Many companies want to innovate, but only a few want to change.
Without a commitment to change the innovation becomes decoration.
Even if a company decides to change it is usually hard to decide what to change. Which direction to take.
Not all companies need to or could innovate all the time.
Most of the time the business follows the industry best practices and as long as it works the business is growing. But at some point, the business cannot grow anymore because they cannot find new customers. They reached the red circle (the lava moat).
This is the point where they need to break out from the best practices and innovate.
There are lots of articles and books about how to build an innovation ecosystem and how to experiment with customers. The question of “Whyshould we innovate?” is also pretty well covered.
But the question “Where to innovate?” is still not properly answered. Yes, there are the ten types of innovation in the Doblin model, but which type is the one you need? Should you change your profit model, your brand or your channels?
35% of the other companies said they changed their Business Model!
So what? You are not them, you probably need different type of innovation.
I will present a simple framework that can help you find the direction of your innovation efforts.
There are four main blockers that form the lava moat:
- Not enough Benefits — the current product cannot meet the performance requirements of the potential customers. Like the mileage of an electric car.
- Too much Effort — there are burdens, inconveniences, time, and learning efforts that the customer needs to go through to use the product. Here are more details about the effort fee.
- Price is too high — this one is obvious. The potential customers don’t see enough value in the product.
- Can’t Scale it— there are potential customers outside the existing market, but we cannot scale enough to serve them. There might be many reasons for that — regulatory, technological, language barriers, skills, etc.
The barriers on the right side (Benefits and Effort) are set by the customer. How much benefit they can use depends on their need, on their Job-to-be-done. How hard is it to use your product depends on their skills, strength, available time, etc. These barriers are subjectively perceived by every individual user, but objectively affect your business.
The barriers on the left side are more internal for the business and could be impacted by the company.
These four barriers are the reason why you can’t attract new customers, and also the reason why your current customers are leaving you.
They are also the weak points where the competitor or disruptor can attack you. Most of the time there is a combination of these barriers, with one of the barriers being dominant. If you want to grow, you need to understand the barriers between your product and your customers.
Before you start your “innovation journey” you have to understand which blocker affects your customers most. And then focus your efforts on building a bridge over that blocker.
Most of the companies are pushing the performance barrier because this is what they know best. But it might not attract new customers. The customers might be happy with the current performance and just want a simpler and cheaper solution. If a few years ago the barrier was a lack of performance now might be a too complicated product, or unreliable delivery.
It is important to know your blockers because overcoming each of them requires a different type of innovation:
- More Benefits — the R&D department, acquisitions, partnership with universities and startups, crowdsourcing, etc.
- Less Effort— Design Thinking, Customer Journey, focus groups, Open Innovation.
- Lower Price — Improving efficiency, Automation, Lean Manufacturing, Continuous Improvements, Value Chain Mapping, etc.
- Scale — To improve the outreach we need to develop new marketing channels, scalable technologies, automation, value chain improvements, overcome regulatory issues, language, training, etc. If you want to be a disruptor you should be able to scale much better and faster than the incumbents.
Adding more Benefits (performance improvements) and reducing Price (cost reduction) are the first places where the business look when try to reach new customers.
Reducing the Effort is sometimes overlooked, even if it is one of the easiest and powerful tools for customer growth. Often the disruptors exploit low effort and high scale to overtake the market. There are several methodologies (like Design Thinking and Blue Ocean model) that the innovators can use for understanding and reducing the customer effort.
Solving the Scale blocker is usually the most complicated. It is different than improving the efficiency. The existing businesses can scale up until the point where the economies of scale turn into diseconomies. The innovation for scale should provide again economies at orders of magnitude bigger scale. Think about the production scalability of quartz watches compared to the manually produced mechanical watches.
Most of the digital businesses are global leaders because the Internet provides a medium to distribute information products at almost zero marginal cost.
Of course not all companies sell information based products, but the digitalization and automation of the back-end can improve their scalability in the physical world.
Once you know your blockers you are halfway there. It is time to find and understand the customers.
We will use the same framework to map the potential customer segments.
You can assess the size of each segment (the inner circle) and the reasons for why they are not your customers.
- Do they want better performance?
- Is it too complicated?
- Is it too expensive?
- Or they just have no access to it?
- What are they using instead, and what constraint the alternative has?
For existing products, an easy way to find such segments is to follow the churners. Find out what made them leave, and where they go when they leave.
Here is the simple recipe for Innovation:
- List the segments you want to reach.
- Analyze the barriers and dig deeper to find the constraints.
- Prioritize the different segments according to size, ease of reach, etc.
- Start targeted innovation challenges to overcome these specific constraints — use whatever methodology works best for you.
- Validate your assumptions using Lean Startup and other methodologies
- Measure the progress of reaching to the new customers.
- Repeat with the next segment.
Your innovation should be focused and fast.
Time is not your friend here. You need to win this new customer segment before someone else addresses them. The incumbents (your current competitors) are usually slow to react, but there might be another disruptor out there.
A joke: “I hope we can address this customer segment during our annual innovation campaign next year!”
The goal is to bring new customers — not to entertain your innovation or technology teams.
This framework will help you answer the question “What needs to change”. And you should decide whether you’ll commit to the change or not.
It will also change the discussion about innovation in your company. It will shift from “We should try this new cool technology” to “How to attract this customer segment using the new technology”.
New Markets and New Products
You can use this framework for reaching out to new markets or introducing new products. If it is a growing market you can apply whatever best practices work there. But, if it is a red market you have to identify the barriers for the existing players and change the game. Find the pockets of unhappy customers or non-customers and build new bridges between them and you.
Look also for solutions that break two or more barriers at the same time. This will make it much harder for the competitors to catch up. Make tradeoffs between the barriers — for example exchanging price for efforts like Ikea does. Or combining lower effort and massive scale like Uber and Lyft do. The disruptors win because they scale better.
Now you have a map for your innovation journey. You have the destination and you can put measurable milestones.
Please let me know if you find use cases that don’t fit in it. It will be great if we can expand it with your help!