- Buyers Guide
In a recent meeting with an executive responsible for her company’s product development activities, she made the comment, “I’ve never seen so little creativity in a three-year plan that’s supposed to define our company’s technology roadmap. You’d think an innovation plan would be innovative. What I’m looking at is just plain boring – a product extension here, adding a feature there. Absolutely nothing that anyone should call a creative thought.”
Her comment is one that we hear all too frequently. Lack of creativity – at a time when most firms depend on creativity to avoid falling into a commodity product trap where price is the only the distinction among firms – is one of the two most frequent issues we hear from executives responsible for their company’s innovation centers and product development initiatives.1 As firms move to finalize their plans for 2011 and beyond, a fresh perspective on the ways in which they can bring creativity into their innovation plans can yield real dividends.
Thinking about your customers – not just your direct customer, but customers at every stage of the customer chains in which your firm participates – provides the inputs for creative planning. In CoDestiny2, we outline three ways in which a firm can bring value to its customers – helping them to grow volume, helping them to achieve a higher price point, and helping them to “take costs out” and strengthen their bottom-line margins. These three routes to success always work, and they work when it comes to identifying innovations and new product strategies. Beyond the obvious ways of contributing (which customers are often imploring their suppliers to address), the following paragraphs describe some interesting variations through which companies have achieved significant successes.
The obvious way that firms look to increase volume is by taking market share. This opportunity should never be overlooked. If a supplier can help its customers win sales, both firms benefit from higher volume. But another way of helping a customer increase volume is by helping them to identify new markets in which they can participate.
Sometimes these new markets involve new geographies – entering fast-growth markets like China, India, or Brazil, for example. It is remarkable how much of a contribution a supplier can make in this area, particularly if their customer’s entry strategy depends on understanding the peculiarities of the new country market, or if it has local-content requirements, or if new sales channels are required to reach end customers.
One supplier of capital goods went through an exercise for its twenty largest customers, assessing for each which emerging markets offered the greatest potential of success. It then classified for each of these large customers the markets that it identified as having strong potential into three categories: (1) customer is already active; (2) customer has plans in place, but not yet implemented; and (3) customer is not yet known to have focused on that market. This firm then developed a discussion strategy, again customer by customer, emphasizing the latter two categories. For discussions involving emerging markets in the second category, it emphasized the “ways we can help”. For those in the third category, it developed a short presentation explaining why it thought that market offered opportunities and how they as a supplier could work with their customer to explore those opportunities. Not quite three years later, this firm can identify fourteen explicit business successes that grew from those discussions. In a majority of these instances, the success required some investment in product development or other types of new innovations, coupled with a strong collaboration in other areas important to their customer’s entry into the new country market.
New geographic markets are but one option through which a supplier can work with its customers to find new sources of volume. Adjacent markets offer a similar possibility, but often require more creativity in terms of thinking. If the options were easy, the customer would probably have thought of them and already implemented them. Successful suppliers have come up with ideas in this realm by thinking of how their own products and services contribute across the customers and markets in which they are active, and then trying to spotlight lessons that can be taken to specific customers that build upon those broader lessons. One firm, for example, had numerous customers that served the aftermarket environments in their industry with replacement parts and services. It identified other firms that only sold original equipment, and went to them with ideas about how to expand to a more complete life-cycle offering. In several instances, this idea resonated with the customer, and the two firms defined product development strategies to allow entry into the customer’s aftermarket environment. In another instance, a firm that developed a new sensor for use in high-challenge environments involving extreme weather conditions subsequently did a systematic examination of other instances in which sensors might be subjected to demanding conditions. The project involved a combination of market research and brainstorming, resulting in the identification of nearly two dozen possibilities. They then did outreach to prospective customers, learned the issues that kept those firms awake at night, and commissioned several development efforts to evolve the sensor’s capabilities into those application environments. Today, over 70 percent of the firm’s sales are in these additional markets.
The second opportunity for value creation, helping customers to reach a higher price point, is probably the one which is most confusing and challenging. It is rare to speak with any company that doesn’t cite the challenge of developing new capabilities that differentiate their product and respond to the challenge we cited in the title of the first chapter of CoDestiny: Your Customers Want More and They Will Pay You for It. At the same time, it is equally hard to find any supplier that doesn’t respond to an idea to gain customer support for a higher-priced product with some version of the new ESPN Monday Night Football feature: “C’mon, Man”. As one supplier’s sales manager noted, “It just about ends discussions when we start a conversation by saying that we have a great new product, but it will cost more.”
One approach that has generated some success stories involves thinking about defining options through which customers can offer a standard product at their current price point and a new, high-end option at a higher price point. This approach allows the supplier to provide customers with a “no downside, real upside option”. If the option is selected, the supplier and the customer can share the rewards of reaching a higher price point, and if the option takes off and gains market acceptance, it can in fact move the market to the higher price point preferred by customers.
A substantial number of the options that we take for granted on our cars and trucks followed this path. In many instances, the automotive suppliers first introduced innovations in the aftermarket, getting motivated buyers to have their vehicles refitted with these options. Small items like cup holders, most of the consumer electronics used in vehicles (e.g., CD players, DVD players, navigation systems, security systems, etc.), performance options like those associated with The Fast and Furious movies, and products like sunroofs that required actual alterations to the vehicle began as aftermarket products. The next step was convincing the carmakers to offer these as options on their vehicles. Many of us can remember making the decision to buy the car with the CD-6 player and the sunroof, even though it had a higher sticker price. Today, most cars offer those options as standard equipment. The automotive industry is not the only one where this strategy has proven successful. Examples abound in diverse industries and across geographic markets.
What it required to make this option successful is insight about the factors that drive purchase decisions several stages down the customer chain. The automotive parts manufacturers that were used as an example in the previous paragraph understood that there were emerging niche groups of buyers that were interested in these capabilities and that would buy them for their vehicles. They also developed channels through which these products could be sold and installed in the aftermarket, often very different from the car dealerships where the actual vehicles were purchased.
Focusing on trade-up options, rather than trying to convince customers to make a wholesale change to a higher-priced product is a solution to the conflict between the need for differentiation and the skepticism about the wisdom of raising prices. Firms that take this perspective can translate new product innovations that got the “C’mon, Man” rejection into success stories for their customers and their shareholders.
The final opportunity for creating value for customers, identifying how to take costs out of the system, requires that firms take a new perspective on innovation. Most frequently, the perspective about innovation and improvement involve better performance or more features. These are, of course, valuable contributions, and the source of many of the success stories associated with growth in sales volume or reaching higher price points. But they are not the only possible contributions from innovation initiatives.
“It reduced our costs of manufacturing.” “It eliminated two steps in the installation process.” “It cut our warranty claims in half.” “It allowed us to increasing our efficiency in managing our shelf space by 25 percent.” “It didn’t require protective packaging.” “It allowed us to use the same component on three generations of our equipment, reducing inventory levels by more than half.” “It was self-diagnosing, reducing the number of trips required to fix a broken unit in half.”
Every one of these statements was included in a supplier success story told by a customer about a highly-cherished supplier that had brought value to the customer. In none of these instances did the success story involve improved performance along the basic metrics relevant in the industry, nor did any involve new features of importance to end customers. But all of them helped the supplier take costs out of the system and improve their bottom lines. In a few cases, the end customer was never aware of the contribution, while in a few others, there was awareness that allowed the end customer to applaud their supplier’s improved productivity.
Every firm has such options, and innovation planning should focus on identifying them and determining whether it is possible to respond to such options for value creation. The best firms become aware of these options by building strong touch point relationships at all levels of their interactions with their customers. It’s highly unlikely that interactions between the sales and purchasing organizations are going to focus on discussions about shelf space economics, manufacturing process improvements, or packaging. But other departments within both the supplier and customer organization are acutely aware of problems and opportunities in these areas. And if those departments interact and share information effectively, it will often be the case that the supplier organization can identify innovations that respond to real customer needs. It takes investment in relationships to get to the point where such innovation opportunities surface naturally, but such investments can have a huge payoff and significantly increase the number of instances in which innovations will be applauded by a supplier’s customers.
To conclude, return to the challenge implicit in the comments of the product development executive introduced at the start of this article. The plain boring plans that she was reviewing failed to listen to the voice of the customer. When this firm refocused its efforts to think about what options would create value for customers, it found exciting options within all three categories. The outcome was a celebrated success in this organization. Within a two year period, it had doubled the percentage of sales associated with new product introductions, and there was widespread agreement within the firm that the best was still to come. The same potential exists through which you can get help from your customers to bring creativity into your innovation plans.
1The second high-frequency problem that we hear is that the project recommendations involve “me too” initiatives, ones that are reactive instead of proactive, only designed to respond to some initiative already taken by a competitor – even in instances in which the competitor’s initiative hasn’t really gained any traction in the market. One executive commented that “sales team members love to cite a competitor’s better mousetrap and too often focus their attention on the rear view mirror rather than on the road ahead.”
2 CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, by Atlee Valentine Pope and George F. Brown, Jr., Austin, TX: Greenleaf Book Group Press, © 2010. See especially Chapter 5.
George F. Brown, Jr., along with Atlee Valentine Pope, is the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. See www.CoDestinyBook.com for more details. Brown is also the CEO and cofounder of Blue Canyon Partners Inc., a strategy consulting firm working with leading business suppliers on growth strategy.