. Other factors include:

• Communication and expectation - what do we expect to happen in our firm based on the innovation approach?
• Investment - proactive means taking action before the first idea is generated. How do we invest in these programs and how do we fund them?
• Compensation/Motivation - it's much simpler to demonstrate that management is involved and committed to a proactive innovation approach. How do we compensate and motivate people in a "reactive" approach?

As noted above, eventually both approaches are important and can run in parallel. For those just starting out, a proactive bias is in order.