The following is a guest post by Juan Pablo Vázquez Sampere.
"Your innovation strategy is great, kid, but is it going to give me growth in the next quarter?” Chances are your CEO has responded this way to your innovation initiatives. Here’s a way to answer this question affirmatively. As Scott Anthony points out in his new book The Silver Lining, low-end disruption can bring growth.
Our research in Europe has shown that a strategic cost-reduction initiative coupled with a low-end disruption helps meet two corporate goals with just one initiative. Low-end disruption and cost reduction are two sides of the same coin. They are two extremes of the same continuum, just as the same enzyme is used in the body to balance two biological processes.
When it comes to cost reduction, European managers try to apply one of these alternatives:
- Rank the Income Statement cost and expenses account by size and determine a percentage of reduction for each.
- Negotiate a layoff with the government (a step that would be unnecessary in the United States).
- Kill the product features managers think the customer won’t notice.
Instead of relying so much on your gut, we propose this methodology to deliver a high-growth product along with a significant cost reduction.
- Step 1: Understand that company insiders can almost never truly understand what features the customer actually values. The reason is that companies analyze the market in from the point of view of the way they make money. They never see the actual shape of the market. It is next to impossible for a company to understand the job its customers are hiring it for, let alone try to improve its products based on that job. This is a well-proven reason to seek outside help in understanding the rugged landscape of customer jobs your company is making money from.
- Step 2: Create a Base of Competition/Product Matrix: Pick one of your products and create a spreadsheet for it. Insert a column for each and every one of its features. Also, insert five rows in the matrix with the following entries: “Functionality 1”, “Reliability 1”, “Convenience 1”, “Adaptation 1”, “Personalization 1”.
- Step 3: For each row, classify the features listed in each column as follows: If the feature listed describes a Functionality, then insert a mark in that row. Then create an additional row beneath “Functionality 1” with the name “Functionality 2”. Continue doing this with the rest of features and bases of competition until you have them all assigned.
- Step 4: Prepare a mini-survey with the content of the matrix. Interview no more than 25 customers. Using customer-friendly terms, ask them, essentially, “by what percentage is this feature overserved?” Tell them that if they answer 100 it will mean the feature is just good enough. If they answer less than 100 that will mean the feature is underserved, and if they answer more than 100 it will mean they are overserved. The amount over or under 100 will be the percentage by which customers are over- or under-served. Please don’t make this survey statistically significant — the sample very small deliberately, so the sample error can prevent you from reducing reinvestment in features that might still be slightly underserved.
- Step 5: Calculate the mean of the percentages from all rows exceeding 100 that refer to a functionality or a reliability. Then subtract to that mean 100. Now subtract the mean from all the percentages. Convert to a dollar amount using your current cost-allocation budget. Chances are this is a significant cost reduction.
- Step 6: The number in dollars you calculated from the previous step is your total cost reduction. Decide how much of that you want to keep, and use the rest to launch a low-end Disruption.
- Step 7: You have now a great starting point to launch a low-end disruption. Just pick the matrix of the product you just prepared and reinvest the desired amount of money in the rows that contain the words “convenience”, “adaptation” or “personalization.”
The next time your CEO asks you how to use innovation to deliver short-term growth, show your new low-end disruptive product concept and explain the rationale used. Our experience in Europe with this has been very positive. Results obtained with this methodology are usually counterintuitive for senior managers, and they normally consider that refreshing. We have used this methodology several times now during the current economic crisis and still haven’t found a CEO unwilling to give it a try.
In times of crisis, the objectives of cost reduction, growth for the next quarter, and making a successful, more convenient, and affordable product are not inversely related. They are actually regulated through the same enzyme — your company’s values. You can’t change them, and values are put to the test in times of crisis. If you can build a solid argument to launch a simplified, more personalized product to a customer who is now much less willing to pay, you will create a precedent that will prove really helpful for your company’s future strategic positioning.
Juan Pablo Vázquez Sampere is a partner at Stratemic and an Associate Professor at IE Business School in Madrid, Spain.
