May 22, 2007
This article touches on a critical issue, how to measure success in innovation. This approach is particularly relevant when considering "option plays", i.e., when the level of uncertainty is too high to have "good" numbers—at this stage do not ask for a business plan but the potential value you can create for your target customers. Go to the complete article for the full impact.
Question: Why are financial metrics the wrong yardstick for evaluating potential products for a portfolio and what should companies use instead?
Mello: Hindsight clearly indicates which products and services you ought to have added to your product portfolio when you were doing last year's plan. Lacking a crystal ball, most companies currently rely on a frighteningly inaccurate mix of erroneous financial projections, analysis of past successes or failures, and strong emotion to decide which innovations are worthy of commercialization. The prevalence of an approach that often resembles the efforts of medieval alchemists to transform base metals into gold in part explains why the failure rate for new product introductions is so startlingly high (estimates range from 50 percent to 90 percent).
Instead of profit potential or ROI, companies should measure something else: customer value. So why aren't they? One reason companies don't use customer value as a metric in determining what goes into their portfolios is that they believe they can't measure value before a product is created. They wonder how to determine whether a customer will pay for a product or service that's not yet fully developed.
The starting point for measuring customer value is a documented, repeatable research process to collect information that represents the voice of the customer. A robust, fact-based system to clearly identify both expressed and latent customer needs also provides a common, unambiguous language to discuss projects with product development teams. Instead of arguing over unreliable financials or engaging in political one-upsmanship, teams can focus on getting done what's needed to meet customer needs.
Traditional approaches to gathering VOC data -- such as focus groups, customer surveys, and informal research by marketing staff -- fall short of providing the deep insights needed to reveal true (and often unarticulated) customer needs. In short, if you simply ask what customers want, you may never gain the insights into their needs that allows for true innovation. (Ken Olsen of Digital Equipment Corporation is reported to have said in 1977, "There is no reason anyone would want a computer in their home," and customer surveys probably would have proven him right.)
An effective VOC process involves interviewing techniques such as probing questions, digging down for the so-called golden nuggets, storytelling about customer problems, and structured first-hand observation followed by quantitative Kano analysis. (The Kano Method, developed by Dr. Noriaki Kano of Japan's Tokyo Riko University in the 1980s, is, at its simplest, a series of two-part multiple-choice questions about user needs.) Using these methods, companies can determine the functionality that products must satisfy, as well as those features that delight, disgust, or elicit indifference in customers. With this data in hand, companies can separate potential winners from losers before launching into product development. Taking this method of analysis up a level to executive management allows companies to evaluate entire product portfolios using customer value as a yardstick