Traditionally, business innovation has been associated with the development of new products and services (NPD). But over the years, innovation has expanded to mean many other things. For instance, business model innovation involves re-thinking the logic of how value is generated to solve business or social problems in more efficient and/or effective ways.
There’s also process innovation (aka: digital innovation), which generally involves using information technology to automate workflow activities with the aim of reducing operational costs. All of these forms of business innovation can impact a company’s performance either by increasing revenue, reducing costs, or both.
The focus of this post is the kind of innovation that drives organic business growth by increasing customer demand for a company’s products and services. We call this kind of innovation demand creation. The aim of demand creation is to continually increase revenue streams by offering best value solutions to customers while minimizing the cost of generating that value.
Thus, demand creation drives organic growth by increasing the profitable revenue generated through products and services. By contrast, approaches like Lean, Six Sigma, and Business Process Management (BPM) are focused on enterprise process improvement and process management with the aim of increasing the profitability of current revenues through operational efficiencies.
We like to think of demand creation as two jet engines, one on each wing of an airplane. The body of the airplane represents a company. Both engines have to work if the plane (company) is going to climb to higher altitudes (organic growth). The first engine of demand creation is value innovation, which involves creating new products/services that offer customers greater value than competing solutions.
If successful, a new offering will pull enough customers away from competing solutions to make that offering viable. Once viable, the solution becomes an existing offering that moves through a product lifecycle over time.
The second engine of demand creation is value enhancement, which involves keeping existing products/services positioned as the best value for current customers relative to competing solutions while simultaneously minimizing the cost of generating that value. The second aim of value enhancement is to pull customers away from competing solutions by offering them best value.
When both demand creation engines work well, a company can consistently introduce new products and services that customers want; they can continue to increase the profitable revenue generated from these offerings throughout their product lifecycles.
All companies have these two demand creation engines and getting these engines to work well is the key to driving organic business growth. But the sobering reality is that the failure rate for new products/services is between 40%-50% and this rate is about 75% if abandoned innovation projects are included (Anderson, 2017; Cooper, 2017; Castellion & Markham, 2013). This statistic is the null hypothesis, if you will, for any value innovation effort. However, this seems odd because companies appear to be creating valuable products and services all the time.
But look closer and you’ll see that many of those solutions do not offer customers best value vis-à-vis competing alternatives. Consequently, they don’t generate sufficient customer demand. To avoid this fate, companies must do more than just innovate. They must consistently offer best value solutions to customers because anything less than best value will likely disappoint.
Sustaining success for products/services after they’ve launched is also problematic. According to a recent study by the Nielsen Company, only 20% of new offerings grow in year two, while more than half significantly decline in sales. Many of these offerings are pulled from the market by year three. Further, 20% of the new products/services that make it past year three account for 70% of revenue—meaning that the remaining 80% generate comparatively little revenue.
The study suggests that this dwindling performance is due to the fact that companies focus less on keeping current customers and attracting new customers following a product’s first year in the market (Nielsen, 2015).
Companies also tend to underestimate fast follower competitors that pull hard-earned customers away with low-priced imitations. This underscores that companies need to actively manage customer value through the product/service lifecycle, especially the introduction and growth stages where demand forces are quite dynamic.
So how can your company consistently innovate for best value? First and foremost, it’s imperative to know precisely the value that customers want from your products/services at any given time. To attract new customers, it’s critical to know how much better your offerings need to be to pull them away from competing solutions. But this is easier said than done. If customers are not dissatisfied enough with a competing solution, they’ll be unresponsive to efforts to pull them away, even if you think your solution is better.
On the other hand, if customers are sufficiently dissatisfied with a competing solution, they’ll be motivated to find a better product/service. If you know the additional value these customers want, you can pull them away by offering them best value. To retain current customers, it’s essential to keep your products/services positioned as the best value for them. This can be challenging since the customers’ perception of value changes as their circumstance changes. Competing solutions are also getting better, faster and cheaper.
The economic force that drives demand creation (and therefore organic growth) is best value. The prerequisite for producing best value is identifying and precisely defining the value that customers want to remove the limitations (i.e., pains, hassles and constraints) imposed on them by solutions-in-use and circumstance. But how do we identify and define what customers value at any given time? How do we measure value in such a way as to guide demand creation efforts to produce best value?
We discuss a Jobs-to-be-Done method in subsequent posts called Value Target Analysis —a fast, reliable and inexpensive way to ascertain the value that customers want from solutions to get jobs done better, faster and cheaper.
Lastly, what does it mean to innovate for growth from a process perspective? Generally speaking, “innovating” consists of the creative thinking and activities—actually doing innovation—that constitutes an innovation process. If the intention is to produce best value, then the innovation process must aim to maximize the customer value of a new or existing product/service via the best means possible.
This involves combining and/or integrating existing and untapped resources with a business model that maximizes customer value at the lowest cost. This kind of value maximizing innovation is only possible when informed by an exhaustive set of value targets for customers’ Jobs-to-be-Done.
Anderson, A. M. (2017). Product Development and Management: Body of Knowledge. Product Development Management Association (PDMA).
Cooper, R. G. (2017). Winning at new products: creating value through innovation (Updated Edition ed.). Basic Books, New York.
Castellion, G., & Markham, S. K. (2013). Perspective: New Product Failure Rates: Influence of Argumentum ad Populum and Self-Interest. Journal of Product Innovation Management, 30(5), 976-979.
Nielsen. (2015). Nurturing Innovation: How to Succeed in Years Two and Three. The Nielsen Company. Retrieved from http://innovation.nielsen.com/sustaining-growth-report