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This book is about “innovating”, not about: “innovation”. More precisely, it tries to help a good idea hit the market and get sold. This part of the innovation’s journey, the one that goes from when an idea has been invented (found, identified) to when it becomes adopted and creates value, is not really well documented in literature. Is just since few years (since 1997, precisely) that Clayton Christensen has described the path of innovation to market and has characterized some typical routes that are made by the successful ones. Failing to understand the differences among those paths, when they should alternatively pursued, and why making the wrong choice leads to failure, causes to most of the Innovators to waste time and resources. The questions collected here should help you to decipher the circumstances in which you are and make the right decisions about whether and how to proceed toward the market. But when we do innovate? Innovation is: “a new way to reach a goal”. I found this definition about innovating in a paper of Benoit Godin, of INRS – Canada, who explained how the concept of “innovation” evolved in time. It started meaning: “Change” (of the established behaviors of the user who will “adopt” the invention), then it added: “Rupture” (with the past, not just detaching from it, but more profoundly destroying it, to achieve a new and diverse “status”) and lately, in the past few centuries, the word “innovation” has been connoted with 2 modern elements: “creativity” and “utility”. Today we assign to an “invention” ( the combining of elements that creates a new value) the status of “innovation” only if the invention brings‐in an “utility”. “Utility” involves both an “adoption” by a Customer ( a change in his behaviors) and the ability of the invention to be “marketable” (capable to generate an exchange of value).
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Under this light it becomes clear that the starting point of any innovating attempt is in “the Customer”. Without him, there is no “Utility”. This is why this book starts with the question: Do you have a Customer? There are only two the options: 1) or you do have a Customer: you have an idea about who is him, and you already bargain with this fellow. 2) or you have no idea at all, and you have to hope to find him.
This entitles to two different kind of problems: In the first case your task is to minimize the chance of failure for your investments. There is a huge set of best practices that companies around the world have collected in order to make the initiative of bringing a new idea to existing Customers, safer. The second option is more tricky: because the only way to discover your Customer is to try. Learn your way to him by trial and error, being ready to change your path when a better way is encountered. In other words is a matter of experimenting: maximize the opportunities to learn, while using the minimum amount of money and avoiding the chains that can tear down your flight. These two courses of action seems self‐evident. And in reality they are equally viable in principle. What Christensen has highlighted, has been that there are precise circumstances that indicate when each one is worth to be pursued. Failing to identify them may lead to dead‐ends, fighting against wind‐mills, struggling with resources, find yourself alone half the way etc. The “Roadmap to Market” will try to guide you to the right path, and help you identify all the signs that lead to success.
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The Roadmap to Market aims at collecting all the information you need, to answer to 3 basic questions: 1) Is there a Client for my idea? 2) if Yes, can I minimize the risk of failure for my new product or Service? 3) if No, can I maximize the chances to find the right one? The First Question will help you recognize the signs to the right Road to market, avoiding dead‐end paths that have been proven (by others’ failure) to have the lowest chances of success – if any. The Second one is aimed at collecting all the data needed for an NPV (Net Present Value) analysis: Demand, Share, Contribution Margin and Risk level. And is the route you should take if you own the Clients and you just want to beat competition and leverage your competitive position to get the most out of your idea, with the lowest chances of failure. The last one is the most risky but also the most rewarding. Because, if you do not have a Client, you may then discover that your idea is worth to someone you never thought before, and he was really just waiting to it to solve his pressing problems. To make you swim in this Blue Ocean of opportunities, you need to ask yourself how you can discover the route to the Eldorado. And because no‐one have been there before, maximizing the result of every trial is the real job that brings you there. Caveat: This book collects lessons of several leading Scholars in the Field of Game Theory ( e.g.: Dixit‐Nalebuff), Strategy (Porter, Christensen, Kim‐Mauborgne) and Marketing (Trout, Reeves, Bly, Stokes, Choun). I sacked wildly their ideas and tried to build a roadmap for innovators, bridging their theories where I saw possible joints. Therefore this book is not intended for beginners. You should have a basic understanding of marketing and be familiar of the common jargons used. In this way you will multiply the effectiveness of this Roadmap, that organizes sound marketing models. Furthermore I not intended to give you a “reading companion”, but a working tool where to find rapidly hints about marketing innovation. You will not find many examples. Just brief explanations of what each voice should mean.
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The Roadmap to Market: Part 1. Do you have a Customer?
Do you have a Customer?
Whenever a friend comes to me telling: “I have a business idea…” the first question I make him is “ do you have a Client?”. But the real way to put the question should be. “ Does any Customer owns you?”. Because is not enough that you have an idea of your target Client. You should have bargained with him. Your potential Client should have been able to experience your service, or at least experience you. Recognizing you as a solution provider. Someone who has the ability to solve his pressing problem, or to allow him to achieve his goal. If this is the case, probably you are not alone. You move into a trajectory with others like you, ready to serve that client at the best of their capability. The Customer dictates his needs and requisites, if not even asks a well defined performance level to an attribute of your solution.
If yes, which part of the market are you thinking to serve?
In case you know your target customer, he can give clear indications about the level of performance needed. But be careful. Not always what he ask for is what he really is going to use. Listening too much to Client’s requests may end up pushing your offer toward the high‐end of the market.
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This is a very attractive segment of Customers. They are never satisfied and ask always more. And are even willing to pay this “plus”. But the higher the performance level, the less are the Clients to be satisfied. The distribution of the Clients within the market may resemble a Gauss Bell shape: With few at the low and high ends, and a mass concentrating around the median performance.
Are you underperforming, or are you over performing?
Taking as a target the median customer, if the performances offered by the market are below the expectation, all the competitors are “fighting for the top”.
Fighting for the top:
They strive to sell a better product into an established market, and each time someone come‐up with a better solution, he causes the immediate competitors reaction. The prize at stake is huge, because usually the mass of the clients are still to be tackled, and the opportunities to sell grow the better the product is. Furthermore the Client does not find a better solution on the market, so is willing to pay for the best. What you really are fighting for is to make your customer achieve a better result, not really to assure that your product reach a better performance. In this race you can not stand still. You will be left behind fighting with a hard to differentiate product, and against competitors with similar cost structures. You are going to look for those idea capable to improve or at least maintain your profit margins, exploiting your organization’s processes, cost structure and competitive advantages. All the inventions that can not deliver improved profit margins relative to the current cost structure, are discarded. Because the cost structure is most probably an heavy one. The architecture needed to manage the
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complexity and the uncertainty underlying the research of a better performance is a huge and costly one. If you intend to take part to the race, better be equipped.
What you need is an integrated architecture. An organization that is a platform capable to achieve new levels in terms of Performance and Reliability of your offer. Is a matter of “concurrent efforts”: you need the ability to develop the components of your offer simultaneously, solving the un‐know and un‐predictable interdependencies among them. It requires Experience, Talents, ability to manage risks and time. And the willing to sustain these efforts for long periods. An integrated architecture can be only proprietary. Is a unique enterprise that demand high Capital Expenditure to cover R&D costs, back‐up inventories, talented human resources. All this command huge margins from each sale. The high capital expenditure and capital on operating costs ratio of an integrated architecture is the source of differentiation, and the first barrier to entry for new competitors into the offering trajectory. The second barrier to entry is given by the steep economy of scale that is generated by an integrated architecture. This is why trying to bring a new invention into an existing trajectory could not be a good idea, unless you do have the integrated architecture and the Clients to serve. The race you would willing to participate would not be a race to succeed, but a race to not fail.
Carefully planning not to fail:
Companies that play this game have organizations, processes, values, resources, that are committed to stay on track and sustain themselves. Their strategic efforts are dedicated to filter out inventions with lower chances to succeed, with expected margins insufficient to sustain their cost‐structure. They are optimized to extract the most out of the existing customer base, and in doing so they fight to scale up the existing solution towards higher margins segment of customers: the high end of the market. A new idea that has the potential will never be just added to the offer. Most probably embedding it into the offering trajectory will require sound practices and experience in managing the interdependencies with all other components. And the more high‐tech is the idea, e.g. if is an invention coming out of a research laboratory, the more resources are needed to govern it. No wonder that only large corporations can dare to bring on the market the most sophisticated scientific discoveries. They are the only one designed to manage the complexity and costs of such a challenge. This race has a toll: the quest for higher margins may distract from understanding where the median market is. Listening to customers who ask for more (and promise
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to pay for it) may end up surpassing the level of performance required by the mass. For these Customers, the marginal increase in price that a Company can sustain for an improved product slowly approaches to zero. This suggests that the marginal utility that Customers derive from using the product also is approaching zero. Your product is actually over‐performing.
Are you over‐performing?
How you can recognize if the offer is over‐performing respect what the Customer is willing to buy? After all, Customers are those who ask for “more” in all the questionnaires, survey, feedbacks and requests for quotation you receive. At least it seems so. On one side, in fact, there is a psychological stiffness of the customer in conforming to the high‐end “luxury tastes”, a kind of irrational wishful thinking, that for a certain period may help your customer feel better, when asked about his needs. On the other side your organization tend to report as feedback, only those that are aligned with what the Company want to hear: more margins.
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And more margins can be found only in the high‐end minority of the market demand. Its feedback is therefore the only one that survive the filtering screening of the Company probes: its middle management. A better look may show that Median Customers are starting not willing to pay for the marginal increment in performance. Suddenly they shift their interest from performance, to “Reliability”. They have enough of what your product range can offer. They want that the product perform the same way as long as possible. Later on, when also this requirement becomes more than satisfied, their interest shift again. It moves to “Convenience”: the preferred product becomes the one that is easier to get and use. Finally when also this feature becomes a “given”, the last criterium of choice among competitive offerings remains “Price”.
When you are still on the performance trajectory, you may start notice that your customers are starting to buy the entry‐level products of your product range, or of the market products range. All of the competitors are started to be treated alike. Price becomes an interesting gauge of choice. Is in this situation that a threats materialize:
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Are you leaving room to a New Entrant?
This is the question from a Competitor stand point. You may see that new competitors with a better pricing can undermine your offer. If such a new player is able to capture customers’ attention, and has a lower cost structure he is going to benefit of high margins until the last competitor of the Performance trajectory, will stay in the market, sustaining the price levels towards the high‐end of the market. The competitors in the Performance trajectory, are even incentivated in their rush toward higher margins, to leave the low‐end segment, moving their offering portfolio towards the high end customers. In so doing their portfolio’s margin tend to increase on average, so making this attraction to the top even financially justified (at least until someone start to see that higher prices by lower volumes do not coop with company’s growth).
Is there a Threat or an Opportunity?
If from the competitors’ pack, over‐performing could be seen as a threat, from the point of view of someone with a good new idea, this situation is more of an opportunity. An observation of the low‐end customers may lead to discover not only a way to penetrate the market, but even to expand it. Among the low‐end customers there are surely users who are perfectly fine with the low‐end products range. But a close look may show that among them there are Clients who, yes are satisfied with the minimum performance, but in reality they are “using” other features of the product. Features that are considered not important or not considered at all by the rest of the Market.
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Some of these low‐end customers need help to make the product work for them. They may need expert consultants who help them adjust and fit the product for their need. They lack of the competences or the infrastructure: tools, systems, information, to just plug and play the product to solve their problem or achieve their goals. All of them are looking for “Simplicity”. Others travel a long distance just to get the product. They use only 10% of it, but that 10% is worth a long trip. If someone could be able to offer the same, just a little more “Conveniently”, would become instantaneously their preferred supplier. Other Customers would love to get the product but they can barely afford the “Price”. Some time they just bounce back and go away and make without it. If they are lucky they try to make with an “emergency” solution, something that make half of the work, but is better than nothing. If your brand new idea can change the cost structure of the offering, reshuffling it to make the product more simple to get, more convenient, and sellable at lower prices: all of these customers are yours.
Can my idea disrupt the Performance’s trajectory game?
If among your Customers you find someone that behaves as said before: looking for simplicity, convenience and price, or just bouncing away, chance are there that a larger crowd of the same type may be served. Unfortunately many time the people that spot these opportunity, lack of fantasy. I have seen people spinning off one of the competitors, just to rephrase the same offer, at lower price, or for just some ”opportunist” customer, but really without bringing anything new on the market. Just giving away margin, and trying to make their way cutting fixed costs (branding, service, R&D…) from the original‐competitor cost structure. This is quite easy to see happening from the service side of the original competitor. It is quite easy to spot the huge margins that the company is making with its service business, stole a few of the best service men doubling their salary, promise lower prices to some friend‐customer and denting for a while the sales of the original company. This may work in an up‐swing economy, where the service offering capacity may be not fully satisfied. But generally does not last the shake out of a downturn, or of a company that had it enough of those “bites” to its revenue base. So if you spotted the opportunity, better to make a sanity check and verify if the move is backed‐up by a new idea capable to bring the same value, but with a new type of cost structure. The people that succeed in grabbing the opportunity, generally have spotted that the products on the market are far more complex than what is needed to deliver the performance “used” by the Customer. ( remember: customers tend to ask for more,
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even when in reality use less than what you offer ) so they find a way to pull together the key components of the product on to a more simpler and standardized architecture. A modular system where the interfaces are fixed, and the components can be plugged in to achieve the sufficient level of performance. This performance becomes a “given” for the Customer: what he is really looking for is speed, responsiveness, convenience and price. If my idea is built on a modular architecture, and this is an invention that can deliver the low‐end performance level required: there are chances that more of the almost‐ customers will switch to this new solution. If this invention can achieve a level of performance that can satisfy the median customers, with a faster, simpler and cheaper solution. The are very good chances that the majority of the Customers will move to your innovation. Disrupting the original market.
Is my idea built on a new (modular) architecture?
In theory the new idea architecture, should not necessarily be modular. For sure is new – different respect the one in use by the competitors on the market. But if it is an integrated, complex one, the chances that the cost structure will allow a lower price are few. The chances that a start‐up new entrant, can manage the complexity, without the experience, and collect resources without a customer base, are few. So before to move, let’s check if the idea is built on a (new) modular architecture. The key point here is that the components of the product shall be plugged in the supporting architecture without have to tune it to the other components. In other words the modular architecture interfaces shall not have unpredictable ( not yet know) interdependencies. In this way each component can be developed separately as long as they meet the interfaces specifications. The components’ specifications limit the degree of freedom of the whole product, so they tend to lead to a sub‐ optimization of its performance. But this is not a problem as long the performance achievable are enough to satisfy the low‐end customers ( better if: the median Customer). What counts to make the final product performance, is not how the components integrate (coordinate), but how well each of them performs. The great advantage is that the performance of each component can be optimized, without having to reinvent the entire product. Furthermore the modular architecture allows outsourcing, leveraging in this way the economy of scale of the supplier. You can do so if your architecture meets the criteria of “Specificability” ( you know what is crucial for each component), “verificability” ( you are able to specify it and to measure it), “Predictability” ( you can say that there are no poorly understood or unpredictable interdependencies among components)
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Is it the right type of modular architecture?
Not all the modular architectures are equally interesting, from a business point of view. If it is a proprietary modular architecture the owner of it, will retain most of the margin, at the expenses of his components suppliers. He can specify the components interfaces, in a unique way. His suppliers can only build a product to fit them, without being capable to offer the same product to other Clients. The Owner of the proprietary architecture will make the money, while the suppliers will fight with competitors to give the best price possible. ( this is the case for example of a Gas turbine manufacturer, that can specify the blades of its turbine, and suppliers compete to satisfy those specs without having the chance to offer the same blade to other turbines manufacturers) If on the contrary, the modular architecture is an industry standard, and other players can use the same, the owner of the architecture becomes a low‐cost integrator, and the supplier makes the money. (see what happen with industry packagers of simple industrial skids) In both case, the modular architecture allows lower costs structures ( R&D, Inventory, HR…) and permits to sell at lower prices to a larger pool of customers. The difference is where the money goes.
Who is the customer of a new modular architecture?
If your idea has passed the test for architecture, is worth to recap the battle you are going to fight, before to proceed, and be sure you understand who are the customers you are looking for.
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You are going to offer your innovation, based on a new kind of cost structure and architecture, to an existing customer base. You are a new entrant on an existing performance trajectory. You compete for customers that are already consuming a product, and the large majority of them are well over‐served by the existing offer. Your entry customers are the low‐end segment of the market. Are those that are the most over‐served, the least profitable, and therefore less wanted by the incumbent competition. You are going to propose to those customers a lower cost solution. Your strategy leverages a modular architecture that grant you a Cost Advantage. This advantage is there only till the same customers are also served by the incumbent competition. As long as the last of the competitors owning the original architecture abandone the fight: your competitive advantage will fade away. You will find yourself fighting against equally equipped (remember: you most probably have an industry standard modular architecture…) competitors a tough price war. So be ready to enjoy the margins until the last incumbent competitor is still there. Your only way to enjoy margins is to precede the abandonment of the last incumbent competitor, invading his space. Your next target is therefore higher tire customers. And to do so you must be ready to extend your modular architecture stretching its performance until you satisfy those higher tire customers. To do so you can only count on your supplier. You must be ready to incorporate whatever advancement they can offer for their component, that can allow to increase your system performance. The architecture in fact is a given, and you can not count on it to increase the performance or gain competitiveness. Speed in adopting the new components is of maximum importance: in order to be the first to reach the new market segment, while the incumbents retreat from it.
Are you giving away your business to your suppliers?
The other side of this mechanism is that the only way to gain something in terms of architecture optimization is to outsource to the suppliers areas always more large of your platform. In this way the supplier can integrated the area and offer an enlarged sub‐system, optimized not only in terms of price, but also in terms of performance. And you have very good reason to do this: your cost structure will benefit, cause architecture’s base costs get squeezed. The natural path is that while you are tackling the higher tire customers served by interdependent architecture players, simultaneously you give away always larger chunks of your architecture to suppliers. They expand the scope of their (interdependent) architecture to fulfill all the requirements of all the possible subsystems of your product. They will finally end up offering to your client a solution that is fully commoditized: is affordable, un‐differentiated, over‐performing, reliable and convenient.
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At that point the only differentiation left, goes into the distributing channel: and among them: the only capable to provide anything – anytime will prevail. This is what happened with the sport cloths industry: where the tailor made solution, are now superseded by large retail chain, offering products branded with the channel name (Decathlon, to make an example). The game therefore never ends, is a token passing hands: the interdependent architecture is pulled towards the high end niches, until the market is disintegrated and superseded by a modular architecture that is then superseded by a commoditized integrated architecture with a differentiating distribution channel...etc.
Can you avoid it? Not really. What you can do, if you are a savvy competitor using an interdependent architecture, is to recognize the emergence of a modular architecture, and anticipate the moves of the new entrant, de‐structuring your offer into the key components, standardizing their interfaces and selling them to the new entrant, that in this way is pushed into a industry standard architecture, before that he fully develop its own, and reduce him to the status of a low‐cost packager. You will retain the technology of the key components, and with it, the largest share of margin the new value chain generates.
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Confess: you do not have a Customer, don’t you?
If you are not sure who your Client can be, probably you are one of those guy that after being immersed into a technology trajectory for a while, you saw a way to find the same thing but much more simply. You probably belongs to the engineering, marketing or service department of one of the leading players. Something trigged your attention and you pulled together pieces of the solution assembling out of the shelf components on a modular architecture and obtaining what it looks like a not‐enough performing abort. But it’s way more cheap, fast to build, easy to purchase. And the suppliers belongs to a totally different value chain, generally speaking, much less demanding and branded. The abort, sorry: idea, that you pulled together does not work for the usual customers belonging to your performance trajectory. At maximum can almost serve the lowest end of your customers segments. Your boss has ridiculized the idea. Customer’s feedback is like to have presented them a toy. Your solution does not show to have the margin required to be able to contribute to the existing product portfolio. But it has a very important attribute: it works. Furthermore its simple. Anyone can use it, it’s much cheaper, because there are not in‐house built precious components: everything was available on the market. If you only had a Client!
Who the hell may want it?
This is the problem with good ideas that are cheaper and simpler, but do not perform enough. Your usual customers do not want it, and you do not know who may. Your colleague, instead, the one that has proposed the big investment needed to improve of the 1% the performance of the existing product line, passed the test. His idea, was risky, difficult to realize, but was in line with what customers were demanding. And what Customer ask for: get precedence. His problem was to make all the plan to mitigate the risk of failure. What the company has done is to carefully check, and eliminate any risk of promising to customers something the company is not able to deliver. Your idea is different. Is there. It works. Just need to find a Customer. The problem is the opposite: is not a matter of reducing the chance of failure. You need to maximize the opportunities to bump into the right customer. And one thing is sure: is not the customer that you already know. Probably is someone that is striving to do a job, where the type of solution you propose may help a lot. But today is not offered. These potential customers probably use something different, a sub‐optimal product, that performs unsatisfactorily. On those respect, your idea would be a substitute product. Probably your product would enable those potential ( non yet consuming) Customers, that lacked the money, the skills or could not easily reach the solution.
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Who are those customers and how many, nobody knows. The only way to find them is to design a set of experiments capable to identify them and the best way to serve them. And because they are not know, you do not even know through which channel you can reach them. You know only that, because they are asking something cheaper, easier and faster, speed and responsiveness will be a key feature of the right channel. And can not be the same channel used by your company’s for its products. Because you can not offer the same share of margins to them. You need to find a channel to market that can be happy with your lower margins: for which your product may offer higher margins respect their existing portfolio. Someone that will be enthusiast to add your product to their offering. There are good news for you, however: first: there is a methodology to help you find the right customer. Is called “Discovery planning” and is summarized in the 3dt part of this book. Second: you are a substitute product: this means that you compete against “doing nothing and live with it” or, at worst, against a temporary, sub‐ optimal solution. Third: you are going to use a value network that nobody is using now. You are the first, the only one that has envisaged the modular architecture that can solve the problem, and even if you are going to steal few customers from the original market, the competition will not even notice it, because they are the one with lowest margins (for them). You just need a plan to discover the right path to Customers, and learning by doing, adjusting your way up to higher volumes and better profits, into a new Blue Ocean of opportunities.
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