Tuesday, April 24, 2007

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?
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posted by Jeffrey Phillips at 5:57 AM

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