What customers want

On What Customers Want

Ziya G. Boyacigiller

This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com

CLASS ON…What Customers Want

Using Outcome-Driven Innovation to Create Breakthrough Products/Services

By Anthony W. UlwickLecture Prepared by: Ziya G. Boyacigiller

Most Attempts to Create Successful Products Fail

60% fail during development

40% of those making it to market fail

¾ of money spent is lost !

Yet failures are not random, they are predictable and avoidable.

Gambling on a Market

Until Mid-1980s Technology-Driven Develop technology then find market

Motorola risked $5 billion on Iridium project, failed, and sold the company for $25 million – ½ cent for every $ ! $3,000 phones at $7 a minute did not

work

Conclusion:Narrow Demographic Appeal

Trial-and-Error is too costly:

Failure rates approaching ~90%

Lead times for success averaging ~8 years

Risk is too high…

A new approach is needed.Instead of developing technology and looking for customers, let’s talk to customers first and develop the technology they need.

Let’s become Customer-Driven

… 20 years later in USA…

Being Customer-Driven is not working:

50-90% products/services still fail Collectively costing ~$100 billion a year

New Coke 200,000 consumer market-research $4 million cost of interviews Biggest marketing flops in history!

PCjr by IBM $1 million cost of market-research 18 months of effort Wall Street Journal announced it a flop in 1 day after

product introduction to public!

A new approach is needed…

Problem: Variance is too high.There are few successes, but too many failures in innovation.

Solution: Treat “innovation” as a “Process”Use similar approach for reducing variance in manufacturing processes, such as:

Use statistical-process-control tools.Identify the stages of innovation.Eliminate the factors introducing variance.

SU

CC

ES

S

Willing Worker

Day 1

Day 2

Day 3

Day 4

Mike 8 11 6 7

Leon 14 10 8 11

Karen 7 10 11 5

Bob 11 10 6 10

Melvin 7 12 6 13

Paul 14 7 7 14

Totals 61 60 44 60

Variance ExplainedDr. Demings’ Redbead Experiment

Dr. Deming asks six willing workers to manufacture white beads by scooping them out of a box containing an 80:20 mixture of white to red beads. They are given a target of no more than 3 red beads per day. But the number of red beads produced was as follows. What is causing the variance?

SPC*: Your quality is only as good as the quality of inputs into the process.

ODI*: Your innovation quality is only as good as the quality of the customer’s inputs into the innovation process.

To improve innovation quality, we need to reduce “variance” in the customer inputs.

(The variance and the closely-related standard deviation are measures of how spread out a distribution is. In other words, they are measures of variability. Variance makes information ambiguous, unreliable, vague...)

* SPC=statistical process control, ODI= outcome driven innovation

How is variance introduced when collecting inputs from customers?

Communication Errors Through using imprecise language

Hears “red” writes red as blood (it is red as her hair…) Translation Problems

Hears “container” writes “box” (it is a “bag”…) Omission Problems

Hears “small container” writes “box” (“small” is lost…) Vocabulary Problems

Hears “crimson” writes “blue” (doesn’t know the word…)

Sampling Errors Customer is not knowledgeable Too few customers are surveyed

Questioning Errors What do you want? (customer doesn’t know either…) Would you use this? (“yes” but how many, at what price…)

etc.

Language is important !

Customer “requirements” can be:

Wants Needs Benefits Solutions Ideas Desires Demands Specifications etc.

We need a precise language to capture “what customers want”.

1. Capture customer inputs well in advance, using precise language,

2. Define what criteria customers will use to judge a product’s value (factual/quantifiable measures),

3. Then, deliver a product that dutifully meets these criteria.

Note: These criteria must be predictive of success (i.e. with cause-and-effect link to success)

Successful Innovation Process

“Phone Design” Game – Part 1

1. Talk to “customers” to define a new phone (to be contract manufactured for you) to sell.

2. Next, draw a picture of the “phone” you designed.

3. Show this picture to your “customers” and see if they will buy it or not. Find out why they like it or don’t like it.

Outcome Driven Innovation is built on “precise customer inputs”

1. Customers buy products and services to help them get “jobs” done.

2. Customers use a set of metrics (performance measures) to judge just what it will take to get the job done perfectly. These metrics are called “customers’ desired outcomes” or “outcomes” in short.

3. These customer inputs make systematic and predictable (low variance) creation of breakthrough products possible.

Explaining Outcome Driven Innovation

1. Customers buy products and services to help them get “jobs” done.

People buy/hire/license: MP3 to manage and enjoy music Insurance to limit financial risk Consulting firms to formulate strategies Corn seed to grow corn Drill bits to make holes Servers to manage e-mail


2. Customers use a set of metrics (performance measures) to judge how well a job is getting done and how a product performs. These metrics are called “customers’ desired outcomes” or “outcomes” in short.

For any job customers may apply 50 to 150 outcomes to judge how well the job is getting done.

[job] “to grow corn” [outcomes] …, minimize number of seeds that don’t germinate, increase number of plants that emerge at the same time, minimize yield loss due to excess heat during pollination, …


3. These customer inputs make systematic and predictable creation of breakthrough products possible – by minimizing variance at each stage of

the innovation process.

With these (jobs/outcomes), companies can improve ability to execute all downstream activities with minimal variance:

Identify opportunities for growth Segment markets Conduct competitive analysis Generate and evaluate ideas Communicate value to customers Measure customer satisfaction

“Phone Design” Game – Part 2

1. Use Outcome Driven Innovation methodology to create a new phone (to be contract manufactured for you) to sell..You need to find and talk to “customers”.

2. Design on paper (draw) a picture of the “phone”.You should make use of Blue Ocean methodology for value innovation.

3. Show this picture to your “customers” and see if they will buy it or not. How may will buy - not buy?

4. Find out what they like – what they don’t like with your design.

Cordis Case:

In 1994 medical-device company Cordis targeted 15 underserved outcomes to grow market share in angioplasty balloon market.

3 outcomes addressed with current products, they had never told customers… revised messaging and sales strategy market share went up from 1 to 5% within 6 months.

“stent” in development pipeline (one of 40 projects) an extremely important and unsatisfied outcome (minimizing restenosis) placed more priority and resources first to market fastest growing product in medical industry with $1 billion sales in 2 years.

remaining dozen underserved outcomes developed and introduced additional products in next 1.5 years market share grew from 5 to 20%, making them the market leader.

Outcome Driven Innovation

Stages of Innovation

Customer-Driven Approach

Outcome-Driven Approach

Benefits of Outcome-Driven Approach

Stage 1: Formulate an innovation strategy

Companies focus on their core markets; other growth strategies are considered too risky.

Companies consider multiple avenues for product, market, operational, and disruptive innovation

Companies devise attractive growth strategies that have high growth potential and a high probability for success.

What Type of Innovation Do We Want to Pursue?

1. Product/Service InnovationAddressing one/few outcome(s) incremental improvementGrow market share

2. New Market InnovationFind underserved jobs (product alternatives exist)Best growth opportunity into new markets

3. Operational InnovationAddress inefficiencies in operations through innovation

1. Dell, Toyota, Progressive Insurance, Wall Mart

Disruptive InnovationsUse new technology to replace prevailing business model in an existing market that is filled with overserved customers.Two types:

“Low-End Disruption”,“New-Market Disruption”(no products exist)(significant growth opportunity)

(see “Innovation Models”, Christensen)

Cu

sto

mer

job

s/o

utc

om

es fi

rst

defi

ned

, th

en

tech

nolo

gy is

develo

ped

.

Tech

nolo

gy is fi

rst

develo

ped

, th

en

com

pan

y looks f

or

cu

sto

mers

Can We Achieve a Breakthrough?

Addressing multiple outcomes

Addressing multiple jobs

Disruptive innovation

What Customer-Jobs Do We Want to Address?

Growth Options

Devise product or service innovations that help customers get more jobs done – often ancillary related jobs (iPod)

Devise product or service innovations that help new customers do a job that nobody is doing yet; no product exists. (telephone, TV, CRM)

Devise product or service innovations that help customers get a job done better. (Nokia phones)

Devise product or service innovations that help new customers do a job that others are already doing. (Canon desktop copiers, angioplasty balloons)

Existing Customer(s)

New Customer(s)N

ew

Jo

b(s

)C

ur r

ent

Job(s

)

Where in the Value Chain Do We Want to Focus Value Creation?

This is important because: Must know who to maximize value for Who to contact to get inputs

Three mistakes to watch for: Company does not consider end user directly

(talking to “ISP” but not to “ISP’s customers”) Company does not consider all relevant customers for

innovation(talking to “doctors” and not to “nurses”)

Company lets one customer speak for another(talking to “sales people” to get “consumer” inputs)

Drug Manufacturer

DistributorDrugStore

Consumer

Doctor

Pharma

Value

Chain






Stage 2: Capture customer inputs

Companies listen to the “voice of the customer” and struggle to make sense out of vague inputs in order to give customers the solutions they requested.

Companies determine what outcomes customers want to achieve, and let qualified experts, not customers, devise the best solutions.

Marketing and development managers have the customer inputs they need to create solutions of significant value.

Three Types of Jobs

1. Functional Jobs(birthday party for your son)

2. Emotional Jobs – Personal(feel good as a mother)

3. Emotional Jobs – Social(show others you care for your family)

Dissection of an OutcomeUse personal and group interviews with observational research…

Reduce the time it takes to prepare the wood for cut <10 min.

direction

unit of measure

outcome desired

Note: Use only “reduce” ,

“increase”,

“meet”

to minimize variance

Note: Overcoming “constrains” is important as well – e.g. Roche Accu-Chek Comfort Curve for people with diabetic episode… (Constrain: Must be useable by people with blurry vision & shaky hands) Constraints are “must” meet outcomes.

Increase the air flow to blow away saw dust >3 cm3/sec.

specified limit






Stage 3: Identify areas of opportunity

Companies define “opportunities” as the solutions customer say they want. They prioritize innovation initiatives based on available resources and existing core competencies.

Companies define “opportunities” as the outcomes customers say are important and unsatisfied. Then find the resources and build the competencies to address them.

Managers know where to focus employee creativity to create customer value. Companies don’t waste time and effort on outcomes that are already overserved or unimportant.

Useless inventions from JapanImportant? NO

World’s First and Only15 Blade Razor

Overdesigned?

Prioritizing Opportunities

1. Prepare survey questionnaire that has all the job, outcome, constraint statements captured from customer interviews.

2. Give survey to statistically significant target population (no more than 600, minimum defined by population size)

3. Ask participants to rate importance from 1 to 5 on a scale, 5=critically important, 1= not important at all

4. Ask participants to rate the degree they are satisfied with how the solutions they are using today from 1 to 5 on a scale, 5= totally satisfied, 1= not satisfied at all.

5. Enter the results into the opportunity algorithm to determine which jobs, outcomes, and constraints are underserved and overserved.

Opportunity Algorithm

opportunity =

importance + max (importance – satisfaction, 0)

(units for importance and satisfaction =

percent of surveyed rated this outcome a 4 or 5.)

Example:

importance= 88% (8.8), satisfaction= 21% (2.1) opportunity= 8.8 + (8.8-2.1) = 15.5

Possible Opportunity Ratings

importancesa

tisf

act

ion

0 5 10

0 0 10ok

20excellent

5 0 5 15good

10 0 5 10

Identifying Overserved and Underserved Markets

Underserved job/outcome when “importance > satisfaction”

Opportunity >15 Extreme areas of opportunity – do not miss ! Opportunity >12 & <15 “low hanging fruit” ready for improvement Opportunity >10 & <12 worthy of consideration Opportunity <10 unattractive

Overserved job/outcome when “satisfaction > importance”

Stop focusing on these outcomes Do cost reduction if market is cost-sensitive by taking out overserved functions Do disruptive innovation, if market has many overserved opportunities of

significant size and/or growth.

Catch migrating value by measuring opportunities over time.

Outcome Driven Competitive Analysis

satisfaction

outcome

imp

sat

opp comp

#1

comp

#2

comp

#3

#1 8.3 4.5

12.1

5.6 3.8 4.8

#2 … … 12.0

… … …

…Note: Best to present these using value curves






Stage 4: Segment the market

Customer are conveniently classified by product type, price point, age, risk aversion, and other demographic and psychographic characteristics.

Customers are segmented based on the jobs/outcomes they are trying to achieve. They are not placed into artificial, company-imposed classifications.

Managers are able to discover segments of opportunity in markets where few if any opportunities appear to exist, revealing new avenues for growth.

Effective Segmentation must create a population that:

Has a unique set of underserved or overserved outcomes

Represents a sizeable portion of the population

Is homogeneous – meaning that the population agrees on which outcomes are underserved or overserved and responds in the same manner to appropriately targeted products or services.

Makes an attractive strategic target – one that fits with the philosophy and competencies of the firm

Can be reached through marketing or sales efforts.

Traditional segmentation techniques (such as demographic or psychographic) do not work when defining innovative products.

…requires an understanding of the circumstances in which customers buy or use things.

Predictable* marketing…

* Knowing accurately which products will connect with their customers (sell)

Milk Shakes Case

Proper Segmentation Increases Market Share

Tier 1 Customers– who were buying other products but were not happy and ready to switch will start buying your product since now it fits their needs better than the alternative.

Tier 2 Customers– who had looked at the alternatives and decided not to buy / wait, will start buying your product since now it fits their needs the way they want it.

Tier 3 Customers– who had not looked, will be influenced by your new “satisfied” Tier 1 & 2 customers by “word of mouth” advertising.

How to Do Outcome-Based Segmentation

1. Collect required data(customers’ desired outcomes)

2. Choose segmentation criteria(use factor analysis*)

3. Group together surveys with similar factors(use cluster analysis*)

4. Profile clusters

* Factor analysis seeks to discover if the observed variables can be explained largely or entirely in terms of a much smaller number of variables called factors.

* The purpose of cluster analysis is to discover a system of organizing observations, usually people, into groups, where members of the groups share properties in common.

Motorola’s “Radio Products” Case

1997, limited growth,market appears to bematuring…

New ways for growth?

Traditional vertical segmentation wasn’t working for them…

1. Collecting the Required Data:

Radio users had almost 100 desired outcomes, such as “Minimize the number of communications that are intercepted by unauthorized parties”...

Designed a survey and sent to a large random sample of radio users population.

Survey captured degree of importance of each outcome for the customer, and the degree they felt each outcome was satisfied by the products currently available.


2. Choosing the Segmentation Criteria:

Grouped similar outcomes together into 18 distinct opportunity-based factors (used factor analysis)

They chose one outcome from each factor that showed the most variation in market response.In factors where there was no substantial market variation, no outcomes were chosen.

In total 11 outcomes were selected as segmentation attributes (see next slide)


Segmentation Attributes for Radio Products

1. Minimize the number of messages that are misunderstood.2. Minimize the number of interruptions during a communication3. Minimize the amount of interference encountered when

communicating4. Minimize the effort required to communicate discreetly5. Minimize the number of annoying incoming communications6. Minimize the time it takes to confirm receipt of a communications7. Minimize the effort required to establish a record of the

communication8. Minimize the number of communications that can be intercepted9. Minimize the likelihood of making inadvertent changes to settings10. Minimize the effort required to program the device11. Minimize the effort to operate the device with gloves on

3. Conducting Cluster Analysis:

Used opportunity ratings given to the 11 selected outcomes.

Decided on 3 clusters who rated outcomes as shown below as important and unsatisfied:

1. Segment 1: Rated 4, 7 , 8 (40% respondents)2. Segment 2: Rated 1, 2, 3, 9, 11 (28% respondents)3. Segment 3: Rated 5, 6, 10 (30% respondents)


Segment Opportunities

SEGMENT 35. Minimize the

number of annoying incoming communications

6. Minimize the time it takes to confirm receipt of a communications

10. Minimize the effort required to program the device

SEGMENT 21. Minimize the number of

messages that are misunderstood.

2. Minimize the number of interruptions during a communication

3. Minimize the amount of interference encountered when communicating

9. Minimize the likelihood of making inadvertent changes to settings

11. Minimize the effort to operate the device with gloves on

SEGMENT 14. Minimize the

effort required to communicate discreetly

7. Minimize the effort required to establish a record of the communication

8. Minimize the number of communications that can be intercepted

4. Profiling the Clusters:

Motorola profiled (surveyed again) the surveyed customers to understand the demographic and psychographic characteristics of the 3 segments. (This could have been done through the initial survey…)

The questions gathered age, job titles, how frequently they used the products, what they used it for, geographic location, etc.


Motorola Mobile RadioSegment Profiles

SEGMENT 1:“Hired” mobile radio products to communicate privately, discreetly, or

covertly, without being noticed by others and without being overheard. They conducted covert operations from inside a vehicle, valued privacy and security related outcomes.

They included police, security personnel, and similar individuals; were younger users; and were likely found in urban areas.

Resulting Solution:Enhanced encryptionA mechanism to prevent others from overhearing communicationNoiseless operation


SEGMENT 2:“Hired” mobile radio products to provide clear, unambiguous, and

uninterrupted communications when face with dangerous, even life-threatening, situations.

Members of the segment consisted mainly of firefighters, police, and security personnel that often leave their vehicles to perform assignments but must maintain vehicle contact at all times.

Resulting Solution:Voice command technologyEmergency locatorsModifications to permit use with gloves


SEGMENT 3:“Hired” mobile radio products to communicate with teams and groups,

to coordinate activities, and to perform administrative tasks. Members of this segment included coast guard, locomotive

engineers, and others who make constant use of radio communications throughout the day to do their jobs. In contrast to other segments, members of this segment required neither privacy nor emergency-situation capabilities.

Resulting Solution:Easier to program radioA mechanism to ensure message is received

Motorola’s Results Until this point, no mobile radio products by Motorola had

addressed the outcomes uniquely desired in each segment with well-matched products and service offerings.

There was a one-size-fits-all mentality.

Motorola optimized a product for each segment.

Products addressed previously underserved outcomes for the specific segment, and eliminated product features that addressed outcomes of little or no importance to the segment population.

Better products at lower prices with increase customer satisfaction resulted. Revenue growth reached 18% in a flat market, and Motorola secured leadership position in the market.






Stage 5: Target opportunities for growth (targeting strategy)

Companies pursue ideas that are intuitively attractive, easy to develop, or that fit within the firm’s core competencies.

Companies pursue underserved and overserved outcomes for improvement and cost reduction, respectively.

Companies proactively define a competitive position that is unique and valued and then devise solutions to occupy that position.

Broad Market Targeting Opportunities

1. Combining related opportunities that form a theme(Coplast “preventing complications” vs. “healing faster”)

2. Combining unrelated opportunities that represent growth avenues (target multiple unsatisfied outcomes)(Bosch CS20 circular saw)

3. Prioritizing a single opportunity that can be addressed with a new, supplementary product(Cordis stent)

4. Eliminating overserved outcomes that add unnecessarily to product cost($2000 PC vs $200 PC – see next slide)

5. Addressing opportunities for technology development and long-term growth(Cisco acquisitions, airbags)

MIT’s Negroponte’s $200 PC

Narrow-Segment Targeting Strategies(what to do when broad-market is not attractive)

1. Identify opportunities that cover multiple (outcome-based) segments (if cannot target 100% of customers, target as many as possible)

2. Build a single platform for multiple segment solutions(thus reduce the number of platforms required, which reduces development time & cost)

3. Pursue the least-challenging segments of opportunity first(segments with many underserved outcomes are harder to satisfy, which makes them more challenging)

4. Target segments that represent attractive (lowest) price points (plot performance vs price point)(least-demanding segment can be disrupted more easily)






Stage 6: Assess messaging and branding (positioning strategy)

Companies are uncertain if their positioning and messaging is tied to the customers’ underserved outcomes.

Products and brands are tied directly to the emotional jobs or functional outcomes customers are trying to achieve.

Messaging connects solidly with customers and enhances the sales of existing and new products.

Messaging Should Tout a Product’s True Value

Most companies don’t know which customer outcomes are important and underserved. (so they talk about all their features in advertisements – and don’t show their differentiating features – see PC advertisements in newspapers, “Which one should I buy? They all look the same to me… Use facts and numbers whenever possible!)

Precision, not vagueness, in messaging is needed to connect product with what customer wants.(companies use “adjectives” – such as “reliable”, “light”, “fast”, “better” which are vague, imprecise, and ope to interpretation – use specific facts and numbers – razor with rubberized handle touted as “easy to use”, customers should figure out what that means. Better to say (“ …so you won’t drop it when your hands are wet…”)

Repeating outdated messaging(once an outcome is satisfied it no longer resonates with customers, holding on to an outdated message will slow sales and growth)

Create a message around a theme or specific outcome

Emotional or Functional ?

JewelryCosmetics

Food & beverages

Packaged goods

Automobiles

Clothing

Bottled water

Chemicals

Raw materials

ElectronicsAppliancesSoftwareServicesMedical devices

Functional ComplexityE

moti

on

al C

om

ple

xit

y

Emotional or Functional ?

Cell phones, digital watches, automobiles, etc.






Stage 7: Prioritize projects in the development pipeline

Managers are compelled to cove all bases. They initiate hundreds of development efforts, spread resources too thin, and are reluctant to kill projects already under way.

Companies evaluate products in the pipeline for their ability to address the customers’ underserved outcomes.

Companies know which initiatives will create the most value. They are able to create more winning products in less time and at less cost.

What issues do companies face when prioritizing projects?

Difficulty determining which concepts will address market opportunities(use opportunity ranking / table)

Compulsion to cover all bases(due to expecting variance and not knowing which opportunity is best don’t put all eggs in the same basket dilutes resources reduces success rate)

Difficulty killing projects(belief that with a bit more work and investment the project will succeed – which is based on assumptions and not on evidence)

Failure to allocate sufficient resources to get the project to market quickly(a 6 month delay to market reduces the life-time profit by 2 – starting a project gives false sense of security that the project will succeed)






Stage 8: Devise breakthrough ideas

Employees brainstorm without focus, generating hundreds of ideas with questionable value. Many ideas must be evaluated at significant cost.

Employees use focused brainstorming to direct their energies toward specific underserved outcomes and generate a few ideas of significant value

Employees don’t waste their time generating ideas that do not add value. They generate only ideas that are worthy of pursuit.

Why do companies fail to produce breakthrough ideas?

Managers don’t direct employees’ creativities.

Companies judge success of idea generation processes by the number of ideas generated, not the quality of the ideas.

Many ideas are generated, and most companies lack a useful way to capture, evaluate, and select the best ideas.

Knowing where to focus creativity is the key to successful and accountable innovation.

Outcome-based innovation makes sure to focus innovation on opportunities, and without diminishing performance along other important outcomes.

Customer Scorecard

satisfaction

outcome

imp

sat

opp concept#1

concept#2

concept#3

#1 8.3 4.5

12.1

5.6 3.8 4.5

#2 … … 12.0

… … …

…

totals 40.3 39.5 47.9

How much value is enough?

Offering <3% more value than current products often fail

Offering 5% to 10% more value results in successful products (grow market share and/or revenue, profit)

Offering >20% more value results in dramatically higher market share, revenue, profit. (breakthrough products)

Genius is 1 percent inspiration and 99 percent perspiration

T.A.Edison

“Innovation is 1 percent inspiration, and 99 percent perspiration.”

Z.G. Boyacigiller

Small Business & Entrepreneurship

What customers want