The Three Key Reasons to Keep Innovating

Everyone can agree that innovation is import--for every type of organization. I was reading the "Innovator's Solution" the other day and Christensen made an interesting observation in one of his footnotes that I think is worthy of further discussion, which are the three key reasons to keep innovating: to keep investors happy, to keep employees, and to enable the adoption of technology.

First the traditional view: keeping investors happy. I did a hasty search on the web to see what other bloggers are saying about why innovation is important and from what I can tell they give several reasons that support only this one. Frankly, I think growing profitability and market share are what the general population generally thinks about as the ONLY reason to innovate. Out of the three reasons, this one is the only one that is directly measurable--the hard reasoning--but there are two soft reasons which are dependent on this first one.

Innovation is important for keeping employees also. So long as the company is growing the employees will have a sense that there are opportunities for career opportunities. As growth slows the sense that career opportunities lie outside the firm will be perceived more and more frequently. Unfortunately, it will be the top employees that will have the greatest opportunities, which means it is the less capable employees that are left to shoulder the firm's growth.

The third reason to keep innovating is that investment in new technologies becomes more difficult. When the firm stops growing it will have to do more with what its got because it will be less capable to support the capital investment required to bring new technologies into the organizational architecture.

No one needs to be reminded why innovation is important--the idea is intuitive. Nevertheless, as you are looking at new companies to invest in or work for you can ask yourself if the pace of innovation in the firm under inspection can be sustained to keep the top talent AND whether they are able to invest in new innovations. The two soft reasons to innovate support the major reason to innovate and are the key to impacting the fundamental metrics of innovation: product value, costs and the pace of innovation. 

Building Product Value-Guidance for Product Managers

In life we talk about building personal wealth. In business we talk about building shareholder value. It's time for product managers to start talking about how to build product value. Value Driven Product Management (VDPM) is the organization, coordination, and execution of activities focused on growing the net value of products and just like there are principles for growing wealth and shareholder value, there are principles for growing product value. In this post I offer a framework for understanding the essence of VDPM.

The Value Driven Product Management Pyramid

I recently reread "Building Wealth" where L. Thurow lists what he believes to be the truisms that provide the foundation for societies, companies, and individuals to build wealth. I couldn't help but see the parallels between building individual/social wealth and building product value. I looked at Thurow's  truisms through the Value Driven Product Management lens and found that much of the framework and principles apply to improving the value of products.

There is an unfinished pyramid on the pack of the dollar bill with a glowing eye at the top. The symbol was placed there by President Roosevelt in 1935 to represent economic strength and durability during a time when America's wealth was anything but that. The unfinished pyramid symbolizes the possibilities of the future and the glimmering eye represents the ability to see what must be done next.

Here are the layers of the Product/Service Value Pyramid

The Eye: Value Driven Product Management

Social and Environmental Consciousness

Value Driven Decision Approach

Product Value Advocates

Innovation and Knowledge Management Systems

Value Driven Culture

Base of Pyramid: Value Delivery Systems

Before we get into the layers themselves, there are a few truths that we posit from the beginning:

Truth #1

Product Managers must be willing to cannibalize old products with new products. If managers aren't willing to give up on old products, competitors will make the products obsolete for the manager.

Truth #2

Product Managers can attain high profit margins and large rates-of-return by exploiting product value disequilibriums that result from technological innovations, under-serviced markets, and evolving social trends. All other prospective product management actions yield marginal results with a low rate-of-return.

With these fundamental truths in place let's look at each of the pyramid layers to see what other truths we can find that can help product managers attain the top of the pyramid.

The Base: Value Delivery Systems

Every organization has a way of doing things. The small business will likely have the efficiency and style of the business owner. The larger organization is build upon legacy processes, methods, and culture. If we think about these characteristics as "business genes", we might say that businesses are predisposed to have certain strengths and weaknesses that are very dependent upon their market. If the business moves to a new market, some strengths might become weaknesses, and visa-versa.

Truth #3

Every organization has a genetic code for delivering their products and services. The secret to success is finding markets where the products' strengths make them exotic and where weaknesses are irrelevant.

Value Driven Culture

There is no shortage of literature that talks about continuous improvement. Lot's of business say that it is part of their culture and in the drinking water. The major distinction of a value driven culture is that continuous improvement activities are not pursued based on perception, but because there is strong evidence that the actions will have a direct impact on the customer's willingness-to-pay (product value) and/or reducing costs to yield a positive change in the net-value of a product offering.

If an action reduces cost, but also reduces the customer's perception of value by more than the cost savings the result is a negative net-value change, which results in less profitability because prices must drop to yield the same demand and results in customers seeking out other alternatives for the same price.

Truth #4

There is no institutional substitute for individuals who know how to grow customer value (see figure below), which is done by improving willingness-to-pay metrics (product value) and/or reducing costs to yield a positive net-value change.

Innovation and Knowledge Management Systems

An innovation in the truest sense is an artifact or concept that is new to the world and improves upon a legacy artifact or concept by either improving performance (think product value) or reducing cost (think product cost). Innovations can come about by accident or systematic discovery, but in nearly all cases they come about through the use and/or the application of knowledge. Businesses need systems to keep track of lessons learned and accumulated knowledge whose immediate implications may not always be clear to ensure the wheel doesn't need to be continuously reinvented.

Truth #5

Innovative ideas come from both knowledge and creativity. Any organization that values structure, policies, and rules above all else will not be creative, but without the right degree of order, innovative ideas and knowledge vanish. 

Product Value Advocates

"There are more cowboys in Detroit than all of Texas!" This is what one automotive industry expert had to say about the cavalier style of auto executive decision making throughout the last several decades. The data were there to suggest that reliability and fuel economy were becoming ever increasingly important in the decision calculus of auto consumers, but because auto companies lacked the proper analytical tools to sense and assign the proper level of sensitivity for these automotive attributes the opportunity was lost.

There are many studies that suggest that people often fall into decision traps because of our limited working memory, limited abilities in cognitive reflectiveness, and limited abilities related to comprehending the true probabilities of uncertain events. When decisions get complicated and we don't have a decision framework we use over-simplistic decision heuristics. Sometimes the result of these poor decisions yield a good result, but what we really want is a good decision based on a framework that gives clarity of action.

Although analytical tools have their place in decision making, the use of intuition is critical to check assumptions. If the analytical tools are to be trusted (and used) by decision makers, models must be transparent so they can be checked with intuition. Balancing analytics with intuition is the job of a skilled analyst who has the proper analytical tools and a solid understanding of decision analysis. I like to call these individuals Value Advocates because they can use their specialized knowledge to detect and communicate value improvement opportunities in a credible way.

Truth #6

Use intuition AND analytical tools to make good value driven decisions because either used alone can be very risky. Product Management teams need both experienced managers to provide intuition and value advocates who know the analytical value tools to reduce risk and provide clarity of action.

Value Driven Decision Approach

A decision is an irrevocable allocation of resources. You don't actually decide to buy a pair of shoes until you pass money to the shoe store. You don't actually decide to go on vacation until you're on the airplane and past the point of no return even though you've purchased the ticket-you could change your ticket to make a trip for reasons other than vacation.

We make decisions every day ranging from what to wear to work to what home to purchase. Whatever the decision, it is clear that the level of consideration that a decision warrants is based upon the level of risk associated with that irrevocable allocation of resources. Will your taste in fashion change after you purchase the shoes? Would you rather spend your money on a new pair of skis rather than go on vacation to the Caribbean? In our personal lives there is no escaping the results of our decisions and therefore we are very careful when making big decisions-those that require a significant amount of our resources.

When it comes to product management, the level of decision analysis should also be directly related to the level of resources to be allocated. While working for a manufacturer of specialized aircraft I often heard complaints from managers that information gathering for decision analysis was "too much work", but if you asked the executives whose careers depended on flawless strategic decision making, their response would be, "That's the way its must be!"

Truth #7

Managers who are interested in building value into their products and services will use Value Driven Decision Analysis. Managers who are on rotation, have plans to move on after decisions are made, or who don't have a true stake are more comfortable making decisions with a limited level of consideration.


Social and Environmental Consciousness
Now more than ever, companies are being held accountable. This accountability is directly related to the ability of stakeholders to organize and get messages out when companies take actions that negatively impact society and the environment-even if these results were unintended or unknown.

In the past it took investigative reporting to get the word out, but with the advent of social networks and media, the message gets out and the implications to the business can be swift and unforgiving.

Truth #8
Negative social and environmental externalities must be understood and quantified when possible so they can be included in the product planning decision calculus. Failure to do so leaves the business open to legal liabilities, political controversy, and societal backlash.

The Glowing Eye: Value Driven Product Management

It should be clear that Value Driven Product Management (VDPM) is more than just a few neat ideas, its more than neat analytical tools, and it applies to all types of products and services. Indeed, to be a value driven product management requires that several modern day management principles be interwoven into the culture and organization. Specifically, VDPM is the organization, coordination, and execution of activities focused on growing the net value of products. 

One of the core enabling capabilities of VDPM is the ability to quantify the critical value metrics as depicted in the chart below as they are the key to managing the fundamental metrics of product value, product cost, and pace of innovation.

What I've offered in this post is not meant to be all inclusive of what VDPM is supposed to be, but simply a framework for understanding the essence of VDPM.

Book Review: "Design for Six Sigma as Strategic Experimentation: Value, Cost, Pace of Innovation" by H.E. Cook

5 Stars (out of 5)

The following is a book review of "Design for Six Sigma as Strategic Experimentation" by Harry Cook. The book was first published in 2005 by the American Society for Quality, Quality Press.

Actually, the book gets 10 out of 5 stars. Don't be fooled by the title, this book is much more than traditional DFSS. "Value Driven Strategic Experimentation: Product Performance Optimization" might have been a better title because the methods and tools described in this book address the major criticisms of traditional DFSS (too much focus on cost, value to the customer is not quantified, the tools are not integrated). Unlike traditional DFSS, VDSE uses BOTH product value and product cost to find the optimum design variable settings to maximize net-value, make tradeoff decisions between product performance attributes, and minimize performance variation. VDSE is what DFSS was intended to be, but never could be because of its reliance on "old" tools that were shoehorned together.

This book, like Cooks other book "Product Management" is the result of  an academic collaboration with industry which strove to provide tools to guide product managers through decisions that involve both technical and commercial feasibility. The book is written for the scientifically minded and mathematically inclined audience and is a seminal work for other "Value Driven Product Management" books. The specific contributions to the domain of product management include: (1) explains the role of product value in product management decisions, (2) offers analytical models for calculating product value, (3) offers analytical models for calculating the value of continuous product attributes, (4) offers analytical models for calculating the value of qualitative product attributes, (5) includes a methodology for creating experiments to find optimal settings for design variables, and (6) provides rigorous support for models based in economics, econometrics, game theory, and psychology. The book is clearly written, has an excellent bibliography, and uses real-world examples to illustrate main points.

In summary, "Design for Six Sigma" is an excellent contribution to the area of Value Driven Management and is highly recommended for quality engineers interested in being on the cutting edge.

Book Review: "Designing and Delivering Superior Customer Value" by Weinstein and Johnson

5 Stars (Out of 5)

The following is a book review of "Designing and Delivering Superior Customer Value: Concepts, Cases, and Applications" by Art Weinstein and William Johnson. The book was first published in 1999 by CRC Press.

"Designing and Delivering Superior Customer Value" was written to serve as a text for MBA students on the concepts and theories of customer value, but would serve as an excellent read for general managers who are striving to make step changes in products and services. The book goes a step further than many other books on customer value as it not only proposes a framework and supporting logic (where most books on the subject stop), but backs up the propositions with real world data and several case studies (half the book is applications and case studies). The book is clearly written, has an excellent bibliography, and uses real-world examples to illustrate main points.

One of the major contributions of this book is that it suggests a relationship between customer value and Total Quality Management (TQM), which was a continuous improvement initiative the proceeded Six Sigma. Indeed, one of the major criticisms of traditional Six Sigma is that it focuses largely on cost savings and forgets to consider improvements in customer value. The authors state it clearly: The losers in the quality battle will be those who attempt to do things right, while the winners will be the organizations that learn to do the right things.

The book serves well as a foundational piece as the methods and tools are largely qualitative, but those interested in the latest analytical techniques that include quantifying and forecasting value metrics may want to seek another book on the subject. Another consideration is that even though the words "Designing and Delivering" show up in the title, the book is largely focused on delivering, i.e. the processes that make up the "service" side of the business and how they contribute to customer value.

In summary, "Designing and Delivering Superior Customer Value" is an excellent contribution to the area of Value Driven Management and is highly recommended for marketing and general managers. This book would also be a good addition to the library of quality managers because of the attention given to the link between customer value and quality.

Book Review: "Value Driven Management" by Pohlman & Gardiner

5 Stars (Out of 5)

The following is a book review of "Value Driven Management: How to Create and Maximize Value Over Time for Organizational Success" by Randolph A. Pohlman & Gareth S. Gardiner. The book was first published in 2000 by the American Management Association (AMACOM).

"Value Driven Management" was written for managers at all levels of the organization who want an intellectual and philosophical foundation of how to think about business. Namely, the book focuses on why its every employee's role to create value for eight fundamental stakeholders: external, the overall organization, employees, customers, suppliers, third-parties, owners, and competitors. The book is clearly written, has an excellent bibliography, uses real-world examples to illustrate main points, and is a very quick read (can be read on a short flight).

The authors admit that the book does not offer a simple formula for calculating value, but is intended to "represent a running start toward the successful implementation and use of the principles of Value Driven Management." To do this they offer "Eleven Assumptions of Value Driven Management"; "Eight Value Drivers"; and "Seven Critical Steps to Implementing Value Driven Management."

The book serves well as a foundational piece, but may fall short for those interested in the latest analytical techniques that include quantifying and forecasting value.  Specifically, the framework puts equal importance on all eight value drivers, where many would argue that there are fundamental value drivers (like product value, product cost, and pace of innovation) which are what make a business a business and secondary value drivers (like employees, suppliers, owners, etc.) which can only enter the discussion after the business performs.

In summary, this book is perfect for managers interested in a foundational understanding of value driven management. This book is not for those interested in the latest analytical concepts and tools.