A formula for innovation

GUEST COLUMN

Many people will remember the famous Lalitaji advertisement of the 1980s. Even today, Lalitaji epitomises the Indian consumer who weighs the price-value equation thoroughly before she buys. She stands for the challenge that the Indian market poses "" large but extremely value-conscious, attractive for a few and hard to crack for many.

It is axiomatic that to make an attractive return, companies have to offer the right product with the right features at the right price. Focusing on creating winning products can (a) create a dominant share, (b) allow a significant pricing premium, or (c) provide a sustainable cost advantage. The Boston Consulting Group's (BCG's) work suggests that firms can derive a 5 to 15 per cent improvement in profits by getting the product right.

A case in point is Apple. In a global survey of top executives conducted by BCG, Apple was voted the world's most innovative company. That reputation is well deserved, especially in recent times. The iPod is a great example of a winning product that played a significant role in the turnaround of a firm that was in the red in 2001.

If innovative products are so important, why do companies fail to create more of them? We believe there are four key reasons for this.

The first is a lack of appreciation of the intrinsic worth of new products. Many successful companies have introduced a great product in the past and then hit a block, typically driven by complacency or fear that existing products will be cannibalised. Sony's Walkman revolutionised the portable music industry, then failed to march in tune with market needs and was eventually edged out by the iPod.

Second, most companies lack a structured process for deriving or acting on consumer insights. Focus groups in air-conditioned rooms substitute for consumer insights. Companies often use disjointed pieces of market research to make a case for the new proposition. The result is a product that has little consumer relevance.

The third key reason is the absence of cost targets. In many industries, from cars to appliances, material costs account for 70 to 80 per cent of the costs. We have found that 60 to 70 per cent of these costs get frozen at the design stage. Subsequent changes, thus, become sub-optimal and the final business economics often doesn't make sense.

And finally, there is the absence of organisational mechanisms to facilitate product development because, typically, different functions don't communicate.

What, then, are the factors that help create a winning product? We believe that there are three key principles that companies should follow.

Really know your consumer

In any new product development, the first stage should entail observing consumers using the products in their homes, making purchase decisions in shops and then interacting with them to find out what makes them tick.

The second stage is during product development, where the interventions need to be designed to gauge whether the new features and concepts match consumer needs and ensure that refinements are incorporated quickly so that multiple mocks and protos can be tested in consumer labs against competition and iterated on.

This consumer insight is the responsibility of the entire new product development team and not only the marketing function. Designers and engineers need to be involved from the start, since first-hand observation of consumer behaviour can spark off different ideas.

In a profile of innovative companies, BusinessWeek noted how P&G, faced with a flat top-line, created a new innovation structure, with a vice president for design, innovation and strategy and supplemented it by asking people from various design houses to sit on its "design boards", interact with divisional heads and, finally, consumers.

This process reaped rich dividends, Swiffer, the dry mop being one good example. Who could have thought that the humble mop could be innovated upon? Noticing that standard wet mops created a mess and that dry rags offer better electrostatic attraction, designers created a radically new ergonomic and attractively coloured design that gave P&G the next $1 billion potential winner.

Develop a rigorous business case

It is critical to develop explicit analyses on cash flows, investments, payback period and the present value. This will help set the associated target costs. It is vital that the CEO personally ensures that these numbers remain inviolate in principle. These numbers may change as the quality of information improves. But a rigorous "toll-gating" process will ensure that costs don't exceed targets "" if they do, the team must return to the drawing board.

To achieve these targets, the development team must focus on two critical things:

First, the target cost is not a target material cost, but the target delivered cost, which includes the costs of manufacturing, delivering and servicing the product through its life. This will help the team focus on maximising value instead of on a short-term, potentially misleading target. This also allows the team to look at cost reduction levers beyond the product.

It is important to build a structured process for data collection (including competition benchmarking), analysis, hypotheses generation and ideation.

Transform mindsets

This is the most critical thing in creating winning products. Consider this scenario that we observed in one organisation. The sales team wanted a new product at a ridiculously low price; marketing wanted a feature-packed product. This was at odds with the R&D team, which wanted to use a new technology "" and the cost engineers were at their wit's end trying to get the product out at the right cost. All of them were pulling in different directions because no one had explicit responsibility for the new product.

The solution is to treat new products like a project "" with a clear project owner and a cross-functional team including representation from finance, marketing, manufacturing, service, materials and designers. A simple action like having this team under one roof can dramatically change the "silo mentality". Such a team also needs to be monitored and rewarded based on their performance on this project.

And finally, the CEO needs to be personally involved in the critical decisions. The project owner should report to the CEO. This sends out a clear signal that the organisation is serious about creating a winning product that will truly satisfy the fastidious Lalitajis of this world.

(Arindam Bhattacharya is Vice President and Director and Abheek Singhi is Principal with BCG, India)