The Art of War is an old Chinese military book. The work, written by the ancient Chinese military strategist Sun Tzu, is composed of 13 chapters.
Each chapter is devoted to an aspect of warfare and how it applies to military strategy and tactics. The Art of War remains one of the most influential strategy text and has influenced military thinking, strategic planning, legal strategy, lifestyles and beyond.
Here are some key points applied to business tactics.
Strategic planning, calculating and comparing competitors leads to a successful company
If a company aims to dominate a market, it is fighting for its very survival. Hence, all efforts must be made to understand how to create new products, and that knowledge must be used to properly plan.
The product leader who draws proper plans before getting a new product to the market will defeat the leader who makes none. Therefore, you must always plan and deliberate upfront. By comparing the competitive landscape on seven considerations, you can forecast success and failure:
Which of the two companies have complete support from his teams so that they will follow?
Which of the two companies is more capable?
Which company has advantages of circumstances like outreach, technological advantage and the domain knowledge?
Which company enforces the discipline of its teams and processes more strongly?
Which company has the stronger product teams?
Which company has the better leaders and teams?
Which company has more consistency in enforcing discipline?
Carefully compare the company to your own so that you will know where he is strong and where it is weak. Then plan according to the circumstances. If you know your competitors and know yourself, you will always be successful.
Secure yourself against failure, and wait for an opportunity to succeed
Successful strategists only enter confrontations they know they will win, whereas unsuccessful ones enter and only then begin to think of how they can win.
A skillful company avoids confrontations they may lose, thus ensuring they will fail. But even the most brilliant product teams cannot say exactly when success will come, so they must wait for the competition to make a mistake and provide them the opportunity for succeed.
A successful company knows that to be successful, there are five essential rules:
It must know when to take bold action and when not.
It must know how to deal both competitors inferior and superior to themselves.
It must have a strong, uniform spirit and discipline.
It must take action so that it is prepared and the competition is unprepared.
It must have the capacity and freedom to make decisions without interference from a others in the organization.
Be cautious. Take action only when you have the advantage. Avoid your competition where they are strong and take bold actions in areas where they are weak.
Avoid the competition when its spirit is keen, its structure and appearance are in perfect order or when it has a more advantageous position such as higher morale ground and public image.
Never enter a confrontation (on twitter or elsewhere) simply out of anger; there must always be something to be won. Your anger will eventually fade, but a company’s image destroyed can never be fully be brought back to life.
Avoid the traps your competitors will try to draw you into. Do not lead your company into situations where you get uninteresting as an employer or where you do not know the domain or your allies well.
Product teams are only successful if stakeholders and employees do not cause their own failure
In companies, the product vision is determined by a product team, but a product team is managed by a manager. Hence, by his direction, a manager can impede his team. The most disastrous ways he can do this are by ordering them to proceed or give up when such action is impossible, by attempting to do product decisions with classical project management practices or by staffing the team with inappropriate roles.
These errors shake the confidence of teams and can cause failure.
However, a leader can also exhibit dangerous faults. He can be reckless and lead his teams to destruction, or he can be a hesitant; he can be so choleric or proud that he is provoked by insults and slander from others; or he can be too concerned with the comfort of his own teams and let such considerations hinder tactics.
The leader is also responsible if any of these six calamities befall a company:
If he hurls his teams against a force ten times its size, causing his employees to resign.
If his teams are too strong in relation to the decision makers, causing insubordination.
If the teams are too weak, leading to them being worn down by leaders and giving up.
If the higher leaders are angry and undisciplined, leading them to follow their own agenda on their own accord and cause the ruin of the company.
If the leader is weak and indecisive, resulting in a weak, disorganized company.
If the leader is unable to estimate an competitor’s strength and hurls an inferior team against a superior one, leading to overwhelming defeat.
Companies are only successful if stakeholders and leaders do not cause their own defeat.
Conserve your resources through stratagems, foraging and espionage.
Maintaining an company is expensive: a host of 100,000 employees can cost 160M€ a day.
Prolonged struggles can exhaust the resources of any company, leaving it weak and vulnerable. Hence, aim for quick and decisive success, not prolonged campaigns.
Avoid campaigns against competitors, because this usually takes month of preparations, and many impatient leaders will squander their resources in pointless activities.
The best way to lessen the cost is to capture the competitions (sales) territory whole and intact rather than to destroy it through costly (price) battle. To achieve this, you need a much stronger product vision and empowered employees than your competition.
A skillful leader will subdue his competition without any fighting, which constitutes the ultimate triumph. This is known as attacking by stratagem. Great leaders excel not only at winning but at winning with ease.
Another way to conserve the companies resources is to take them from your competition by foraging locally and augmenting your own strength with the competitors resources.
As single battles can end wars, you should engage market intelligence: it provides decisive information about the competitors disposition as well as carry false information back to him.
Conserve your resources through stratagems, foraging and market intelligence.
Deceive your competition and impose your will on him.
The art of war is based on deception. You must mask strength with weakness, courage with timidity and order with disorder. Confuse your enemy and let him grow careless.
Have your troops feign disorder when in reality they are highly disciplined. When you draw close to your enemy, make it seem like you are far away. When you are able to attack, make it seem like you are unable.
Play with your enemy as a cat plays with a mouse. If he has a temper, irritate him. If he is at ease, harass him; if well supplied, starve him; if quietly encamped, force him to move. If you wish the enemy to advance, hold out bait to him; and if you wish him to retreat, inflict damage on him.
A clever leader seizes the initiative and imposes his will on the competition.
Attack the enemy in poorly defended points that he must rush to defend. Force him to reveal himself so you can seek out his vulnerabilities.
Keep your enemy guessing as to where you will attack, forcing him to splinter and spread out his forces: numerical weakness comes not only from absolute numbers but also from having to prepare for attacks on many fronts.
Deceive your competition and impose your will on him.
Observe the market and your competition, then adapt accordingly.
A good leader knows that there are always positions that cannot be held, roads that must not be followed and commands from the superior that must be reevaluated.
Just as water shapes its course according to the ground it flows over, so you too must adapt to the situation, to the market and to the competition’s disposition.
Observe the market to take advantage of its natural advantages and avoid its disadvantages. In order to fight, do not attack companies with a higher position, or distance yourself from the fundamental core of the company.
Avoid dead ends, environments with small room to move or areas your company doesn’t have a firm stand where small competitors can destroy the entire company. Listen for rumors, events and customer attitudes; they can indicate that a competitor is moving its positioning.
Observe the competition, too. When his employees do not have a clear message for example on social media, they are unorganized. When the employees he sends to the customer start praising themselves for accomplishments of the company, they are suffering from lack of recognition.
And when they start to cannibalizing and consolidating their own portfolio, know that they are willing to innovate.
Adapt your tactics as needed to these circumstances and take advantage of opportunities as they appear.
Observe the market and your competition, then adapt accordingly.
To be successful, manage your employees sternly
Managing and controlling a large company is no different than managing a small one: you must simply divide your teams into smaller numbers and then use technology such as collaboration platforms to control and align your forces.
They will move as one, and the lazy will not dare to do his fair share. A skilled leader leads his company as if he was leading a single man by the hand.
Treat your employees like beloved sons and they will stand by you. If, however, you are unable to command them with authority, they will be as useless as spoilt children.
Discipline among your employees is a sure road to success. But for discipline to be effective, your employees must grow attached to you. Thus, you must treat them humanely while also keeping them under control with discipline.
As a leader, you must be secretive. Keep your competition ignorant and change your plans frequently to keep the competition guessing. (Remark: Sun Tzu also suggests to treat employees the same way. But from my perspective, while in modern time this might lead to short term success, it will destroy the morale and stand-up mentality in the organization and therefore negatively impact the long term success of the company)
Change sides and take long circuitous routes instead of direct ones. Only reveal your hand once you’re deep in the competitions terrain.
When the situation looks bright, tell your employees about it; but when the situation is poor, keep this knowledge to yourself.
The further you penetrate into competitors terrain, the more your employees will feel solidarity.
Put them into challenging situations where there is no solution yet for a specific problem, and they will try their very best to live up to the expectation.
To be successful, manage your teams sternly, keep the competition in uncertainty and challenge your teams.
Final summary
The key message is:
Product development is a matter of survival for the company, and so meticulous planning and estimating must go into the development. A skilled leader chooses confrontation only when he knows success is secure; thus, he is never defeated. He is observant, resourceful and adaptable. He imposes his will on the competition, deceiving and irritating him to drive him to make a fatal error.
The questions answered:
How can you ensure success?
Planning, calculating and comparing company resources leads to success.
Secure yourself against defeat, and wait for an opportunity for success.
A company is only successful if stakeholders and leaders do not cause their own defeat.
How can you achieve advantages over your competition?
Conserve your resources through stratagems, foraging and market intelligence.
Deceive your competition and impose your will on him.
Observe the market and your competition, then adapt accordingly.
How must you manage your employees?
To be successful, manage your teams sternly and give them hard problems to solve.
At the core of the digital revolution we’re experiencing right now is a mindset change. More and more corporations understand their new corporate social responsibility.
Yes there are new apps, yes there are new gadgets, yes there is more data.
But no data, no new dashboard or app will help you, when your organization is set up to suppress transparency and collaboration, there will be fancy new machines but no one to take the risk to stand up and do the right things with insights from for example analytics.
It is about the need that people have to continuously learn and improve, themselves and their company.
The digital era is a fast changing environment, only fashion industry has faster cycles. 60% of what you learn today will be obsolete within a year.
For this, most companies are not prepared.
And for this reason it is required to implement mechanisms that stimulate collaboration as well as continuous learning and don’t suppress it. Only in a group we are able to learn fast enough to keep up with this pace.
If you don’t, you will be obsolete.
The proposed approach really is a series of different aspects required to collaborate efficiently.
Company goals
As discussed in my previous article, goals must consistently support overarching goals, starting from vision down to the products of a company and the actual measures in a product have to provide information of the status of the companies goals in real-time.
Incentives in corporate environments
Achieving the goals described earlier is usually enforced by financially incentivizing individuals in the hierarchy to reach the given (profit) goals.
At the same time, most individuals have a private agenda such as climbing up the ladder or earning more money to buy a bigger house.
Because of the combination of incentives and the private motivation, peers are incentivized to create silos.
This leads to the following problem:
The current incentive hierarchy prevents collaboration
Mindset of sharing
During my time in the US I learned “sharing is caring”.
If you generate assets such as services and products, make them available to everyone in the organization to use and sell to the customer.
Count the use of the service you created and paid for. Don’t do margin stacking but report the amount of reuse. It shows how central pieces in the puzzle are. It is easy to do this if you use central repositories by counting dependencies.
Digital business is often not domain specific. Carve out domain specific parts. Configure, don’t customize.
Create a culture of reuse. If something isn’t there yet, build and share it. Stop wasting human capital and stop building the same thing over and over again.
Product platform
Ask employees to publish ideas on a central platform. All employees can vote for the products listed there. That way small things that impacts many gets the deserved attention.
Use it as central place for documentation and enables others to commit to supporting the idea, either financially or with their manpower. At least in times of low business in the own area this could prevent layoffs and protect know how.
Use this tool for reporting financials and goals as well as their status. Make it visible to everyone.
Live transparency, don’t just create it.
It is important for individuals in the organization to identify themselves with the products. Only someone who does this will be motivated to learn.
Stop product related email chains. Provide a messaging area that can semantically reference the products, processes and people. This way the questions are categorized and are available for others to look up the answer.
Let the teams around this form organically and not only out of the companies structure. See the company structures more like a grouping of people with the same interest and as a channel to a customer segment instead of competing entities.
We are far enough regarding digitalization of communication that people, sharing the same passion, don’t need to be colocated. I would prefer colocated teams that commit together on the work to do (product) though.
Create customer specific projects as separate entries in this tool. Projects executed by solution teams use / group products (including services which I see as product) to fulfill customer needs that are not satisfied with an existing product that has stand alone value.
Credits as measure for collaboration
Once the product platform is in place, allow the contributors to rate the contributions. This can then be used for incentives.
Vision, Objectives, KPIs and Principles
Use tags to link all products to goals. Each team can specify own goals but needs to document and link their contribution to the overarching goals.
Provide easy access to data that can be used to calculate the KPIs that measure the goal achievement.
In this setup it is very important to formulate a clear vision, not only for how the company is supposed to look like, but more importantly what the company wants to be for the customers, the society etc.
Basing on the vision, define objectives and their key results. KPIs are to be defined as indicators that monitor the key results.
Last but not least, setup a set of principles that act as guiding rails in day to day business. They need to be as precise and short to fit all on one baseball card such as “customers go first”. Think about the audience and choose appropriate wording.
To be clear, this shall mean: no abstract and empty sentences. Everybody is supposed to act according to the principles.
This enables the empowered teams to prioritize their work and decide whether preparing internal slides or the customer is more important (to pick up the example above). It allows everybody to justify their decision based on a common set of rules. This also leads to situations that artificially urgent internal demands automatically gets suppressed.
Self Contained Offerings and Modularization
Products are supposed to deliver clear (customer) value, either in form of stand alone, or enablement value.
This value is to be part of the previously mentioned documentation and needs to be linked to customer goals.
Self contained services have to be build around shared requirements and grouped to provide a clear value. An indication that the service contains functionality that should be carved out is, that it provides different values.
A good example would be user management in software or a modular power supply for hardware.
Have the commited team run the ops for that service. If others in the organization need some more functionality, they need to commit resources. Duplicates are not permitted.
In case of the hardware example, the power supply is supposed to be produced by that specific (regional) product team.
Manage the services in the product platform. It is especially important to track the use of shared services to show how central they are to the ecosystem.
Product & Project Culture
In other articles I wrote about the difference between a product and a project. This is why I focus on the core with the following statement.
A product lives until it is discontinued. It lives. Whereas a project is defined by its uniqueness, scope, etc.
This is a major difference and it seems this difference is hard to understand by many. It regularly leads to misunderstandings and awkward opinions / statements about the other side, especially when one side needs something from the other side.
The point is, project folks expects defined scope to be delivered at a certain date whereas product folks is used to explore what is actually needed, maximize product market fit and return on invest. For them it’s most of the time less important whether it is this or next month. What counts is maximum value and high scalability.
As an organization, product thinking is important to identify what the market actually demands and to decide whether the cost is reasonable to adress a certain value pool.
Project thinking is important to get certain products to the customer that need a lot of coordination and integration. Those products are typically to be integrated into a bigger landscape and require lots of customization / engineering. In this case the main products are the planning, engineering and commissioning services to manage complexity and take the risk.
Both are equally important and it depends on your business where you set the focus but it is important to understand and communicate the differences as well as to make sure one side can leverage the specific value the other side provides.
People at Forefront
Innovation is the core of future business and the foundation for future growth and profit.
We distinguish between:
Product innovation: the iterative improvement of the portfolio and its products (what)
Process innovation: the improvements in how we create products
Business innovation: the improvements or changes in the business model. For example to implement a multi-sided platform and to participate in revenue streams, not primarily generated, but enabled by our offerings.
All engaged employees are stakeholders in the business journey. And it is important to give the individual a way to influence future business. This can be done via the previously described product platform.
Especially people in the first line experience the customer journey every day and have the best relationships with your customer base. This can be used to generate viable insights into what the customer is struggling with.
Let these people document the customer experience, typical workflows, tools used, personas, contact persons and pain points in a systematic way. This gets invaluable when making informed decisions on where to invest and during product ideation.
This content can then be referenced by the products in the product platform and gives a clear picture into potentials and how your current solution space matches the problem space.
Especially in larger corporations this view of your company is incredibly helpful when setting up strategies.
Management and an Empowered Organization
Up to know we discussed how to empower your employees by flattening the hierarchy, innovation needs to traverse, to be close to the market and orient the company to deliver the right products with the use of a product platform as central element.
But there is still a void that needs to be filled to keep it all together.
How do you make sure the organization is heading into this right direction and has the capabilities to implement the vision?
In other words:
Who makes sure we’re hiring the right people?
Who gives the direction?
Who gives purpose and vision ?
Who defines the rules of the game?
Who ensures we learn the right stuff about the market?
Some of it will be a logic consequence of an empowered organization.
Hiring for example needs to fill a future demand. If the organization however gets into the situation that capabilities are not available, there is something wrong in the employee employment strategy.
So identifying and building up the know how (especially the learnings about the maket, validated learnings) and to manage the distribution internally is one of the core activities required from the leadership team.
So planning demand ahead with the constant feedback from the teams is essential. On one hand it is important to have the right technological skills but more important is the “drive” potential candidates have.
Don’t hire to fill a gap in skills, but select self directed, autonomous people that have shown their willingness to make a change. I know that team play is a highly requested skill but it is way overrated nowadays.
People who want to perform and make a change but lack team skills will find their way to communicate. Whereas people who lack the drive can communicate but don’t make a change. It is way more complicated to change people’s motivation than to teach them how to communicate.
So focus on finding performers that can demonstrate their ingenuity.
Ask what business they would found, why, how to make money, whom they need for this. Why they didn’t do it yet. Let them draft overviews in the f2f interview and skip one or two abstract “how do you feel about…” questions without context.
Take your time but recruit continuously, not just on demand.
Hire only people with drive and passion, no one else.
If a manager is required to make day to day decisions, this will lead to resource issues later on. Taking the decisions on a product level is the job of a product team. Between products and on solution level, the teams need to negotiate.
Whether the decisions are right is measured by their contribution to the overall goal, even when this requires to step one or more levels up in the goal hierarchy.
As both teams’ goals are derived from the same hierarchy, there will be a level the new goal of the collaboration contributes to. Both teams have to add the new goal to the product platform.
If the required contribution is exceeding the capability of team (A), a minimal delivery can be negotiated and extended later. If the required delivery still exceeds the resources of a team (A), the requesting team (B) has to implement the part and contribute to the team (A) via pull request.
In some cases, team B can’t contribute to team A, for example if a software team requires certain hardware features. In this case both teams have to use the addressed customer value pool to prioritize accordingly.
So the remaining activities of direction, purpose and rules. A company vision is vital and to keep track of the distance to it is essential. For this, the leadership has to work out tensionable top level goals and support the teams in defining team goals. It shouldn’t be required to dictate the goals from outside.
The product of the company internally (the managements product) are among others the north star / vision, empowered teams and qualified resource availability. This can again be described and shared via the product platform.
Defining management activities as products makes them transparent for employees, associate them to the goals and show how this has an impact on the vision.
See it as a corporate social responsibility to maximize the efficiency of which human capital is used.
Added value and the corporate hierarchy
Typically an organization has several hierarchy levels. Each layer should add clear value to the customer. If all decisions need to be escalated, the layers get overloaded. This is where principles become important. Principles act as guiding rails for every day decision making.
They need to be precise, easy to understand and tensionable. With proper principles, bottlenecks in decision making can be reduced and the resources are offloaded.
This new capacity can then be used to focus the energy on what really matters, the customer.
Hierarchy Value Delta
Every hierarchy level is supposed to add a certain delta to the customer value creation and shouldn’t be responsible for the value, created by the layers below. The responsibility is limited to the added value delta.
Let’s be a bit more specific about what is meant by this value delta. On customers side there is, similar to the own organization, a hierarchy.
So selling a product that improves the efficiency of a plant operator at costs of $19,99 per month can typically be approved either by the operator himself or his boss.
If we are supposed to implement a digital transformation for the customer, the decisions are made on executive level. This requires a different counterpart on your own side. While the products are still sold and under the responsibility of the product teams, the “transformation pitch” is the delta added on the own executive level.
On another level you find transformation of a whole industry, the adoption of certain business models or stimulating the buying environment of a country.
What changes is the excercised influence and the scope but without the responsibility for the aggregated sales (measured with revenue). Instead, these levels are guided using their individual objectives and corresponding measures, such as market share and number of customers.
Stop Aggregating Revenue for Controlling as main KPI
If you stop aggregating revenue in the organization’s hierarchy, measure it only with a flat structure (per aggregation of the product platform) and the use of product specific measures, chances are good that this sparks lots of collaboration.
Guiding KPIs should take the products maturity into account and focus on customer value driving measures such as number of users, an app’s use per user or runway in the introduction phase, given that profit grows with increasing customer base (scalability).
This does not mean not to measure profit, but depending on the maturity, other measures give you better insights into progress and achievement of goals.
Customers in the center
To focus your efforts on maximizing ROI, it is crucial to reduce investments in functionality that is rarely or never used by the customer.
Future growth hereby can only be found by consequently investing in topics the customer is willing to pay for, either with money or data.
Please note that this implies that you shouldn’t only talk to your existing customers. Typically a large portion of growth lies with the potential customers.
So learning from the customer is the only way to build great products. And it’s not the large increments that will get you there most of the time. Large increments bear huge risks and that the customer might not see the balance between value and price.
Choose small chunks that focus on delivering either stand alone value or enablement value. Be playful about this and test alternatives for example with A/B tests.
But most importantly:
Let data decide what the customer wants.
Start including measures to verify hypotheses from day one. This is often seen as overhead and done after the product has been built, but at that point the true power of gaining insights is already over. Let insights gained by data guide your decisions how the final product will look like.
Use these insights to identify what’s valuable for the customer and forget what everyone seems to know internally about what the customer wants.
Interviews can give additional insights especially into additional use cases. They are the channel to learn from the customer. In addition they can be used to verify hypotheses.
With an open mind, they will allow you to identify opportunities and get direction for the next increment.
See the product team as your guide for a good product. Let it hike with the customer and allow them to interact with the customer. If they get to a crossroad, ask questions to verify hypotheses such as “if we go that way there might be mountain lakes to catch fish, do you like fishing?” If the customer says yes, head down that road for a while until you get to the next top and you can see whether there are lakes.
Now you already got a new business idea, next time sell a fishing rod. Put it back into the product platform.
I know, you might say: Accelerator? Corporate startup? We’ve got that already.
But let’s be honest, according to HBR 94% of the managers surveyed by McKinsey said they were dissatisfied with their company’s innovation performance. So why is that, when you’re already doing it right?
Fundamentally, a startup within a company is the same as one in a garage: a group of entrepreneurs trying to make the world better using new ideas and inventions.
While to some extent the term “corporate startup” is self-explanatory, let me elaborate what is meant by it.
When talking about corporate startups, we focus on an innovation process inside companies. It is one of many types of entrepreneurship. But first, let’s focus on what’s meant by innovation:
Innovation is often also viewed as the application of better solutions that meet new requirements, unarticulated needs, or existing market needs.
In economics, management science, and other fields of practice and analysis, innovation is generally considered to be the result of a process that brings together various novel ideas in such a way that they affect society.
Wikipedia
When it comes to corporate startups, the focus is specifically on adjacent and transformational innovation. In other words, looking at innovation targeting new customer markets and/or new solutions.
“Managing Your Innovation Portfolio” introduces the “Innovation Ambition Matrix.” Corporate startups focus on the top right half of the matrix, the adjacent & transformational aspects.
The core section is typically already well covered by R&D.
Can a Corporate Startup work?
Entrepreneurship is the process of designing, launching and running a new business, which is often initially a small business, or as the “capacity and willingness to develop, organize and manage a business venture along with any of its risks to make a profit.”
Wikipedia
In other words, an entrepreneur, by definition is an individual the takes existing resources to innovate and create something new- to generate economic value. Traits of the entrepreneur? Innovation, risk-taking, self-efficiency, opportunity recognition, ability to exploit opportunities, strong locus of control.
What is a start-up? An early–stage venturefounded by an entrepreneurial individual. A startup venture is typically distinguished from an SME or lifestyle business by its degree of innovation, disruptive capacity and…you guessed it, providing (new) economic value.
What distinguishes a startup founder from an entrepreneur? The only difference comes down to that a startup founder is currently running an early-stage venture. Does that still make him and entrepreneur? Yes.
The only distinguishing factor is that an entrepreneur could have a few startup ventures, some which have grown, some which he may have exited. He may still be running his original ‘startup’- but it has grown, and can no longer be called as such. The entrepreneur actively looks for new opportunities to exploit.
Hence- the differences are temporal, and have to do with size, scale and time- of the venture NOT the individual.
So yes, corporate startups can work, why not. You need the right people with the right mindset (which is crucial) and processes.
I’d like to note though that I see it as very important to protect startup and corporation from each other.
There is a “But”
Startups can exist and thrive inside companies, but it is important to acknowledge that the tools and processes are very different.
A startup is typically financed by venture capitalists. It needs to figure out the right mechanisms to value and fund these activities, especially since a startup’s time horizon is much longer than the next annual operating budget.
In contrast, startups in corporations need to convince management of the viability of the new venture. Here it is important to note that it is not only the stand-alone value that is up to valutation, but also the associated enablement value.
This small detail is important when making a go / no-go decision for a corporation because it needs to stay focussed on the core business. Each diversification comes with an associated cost.
Corporate Startups – Transformational Innovation or Obsolescence
Finally, I’d like to make one final point to executives: not only CAN you do this, but your organizations MUST engage in corporate entrepreneurship to remain relevant or you will be obsolete in some years.
The chart above shows both the acceleration of companies disappearing from the S&P 500 as well as their forecast for this trend to accelerate.
While there are a number of reasons for this, the primary one is that the rate of change is accelerating and so transformational innovation is key. Put another way, the things that got your company to its current position in the marketplace will not keep it successful indefinitely.
In the first HBR article mentioned above, in which they set up the Innovation Ambition Matrix, the authors acknowledge there is no “golden ratio”. However, they go on to suggest a good starting point is a minimum of 20% investment in adjacent innovation and 10% in transformational innovation. Interestingly, in follow up research focused just on “high performers that invest in all three levels of innovation” they explain:
Of the bottom-line gains companies enjoy as a result of their innovation efforts, what proportions are generated by core, adjacent, and transformational initiatives?
We’re finding consistently that the return ratio is roughly the inverse of that ideal allocation described above: Core innovation efforts typically contribute 10% of the long-term, cumulative return on innovation investment; adjacent initiatives contribute 20%; and transformational efforts contribute 70%
In other words, to avoid disappearing like your peers on the S&P 500, you need to invest in adjacent and transformational innovation by creating corporate startups.
If you want help building your own corporate startup capabilities, the feel free to explore our webpage further.
Customer value is satisfaction, experienced by taking a given action relative to the cost of that action. Typically this action is taken to achieve specific goals.
In other words: Product value is a perceived benefit that helps your customers to achieve their goals.
Knowing your customers’ goals and to address them with your product with an appropriate ratio between benefit to cost increases your chance for a win-win.
Especially in large enterprises, it is common to break down the goals into sub-goals such as to improve quality, increase innovation, reduce downtime, increase throughput, improve OEE, etc. which replace the main goal of the overall company (make money) during day-to-day operations.
While focusing the daily operations on optimizing them separately, companies are often not able to realize their full potential.
The sum of local optima is not the global optima
The knowledge about the goals, corporate culture, innovation strategies and internal politics of a customer helps to determine the appropriate price.
Every pitch, flyer, link, poster, and whitepaper must address these goals.
The definition of meaningful is something that has a purpose, that is important or that has value.
yourdictionary
So if a product is supposed to be meaningful, it needs to provide value, and help customers reach their goals.
An innovative product, if monetized properly, can lead to a significant increase in market share and income. But how do you find one? Why is it important to concentrate on finding meaningful products?
Let’s have a look at what we are trying to create: An innovative product.
So why does the product need to be innovative?
Not without a reason this question should be answered first. It is often a lot harder to be the first in the market when introducing innovative, meaningful products.
Being second and adapting a certain product, for example to another market can often be more attractive than creating a new product.
Another motive might be the personal ego or the drive to leave footprints. While it feels very rewarding to create something from scratch, you should ask yourself whether it is worth it and whether this “drive” will fuel you till the end.
There are various reasons why you would want to create something innovative. And I’m the first to advocate for a “do it”, but please, be clear about WHY you do it.
The misconception about innovative minds
A widely spread misconception is that innovative minds such as Leonardo Da Vinci, Newton, Einstein, Schroedinger, Hawkins, Maxwell, Galileo, Bell, Curie, Faraday, Kepler or Charles Darwin were simply geniuses.
If you look closer though, you will find that all disruptive innovators had certain things in common:
Some of the most innovative, meaningful products and ideas are very complex behind the scenes but easy to understand with a decent model. This makes it tempting to attribute all the hard work to create the model to the pure genius of the author.
Innovation is to cause change in a controlled way.
Why do customers value products?
Customer value is satisfaction, experienced by taking a given action relative to the cost of that action. Typically this action is taken to achieve specific goals.
In other words: Product value is a perceived benefit that helps your customers to achieve their goals.
Knowing your customers’ goals and to address them with your product with an appropriate ratio between benefit to cost increases your chance for a win-win.
Especially in large enterprises, it is common to break down the goals into sub-goals such as to improve quality, increase innovation, reduce downtime, increase throughput, improve OEE, etc. which replace the main goal of the overall company (make money) during day-to-day operations.
While focusing the daily operations on optimizing them separately, companies are often not able to realize their full potential.
The sum of local optima is not the global optima
The knowledge about the goals, corporate culture, innovation strategies and internal politics of a customer helps to determine the appropriate price.
Every pitch, flyer, link, poster, and whitepaper must address these goals.
The definition of meaningful is something that has a purpose, that is important or that has value.
yourdictionary
So if a product is supposed to be meaningful, it needs to provide value, and help customers reach their goals.
Why do customers love a product?
There is more to it than “just” value that makes someone love a product. According to GoodTherapy love is:
Extreme feelings of attachment, affection, and need.
Dramatic, sudden feelings of attraction and respect.
A fleeting emotion of care, affection, and like.
Some combination of the above emotions.
All the mentioned definitions, even though made for loving another human, can be adapted 1:1 to ingenious and meaningful products
Some people check their social media every few minutes until it shows addictive behavior
Some users religiously swear on using only certain computers with fruits as logo, others religiously reject them
The amount of care given to the virtual characters for example in online games sometimes leads to less social bonds in the real world
As you see, many attributes apply to (innovative) products in a similar way.
Having that said, as you are the one designing the product, it’s up to you what character your new product shall have.
So please keep in mind while designing your products:
Show respect and act ethically. Do not intentionally addict customers for the sake of profits
Technology is supposed to augment and simplify navigating life; to make it more joyful and enrich the experience. It is not the other way around, that we serve technology.
The enterprise environment
In many cases, companies had a more or less working product management which was shielding the customers from development team questions such as “what do you want to achieve”. This often prevented disruptive innovation.
The development teams were embedded in V and waterfall models, which work very well for products where components need to be put together and projects.
Software development, however, is a creative process that can better be compared to painting a picture. Even a doctor’s visit to check the reason for certain symptoms comes closer than assembling a motor.
At the same time the handover date, scope of work and resources/price need to be communicated upfront. A timeline is required to, for example, ramp up the complex marketing machine for the new product.
This is also btw, why I think it is not good to speak about projects in product development:
A project is temporary in that it has a defined beginning and end in time, and therefore defined scope and resources. And a project is unique in that it is not a routine operation, but a specific set of operations designed to accomplish a singular goal. So a project team often includes people who don’t usually work together – sometimes from different organizations and across multiple geographies.
PMI
A product team is quite the opposite. It is an in many regards well-balanced, empowered team that stays together and continuously explores innovative opportunities as long as the product is alive. The goals are defined per iteration and base on moving targets, such as KPIs.
It’s literally a clash of two systems, military command & control vs. empowered, highly trained special forces dropped behind the lines. While in military the reporting structure seems to be well integrated, in organizations they are often not.
Understanding the difference is very important if you are to build your innovative product in an enterprise environment.
The process of finding Product Market Fit
The process of finding an innovative product that fits the market looks pretty straight forward but is maybe the toughest job in a company. It often requires a lot of ingenuity.
A Minimum Viable Product is defined in many different ways and you will get 30 different answers if you ask 15 Product Managers.
For me, it is defined as a minimum increment that has the characteristics to be valuable, usable and feasible.
Please note the difference to Eric Ries’s hypothesis testing or the smallest possible experiment.
Such a hypothesis test could be a paper-fold prototype to show an aspect of the new product to customers, but it is not sellable. A hypothesis test serves exactly one purpose, to validate a hypothesis quickly to rapidly reach product-market fit.
I see the complete product development process as a path in a tree, starting from a root element, developing towards leaves. Without ever reaching an end, until the product gets discontinued (compared to a project, which has an end).
I believe both concepts work well together to find incredible solutions. In the mentioned tree, every edge, leading to a new node represents an MVP. The hypothesis testing hereby defines whether to go left or right for the next iteration / innovative leap and sets the direction with minimum investment.
In other words, there are two tracks going on in a product team at every given time:
Product Discovery (WHAT): Finding a Product Market Fit through validated learning using hypothesis testing. In the product discovery, the team is to find a market need that is scalable and valuable
Product Delivery (HOW): Smallest increment to deliver value to improve the Product Market Fit
In many organizations, Product Discovery is separate from the product team which pretty much cripples the team and degrades the whole “product team” to a feature delivery team or extended workbench. You can’t expect innovative solutions from such a team.
A truly empowered product team determines the product’s destination (within bounds) on its own with high-level targets, set for example with OKR.
The required skills are to understand the market, the domain, being able to define a business strategy, to develop a product strategy, deliver on it, make money, do consulting and often also sales as well as business development at the same time.
You could open a startup with such a team. I didn’t initially call it without a reason maybe the toughest job 🙂
The art of having ideas
There are maybe as many creativity techniques out there as people trying to have an idea.
Brainstorming, freewriting, swot, five Ws, etc. all have fancy names but do typically more or less the same, they force you to act and think outside the box, either in a group or as individuals.
Every time you take action, you allow your mind to let go of a thought it otherwise would try to groom. Taking action on an idea enables you to have more ideas afterwards.
I call this the hydra method according to Greek mythology where Heracles (Roman = Hercules) was sent out by Eurystheus to kill the Hydra. Every time Heracles cut off one of the serpent’s heads with his mace, the Hydra would regrow two new.
An activity can mean writing it down, sketching the innovative idea or creating a prototype, etc. So some form of doing or taking action. It can also mean to delegate the task of exploring an opportunity, work with a university (Capstone, Ph.D., etc) or discussing it with a team of open-minded colleagues.
You can use Hydra to increase the flow of ideas in all situations from innovative business ideas to vacation ideas. Because you just need a blank notebook to get started, you can do it everywhere, no matter whether you have a power supply or not.
The core of Hydra can also be found/combined in other techniques, such as brainstorming and slow-motion multitasking.
Must have documents
From my experience, not a lot of documents are really important in a product team, but the few remaining are so important that I would not advise developing anything without them.
The documents are centered around the following questions:
Why do I build the product?
For whom do I build the product?
What is the value I’m creating?
How it the value delivered to the customer?
What is the impact of my product?
What’s my competition?
How do I measure success?
All documents are considered living documents and should be managed with a version control system.
You will get access to vector graphic templates of the canvases I use, via the newsletter soon.
All documents should be visible in the area where the team works at any time, for example in the team room, etc. The team is supposed to be able to have informed discussions during meetings.
Most of them can be found in the Design Thinking process and SCRUM.
I hope it also gives everybody who thinks Agile means “we don’t have to plan” an idea of Agile planning.
Porter 5 Forces
To gain an understanding of the competitive landscape and the attractiveness of the market for the innovative product, M. Porters 5 Forces is a great methodology to apply.
The understanding of how the threat of new entry, buyer power, the threat of substitution and supplier power apply pressure on the market which increases competitive rivalry helps to understand patterns and often explains the behavior of market participants.
If you will, the 5 Forces show you how the sandbox looks like in which you want to play with your new product. This is why I would advise doing Porter first whenever you think about entering a new market.
Lean Canvas
20 years ago it was common to create extensive 300+ page business plans before doing anything else. Most of the time with the same result, once created, it never got updated or even used in day to day business.
The core of the one-page lean canvas is the same as the 300-page document:
How to deliver value to the customer?
You can use the Lean Canvas to architect and communicate your ideas to team colleagues or investors.
For a very good description of the different areas please see Ash Maurya’s description on leanstack.
Please note, that a Business Model is not a Revenue Model. It is helpful to distinguish wherever possible. Often though, many use the term interchangeably.
A Business Model describes what and how value is created as well as how it is delivered to a customer. It is about value. A Revenue Model is about monetization.
Typically the Revenue Model is anchored in the lean canvas in the Channel and Revenue Streams section.
The reason it is good to distinguish this is that in enterprise environments, value is typically created by the product team and the monetarization by the sales machine. The salesforce hereby addresses many different vertical markets and regions.
By making this cut, misunderstandings in responsibility can be avoided and a clear scope for discussions is set.
In a truly empowered product team, the sales role would be represented in the team as well but as the product and its target market grow, the benefit of separating this role gets clearer. So whether it makes sense to integrate this role into the team depends on your business and its maturity.
Revenue Model
A revenue model describes, how you intend to make money with your product. It sketches who pays for what and how.
I’m not aware of a standard template for the Revenue Model and typically use Visio to draw a component diagram depicting the value- and revenue flow in one view. In many cases, I visualize this as an overlay of the Lean Canvas itself to show how different customer segments interact.
User Journey
A User Journey visually shows the interaction of a user with a product, process, or in general a system.
It can be used to capture customer interaction with an existing system during the Product Discovery.
The User Journey describes step by step what the user experiences while executing certain tasks in a sequence to get a job done.
The level of detail can vary from 10000ft view down to a fine granularity. In addition to the tasks, the team notes the emotions the customer is experiencing and connects the moods with a line along the sequence of actions.
After finishing the User Journey, it is easy to detect which situations need improvement. Typically delivering solutions to improve the most negative feelings in the first iterations should provide enough value to the customer to convince to purchase. (If priced appropriately)
Personas
Personas go hand in hand with User Journeys. Personas give the anonymous, typical user a face in the team. They create empathy in the team.
During Product Discovery the team identifies different archetypical users. They represent goals, Jobs To Be Done (typically referred to as JTBD) of a large group of users.
A persona is presented on a poster-sized one-page document. Typical attributes captured are: Tech seavyness, age, occupation, location, motivation, goals, frustrations, personality, picture, etc. The captured attributes vary a lot from domain to domain.
Unspecific personas such as “user”, “customer” etc are not allowed.
Product Vision
A Vision describes the desired state or dream in the future. Watch out that it doesn’t just sound like a dream though. The Vision can be on a company level, or in large enterprises broken down to a finer granularity.
For a product team, it is helpful to use a product vision. It needs to be in sync with the corporate vision though.
A product vision must follow the overall theme of the product (line). Be very precise with your wording. For example instead of: “Create transparency and insights for cities” use “Create transparency and meaningful insights for city infrastructure“.
The differences are often small, but have a huge impact and help to drive conversions. In the example above, adding “meaningful” causes to think about what meaning for a customer means and how it can be ensured to provide that meaning, what a customer wants to achieve, etc.
Epic Map
Epic Maps structure User Stories visually in one view and allow to easily communicate progress to stakeholders and in the team.
In an Epic Map, Epics are grouped into categories and broken down into User Stories. I haven’t seen this representation in tools such as Jira, which makes it a bit tedious to maintain. But it’s a great way to improve communication.
So User Stories are created in the Epics Map, moved around, refined, split, etc. and once their position in the big picture makes most sense the stories are added to the Backlog. Starting from there, both systems need to be synchronized from time to time.
When working with colors and stickers, it is very easy to communicate overall progress towards releases and dependencies.
You can see it as a visual representation of the Product Backlog with additional structure. It looks similar to a Work Break Down Structure.
Risk
As always, risks have to be considered and proper mitigation needs to be identified and tracked.
In addition to technical risk, risks in the market (demand, financial markets, customs delays, etc), company culture the business model, revenue model, etc. has to be captured.
Because of the iterative nature of SCRUM though, the list of risks is typically not as excessive compared to traditional project management, as the team is flexible to reprioritize the Product Backlog. So risk naturally comes more often from uncertainty in the environment than feasibility.
Product Backlog
The Product Backlog is a prioritized list of User Stories written from a user (persona) perspective (requirements) by the product owner.
A typical User Story has the following structure “As a PERSONA (Who), I want to ACTION (What) so that I can BENEFIT (Why)”.
It is important to note that a User Story clearly states what’s in for the customer. In other words, it refers to values and goals.
Unspecific personas such as “user”, “customer” etc. are not allowed. The same goes for stories not having a user in focus and referring to an internal persona, for example “Product Owner”, “Stakeholder” etc.
A persona is someone interacting with the system and someone benefiting from the provided value.
User stories are estimated by the team. They describe value (What). The team pulls as many stories into the Sprint Backlog as the Velocity permits.
In the Planning Meeting, the dev team breaks User Stories down into Tasks (How). During this, the PO is only required to answer questions and doesn’t participate in the estimation.
Once a Sprint is completed, the team hands back items that meet the acceptance criteria from their perspective and the (more general) definition of done in the Sprint Review.
The PO either accepts a User Story and sets it done or adds it back to the backlog.
The sum of “done” User Stories per Sprint is called increment. An increment must be shippable to the customer. But the PO eventually decides wheter he wants to do so, or not.
The Product Owner is responsible for the Product Backlog. No one is supposed to add items, modify or reprioritize without the mandate from the Product Owner. Stakeholders can provide their input, for example their priority, but the final call is made by the PO.
One word about priority: The reason to prioritize is to reduce complexity and allow sequential processing. This means, there can’t be multiple priority 1s.
Goal Sequence
Roadmaps have one major flaw in development: They don’t work (when they are too detailed)
As said earlier, development is a creative process. Putting into a roadmap “what”, “when”, sometimes even “how” combined with the fixed team size (resources) sets the team up for failure.
Interestingly medical doctors seem to have fixed this perception with their customers long ago. Try to set up a roadmap with a doctor include payment, delivery, KPIs, and so on.
The answer you’ll get is most likely “I can’t agree to this” because: “you are a significant part of the solution” and / or “everybody is different” etc.
At the same time, roadmaps are important because they allow other entities in large enterprises, such as marketing, to plan.
So as often, the best way lies in between. The theme can be communicated and the customer value, but avoid by all means to have a roadmap of features.
To provide guidance to the team, better set a sequence of desired business outcomes instead of roadmaps.
Here is what Marty Cagan proposes: Use Business Objectives, describing the specific, prioritized objectives for each product team.
The best way to define Business Objectives I’ve seen so far is OKR. You can find a very good book about OKR here.
So create a list of OKRs and tell the team WHAT, as well as KPIs to measure success and let them figure it out.
You’ll be surprised by what a truly empowered product team can accomplish. This is where the team will need the Vision as a context.
If used properly, the same OKRs can be conveniently used in corporate performance planning.
Idea potential evaluation
Once a list of ideas has been created, a phase that requires a lot of discipline starts: To prioritize what ideas should be developed, in other words, the idea potential evaluation.
This evaluation is typically difficult because in it’s infant state it is hard to estimate the impact of an idea. The following describes a mechanism that works very well for me.
The core of a profitable business is scalability and value
Increasing complexity and effort means higher resource usage or slower time to market with constant resources.
More gain or removed pain, on the other hand, increases the value of the solution.
If you put this in a formula, you’ll get:
As the concept focuses on customer value, combining it with Value-Based Pricing enables you to answer the question about an approximated market price, as well as the revenue potential, very early.
The idea with the highest-ranking shows the best value to effort ratio.
Do patent research
In 2018 308,853 patents have been granted in the U.S. 159,724 directly related to digitalization in data processing, Transmission, wireless, image processing, data processing, etc.
These numbers alone show, that getting a product to the market is almost impossible without violating patents if no research is done. Patent research is a central part of the product business.
To do research, use the U.S. Patent and Trademark Office (USPTO) to research prior art and note down how your idea is different. It is wise to use an IP attorney to make sure you are legally ok to sell your product and protect your own IP.
Patent research can be a great way to check how others solved a particular problem as well.
Check for standards & regulations
A topic that is often overlooked is to comply to certain standards such as FAA and FCC. Which authority is responsible depends on the country you live in, but wireless compliance is a topic in almost every country.
FCC compliance ensures your product is not interfering with other radio communication. Please note that a product doesn’t need to purposely emit radio waves (see EMI). You still have to comply.
Please note that your product must comply with every country you want to sell your innovative product in.
To export a new product, it needs to get export control (ECC) clearance. Clear means that your product is OK to be exported.
Create a prototype
Prototypes are the heart of a hypothesis-driven development. They can be used to generate proof points for a variety of different areas.
Never underestimate the power of being able to prove a point quickly!
A paper fold prototype or mockup could, for example, be used as an MVP test to be shown to a customer, collect feedback and show fast turnaround time.
A demo webpage can be used to evaluate the market resonance and willingness of customers to purchase a product or service before it is even fully built.
In yet another situation, a prototype (3D print, Algorithm, etc), is used to eliminate a technical risk and show the feasibility of a concept.
When done properly, prototypes often give the impression of a lot of progress to others. This can be dangerous at the same time if stakeholders do not understand what the purpose is and expect the same speed from the team going forward.
So be aware to maintain a certain quality standard or get the (written) commitment from everybody upfront that this deliverable will not be integrated into production.
Important KPIs
Depending on the type of innovative product you’re building, some indicators may change.
KPIs need to measure success on an appropriate granularity to provide the necessary foundation to make decisions without adding additional work.
Plan to build the product in a way, that the application automatically generates the required numbers for you in real-time.
When you define your goals with OKR, as discussed earlier, a KPI is simply measuring the key result.
Always have the primary goal of your company (“To make money”) as one of your KPIs in some form. This could be achieved by breaking it down to measuring the number of paying users while not increasing the cost.
Please note that there are times where you purposely sacrifice revenue to, for example, generate a customer base and get data for business models basing on analytics. In these cases, it is important that you have a scalable model and your cost stays more or less constant.
Also, always be sure to collect data that contains a higher density of information, even though you might not know what to do with it yet. Think about GPS positions of people for example. One can immediately think about correlation, accumulation of reported positions, distance to fixed positions, etc. to monetize in the future.
My point is, there is raw data that contains by nature a lot more possibilities than others.
Have in mind that there are also counterproductive KPIs, for example to measure productivity in lines of code. This is absolute nonsense.
Think about chess: A good chess player uses fewer moves to win. If he was measured in how many moves he uses to win, a game would take forever.
Being successful is about using fewer moves than your opponent to achieve the same result
So as a general rule of thumb, set up KPIs around resource usage, proof of value and profit generators. For example, the number of connected assets, the number of users, number of uses per day, usage time, follow up actions, server time used, number of inquiries, number of requested trials, customer acquisition cost, revenue, maintenance cost vs development cost, customer rating, etc.
Using Hydra and Tricks to Boost Innovation, it is easy to generate large amounts of potential business ideas in a short timeframe. Once written down, a phase that requires even more discipline starts: To prioritize what ideas should be developed. I call this also the idea potential evaluation.
This evaluation is typically difficult because in it’s infant state it is hard to estimate the impact of an idea. The following describes a mechanism that works very well for me.
The core of a profitable business is scalability and value
The concept to perform an idea potential evaluation is actually very simple, but the variables in the formula need some explanation.
As you will see, the evaluation will be quick and give you a list of ranked business ideas. It is best to use an excel sheet for the evaluation with the following columns:
Domain
Idea Name
High-Level Concept (Lean Canvas)
Brief description (only cornerstones, not too much detail)
Pain Relief
Gain Creator
Number of users
Effort/Complexity
Ranking
Pain-Relief
Pain is a distressing feeling through negative experiences. These experiences cause negative emotions that the customer feels in the process of getting a job done.
Pain-Reliefs are features to improve unpleasant tasks a customer has to do in a user journey.
To get a clearly prioritized idea backlog, use Fibonacci numbers for the estimation similar to Story Points.
Limit yourself to 5-6 numbers such as 1, 2, 3, 5, 8, 13. The stronger the pain, the higher the number.
Gain-Creator
Gain refers to the benefits which the customer experiences, what would delight customers and the things which may increase the likelihood of adopting a value proposition.
Gain-Creators are features to make pleasant tasks a customer has to do in a user journey even better.
To get a clearly prioritized idea backlog, use Fibonacci numbers for the estimation similar to Story Points.
Limit yourself to 5-6 numbers such as 1, 2, 3, 5, 8, 13. The higher the gain, the higher the number.
Pain vs Gain
Typically, customers experience the removal of pain more intensively than adding gain.
If a customer, for example, bought a car with no wheels, the experienced pain when looking at the car and thinking about the money spent, while not being able to use it, is very high.
If compared with creating gain such as adding more speed, the pain (getting wheels) will most of the time dominate.
If a pain-relief, however, targets a pain caused by a product you sold yourself before, the customer will often require to get it for free.
Number of Users
Estimate the number of users experiencing the pain or gain. It is important to note that users are not necessarily persons you sell the product to!
This might need some more explanation: If your added value enables your customers to gain a competitive advantage using your product, the pain/gain of their customers becomes their perceived value.
To get more accurate results, use officially available data from, for example, government agencies or ask google questions like “how many pizza places are there in the US” (answer btw. is 61269).
If you are targeting multiple customer segments, add the individual numbers.
Effort / Complexity
Similar to product backlog prioritization, estimate every individual idea and take the following into account:
The amount of work
The complexity (technical and logistics)
Any risk or uncertainty
For this estimation, it is best to involve a small group of open-minded seniors (Software: Product Owner, Architect, Developer, Tester, Data Analyst).
Explain the idea, but do not get tempted to go too much into detail. 5min for every idea should be enough. Better do this upfront for all ideas.
To be honest, I believe if your High-Level Concept (Lean Canvas) is well formulated, there shouldn’t be any long talking required.
To get a clearly prioritized idea backlog, use Fibonacci numbers for the estimation similar to Story Points.
Limit yourself to 5-6 numbers such as 1, 2, 3, 5, 8, 13. The higher the effort/complexity, the higher the number.
The Formula – Putting it all together
Using the information determined above, the actual formula is simple but beautiful.
Idea potential evaluation with the concept described creates a ranked list of potential business ideas with the focus on scalability and value.
Idea Potential Evaluation – Conclusion
Increasing complexity and effort means higher resource usage or slower time to market with constant resources.
More gain or removed pain, on the other hand, increases the value of the solution.
As the concept focuses on customer value, combining it with Value-Based Pricing enables you to answer the question about an approximated market price, as well as the revenue potential, very early.
The idea with the highest-ranking shows the best value to effort ratio.
According to Samsung, the company implemented what they call a New Concept Development in 2013. At the time, this was the new product development strategy of Samsung. I’ll explain what this has to do with Digital Transformation in a minute.
As a part of Samsung’s overall innovation process, a Project Innovation Team (PIT) was born out of the need to have an incubator group to work with every business unit to provide more market insight.
Taking advantage of the Google Android operating system, the company is nowadays leading the global Smartphone market with 22% in Q2’19.
It is interesting to read Yoon’s comment on the core of the change.
The primary mission was to change our customer-facing product development process from engineer-driven to customer-driven
Yoon C. Lee
Samsung’s PIT is following a four-step process: Understand, Ideate, Concept Development, Concept Finalization.
Transformation In Progress
Around 2006, the time the team has been established, a lot of organizations made the step to customer-centric development. In retrospect, I’m asking myself why it has ever been done differently, to be honest.
Considering the sizes of enterprises such as Samsung, Microsoft (which also performed a remarkable transformation), GE, ABB, etc. it is no wonder that some large companies are still in the process of implementing the new concepts.
Thinking of the Past
In most cases, the companies had a more or less working product management which was shielding the customers from development team questions such as “what do you want to achieve”.
The development teams were embedded in V and waterfall models, which work very well for products where components need to be put together.
Software development, however, is a creative process which can better be compared to painting a picture. Even a doctor’s visit to check the reason for certain symptoms comes closer than assembling a motor.
At the same time the handover date, scope of work and resources/price needs to be communicated upfront. A timeline is set to, for example, ramp up the complex marketing machine.
This is also btw, why I think it is not good to speak about projects in product development:
A project is temporary in that it has a defined beginning and end in time, and therefore defined scope and resources. And a project is unique in that it is not a routine operation, but a specific set of operations designed to accomplish a singular goal. So a project team often includes people who don’t usually work together – sometimes from different organizations and across multiple geographies.
PMI
A product team is quite the opposite. It is an in many regards well-balanced, empowered team that stays together and continuously explores opportunities as long as the product is alive. The goals are defined per iteration and base on moving targets, such as KPIs.
Why the Digital Transformation is so hard
Until today, applying the project way of thinking, which is dominant in industrial environments, to product teams causes friction in organizations. This might also be related to the fact that development works best with budgets than cost/effort estimations.
Effort estimations and Statement Of Work-based pricing almost always lead to a lock-in of too many variables (quality, resources, time, money, scope) which lead to missing the agreed goals.
So why is it so hard in large enterprises to think of development like going to a doctor?
Digital Transformation isn’t about digital products
It’s about an organization’s mindset
Everybody accepts that doctors can’t tell upfront how long it will take to heal, so why do we expect the development team to be able to do this?
It is convenient and gives a feeling of control.
But it is a lie.
Consider the pain involved in accepting this. Whole sales organizations are incentivized to sell equipment which gives a commission. If such organizations are asked to sell digital subscriptions, you are set up for failure.
When given the choice, a salesperson would always choose the one with the high commission over the low. To be honest, who wouldn’t?
On the other side, for example for co-development, it is better to use incremental delivery contracts. This enables the customer to exercise influence and get what is required with a lot less emotional pain. On top of this, it enables a faster go to market for the customer himself.
Embrace Change and move on
The sooner an organization moves on and deals with this, the sooner products can be created that really provide customer value. After adapting the required mindset, introducing digital products is easy.
Where value flow is, there can be cash flowing as well
Conclusion
So what’s important for a successful Digital Transformation is:
Separate disruptors / the Product Innovation Team (PIT) from the rest of the organization, while they are in their ideation to allow them to be creative without the judgment
Get the PIT regularly grounded by involving operational entities
Give the PIT market access
Understand that PITs have another working mode (explorative, hypothesis-driven vs assertive)
Incentivize everybody on the goals of the transformation
Have goals that make sense for each organizational level
Manage goals and expectations (a mindset doesn’t change overnight)
Embrace failure, but require to document what has been learned
Give everybody in the organization a voice (not via townhalls, but via collaboration platforms)
Record every meeting and hold people accountable
Reduce meetings to 6 participants and have a timebox
Note the money spent for a meeting
Trust the teams to make autonomous decisions
Digitalize internally first, then externally
Change the mindset to “You rent a team and don’t buy the outcome”
By now it should be clear, why I picked Samsung in the beginning. I think they are doing a lot right, which is why I’d like to cite Yoon again:
Without a replicable process, it is very difficult to make innovation stick within a large organization. But there is a secret sauce to it. Make the process extremely simple.
Yoon C. Lee
Print your guiding principles on the back of every business card. Why should you hide them from your customers anyways? You might, after all, have the same gole but didn’t know yet 🙂
Determining the right pricing strategy for a product the market hasn’t seen can be tricky. Set the price too low and the profit is not maximized. Set it too high and no one will buy the product and all invested marketing will be for nothing. Out of the ocean of pricing strategies, a good way to find the right price point is value-based pricing.
The too-high price hereby is even worse than too low because it takes significantly more effort to persuade a potential customer after adjusting the price to try the product again.
Pricing Strategy 1: Using a Too Low Price as Advantage
“Why’s a too low price better?” you may ask and “am I not losing money with a too low price?”
Yes, you do. And I’d recommend changing this situation as soon as possible. But until then, use it to your advantage.
If a customer is using the product, it is easier to forward additional cost, for example of development, by increasing the perceived value with extensions via in-app purchases. In this case, the product is a channel to the most important person out there, your customer. There is not even a real marketing campaign required to reach an existing customer.
An active customer gives you valuable insights into usage patterns. These patterns can be utilized to further improve the product and discover additional marketable features.
Most importantly, a customer using your product already pays with data. This data enables you to extend your offering with more advanced features (machine learning for example).
If you read the previous paragraphs carefully, you might get to the conclusion that the more functionality you release in one block the bigger the risk of failing to meet the customers’ expectations. In addition, it is more likely to miss the right price. You are right.
This leads to two important constraints:
Release small increments
Know the customer values before pricing
There are at least two ways of pricing. Cost-based and value-based pricing, which I’d like to explain separately below.
Pricing Strategy 2: Cost-Based Pricing
Using cost as a basis for pricing is a way to price a product or service by analyzing its cost structure and then applying a markup. Calculating cost includes amongst others development, operations, marketing, project management, sales, maintenance, infrastructure and overhead. The method works very well in environments with traditional project planning and component-oriented products.
During the price calculation, an estimated guess of the total customer base is used to spread the one time cost, for example development, across all customers. Coming up with the right amount of users can often be tricky.
In digital environments where a product is created once and sold to millions of users however, the cost of creating the product is typically low compared to the customer base. Customer acquisition cost (CAC) however get even more important.
Whether your price is covering the cost to provide the service should still be calculated when you do value-based pricing.
What is Customer Value?
Customer value is satisfaction, experienced by taking a given action relative to the cost of that action. Typically this action is taken to fulfill specific goals.
The action is usually the purchase, a sign-up or something similar. Cost refers to any type of payment/transfer in order to receive a benefit. This can, for example, be money, but also data, time or knowledge.
Knowing your customers’ goals and to address them in marketing with an appropriate ratio between satisfaction to cost increases your chance for a win-win.
Especially in large enterprises, this is often not clear throughout the organization due to the specialization of individuals/departments. Breaking down the goals into sub-goals such as to improve quality, reduce downtime, increase throughput, improve OEE, etc. replaces the main goal of the overall company (make money) during day-to-day operations.
While all of these sub-goals might make sense locally, it is often preventing to fully achieve the primary goal on an enterprise level.
The sum of local optima is not the global optima
As an example, you might want to think about corporate incentive systems that are typically set up around profit & loss. Two peers are for example indirectly incentivized to prevent collaboration, even though it would increase the profits for the company as a whole. Instead of collaborating, peers try to maximize individual profit (local optima).
The knowledge about the goals, corporate culture, strategies and internal politics of a customer helps to determine the appropriate price. Every pitch, flyer, link, poster, and whitepaper must address these goals.
Please note that value is perceived and therefore differs from customer to customer. Customers sharing the same values can be grouped into customer segments.
Because value-based pricing can be applied to whole segments and focuses on the customer (value), compared to on yourself (cost), the concept gets very powerful.
Pricing Strategy 3: Product Pricing basing on Customer Value
An optimal deal always creates a win win
Determine which goal the customer is trying to achieve. For example, the goal is to minimize the time a maintenance manager of a plant needs to spend checking the oil level of a machine at a remote location.
The primary objective is to save costs (Pain). Depending on the customer’s operation, faster response times might offer additional, previously untapped opportunities (Gain). If the remote reading was digital, the maintenance manager could do something else during this time.
It’s important to note that there should be something else to do for him though. If there is nothing else to do, the employee would not be required. There might still be a way to sell, but definitely not to the maintenance manager.
It is better, to create inclusive products, which require training, not to replace people. Besides providing a more human solution, this creates a positive image of the company as well as the product and helps sales. If you can provide the training, you even earn double.
Best is if a product creates multiple wins not just win win
For the example above this means there are many winners, the customer (less cost, faster response time, safer operation), the maintenance manager (higher qualification, less repetition), society (less unemployment, less pollution, fewer cars on the road), government (sales tax, qualified workforce) and you (profit, access to data).
Example Calculation for Value-Based Pricing
The goal above was to minimize the time a maintenance manager of a plant needs to spend checking the oil level of a machine at a remote location.
By determining the average distance for one trip (100km) and the number of times to drive the tour (10 times per month) the total distance for the activity per month is 1000km.
The pickup truck to drive the distance has a consumption of 15l/100km. This means the total amount of fuel per month is 150l. Assuming gasoline and one liter is 1.22 Euros, all trips per month cost 183 Euros.
Depending on the customer segment, the willingness to share needs to be determined for example in customer interviews. Let’s assume a willingness to share the savings of 183 Euros is 30%. This means the customer is likely to accept a subscription price of 55 Euros per month.
To ensure profitability, the determined price still needs to be compared with the occurring cost to provide the service.
Conclusion
For digital products with many customers, value-based pricing is the preferred pricing strategy and allows to price according to the perceived customer value. This leads to increased profit and customer satisfaction.
You can find my favorite book regarding product development here.
Please let me know what you think, either by sharing or leaving a comment below.
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