Lean Product Management – Outcome-driven Innovation

Lean Product Management – Outcome-driven Innovation

Being customer-driven has become the mantra of the corporate world. However, being customer-driven is not enough and we need outcome-driven innovation.

Many of the companies that are truly customer-centric still make a fundamental mistake when developing new ideas, products or innovations:

They ask customers what they want, what they need or what their problems are.

Don’t ask customers what they want or what they need. Because, they don’t know. Quoting Henry Ford,

“If I had asked people what they wanted, they would have said faster horses.”

Needs, wants and problems are confusing and ambiguous concepts which introduce a lot of variability in the product strategy and product development process.

We need a common language and a common pattern for identifying opportunities for innovation and designing a winning product strategy.

But, first of all, let’s go back in time …

Beyond Customer-Driven Innovation

In the 1980s most companies began to realize that being technology driven was not enough. Up until then it was very usual for companies to create a new technology in their R&D unit and then seek markets to push their invention. They gambled on markets that were not there. Just like the sadly famous Motorola’s Iridium project.

Eventually many companies recognized how expensive it was to continue with this trial-and-error approach to innovation. With failure rates approaching 90%, R&D expenditures under surveillance, and lead times for break-even averaging nearly eight years, it was clear that a new approach was needed.

By 1990s, companies began to adopt the ideas and principles associated with the customer-driven movement. Its basic belief is that companies should understand what their customers want before they invest in the creation of a new product or service.

This approach was aimed at making the innovation process more efficient. Using the customer-driven approach, companies began to conduct customer interviews and act on the feedback they received. They performed ethnographic and anthropological research and began to test product concepts with users: Focus groups, customer visits, conjoint analysis, needs-based segmentation, and lead-user analysis became common tools.

Customer-driven thinking quickly became the mantra of the corporate world. But after more than twenty years of customer-driven thinking, most companies find that 50 to 90 percent of their products fail.

Although some improvements have been made, in today’s global and hyperconnected economy there is an unprecedented need for sustained market growth, so, clearly a new approach to innovation is needed. But, how can we take innovation to the next level?

The Problem with Customer-driven Innovation

Innovation is not a question of luck or being in the right place at the right moment. There are some laws and principles that can be translated into a process. And, like any other process, it can be improved by reducing sources of variability and focusing on customer value.

But, what is value? Value is how will customers evaluate how well your product satisfies their expected outcomes when doing something. It is not what customers want, or need, or request, or the problems they have, instead, it requires identifying the jobs customers are trying to get done and the outcomes they expect to get out of it.

The most important factor in hindering the customer-driven approach and in introducing process variability is, ironically, the inputs that come from the customer – the customer’s requirements.

When companies gather customer requirements they do not know what types of inputs they need to obtain from the customer. Neither does the customer.

To figure out what customers want and to successfully innovate, companies must think about customer requirements very differently. Companies must be able to know, well in advance, what criteria customers are going to use to judge a product’s value and design a product that ensures those criteria are met. These criteria must be predictive of success.

A common language is fundamental to success in any discipline, but confusion has infused product development as companies define “requirements” as any kind of customer input: customer wants, needs, benefits, problems, solutions, ideas, desires, demands or specifications. The problem is that those are all different types of inputs, none of which can be used predictably to ensure success.

Outcome-Driven Innovation

A new approach, developed by Clayton M. Christensen is the answer to this innovation challenge.

Three principles define this approach:

  1. Customers buy products and services to help them get something done.
  2. Customers use a set of metrics (performance measures) to evaluate how well a job is getting done and how a product performs.
  3. These customer metrics make possible the systematic and predictable creation of breakthrough products and services.

Jobs-to-be-Done

In the outcome-driven paradigm the focus is not on the customer, it is on the job: the job is the unit of analysis. The focus on helping the customer get a job done faster, more conveniently, and less expensively than before.

Only after a company chooses to focus on the job, not the customer, are they capable of reliably creating customer value.

Customers don’t go about their life by conforming to particular segments. Rather, they take life as it comes. And when faced with a job that needs doing, they essentially “hire” a product to do that job.

So, we suggest companies start segmenting their markets according to “jobs-to-be-done” and identify opportunities for innovation by identifying underserved outcomes.

Measuring Outcomes

Customers use metrics to measure success in getting a job done, although they seldom articulate them, and companies rarely understand them. We call these metrics the customers’ desired outcomes. They are the fundamental measures of performance inherent to the execution of a specific job.

When corn farmers grow corn, for example, they may judge products for their ability to minimize the number of seeds that fail to germinate, increase the percentage of plants that emerge at the same time, or minimize the yield loss owing to excess heat during pollination.

But these metrics cannot be revealed by listening to the customer in the customer-driven approach, so they are neglected.

Improving the Innovation Process

With all these inputs, companies dramatically increase success odds by improving all the activities involved in the innovation process, including the ability to identify opportunities for growth, segment markets, conduct competitive analysis, generate and evaluate ideas, communicate value to customers, and measure customer satisfaction.

In outcome-driven innovation we don’t generate hundreds of ideas and then struggle to figure out which are valuable. Instead we figure out which of the outcomes for a given job are important and unsatisfied and then systematically identify ideas that will better satisfy those underserved outcomes.

For instance, in our Lean Product Management workshop we develop a potential idea throughout two days. We start with the insight that as parents we believe that buying toys for our kids could be dramatically improved. But we don’t look at the problems or needs. We investigate what we are trying to get done when buying toys for our kids. Then we realize that as parents we are trying to minimize the amount of money wasted in useless toys, we are trying to maximize usage by our kids, we are trying to minimize space occupied at home by multiple toys, etc. So, then we know not only where to focus our creativity, but also that time spent doing so will result in ideas which are worthwhile.

After understanding what jobs customers are trying to get done and what outcomes they are trying to achieve companies can systematically and predictably identify opportunities and create products and services that deliver significant new value.

When a company knows which outcomes are most underserved and has chosen them as growth targets, then the company is able to:

  • Optimize messaging strategy and exploit the advantages their current products have in satisfying the targeted underserved outcomes
  • Prioritize projects in their development pipeline so they can quickly bring to market those products and services that do the best job of addressing other targeted opportunities
  • Innovate by identifying ideas that address the remaining unexploited opportunities, creating breakthrough products

For example, imagine a company that produces video security systems for home. When they analyze the jobs their customers are trying to get done they realize that many of them also want to monitor their pets while they are not at home. So, just by creating and additional sales funnel and messaging they can generate new growth without any additional development.

Or think about the situation where you look at your development pipeline and you find an idea that tackles an extremely important but unsatisfied outcome. You can prioritize it or make it a standalone product and market it at a higher price point as it is targeting an important and unsatisfied outcome.

Hiring a Product

Successful product development requires an understanding of the circumstances in which customers buy or use things. Specifically, customers have “jobs” that arise regularly and need to get done.

When customers become aware of a job that they need to get done, they look around for a product or service that they can “hire” to get the job done.

Everything starts with an awareness of needing to get something done, and then they look for something or someone to do the job. The attributes of the client or of the job are not as important as the circumstances and the context. This is how we can categorize markets based on circumstances.

Companies that target their products at the circumstances, rather than at the customers, are those that can launch successful products.

Jobs-to-be-done Example – Hiring a Milkshake

To understand this, let’s consider this famous example by Clayton Christensen. A fast-food restaurant chain’s initiative to improve its milkshake sales.

Traditional Segmentation

Initially they segmented its customers based on psychographic and behavioral dimensions in order to understand the type of customer most likely to buy milkshakes. In other words, it first structured its market by product and then segmented it by the characteristics of existing milkshake customers.

They then interviewed people with those profiles, and explored what changes in the milkshakes would satisfy them better. The chain got clear inputs on what the customers wanted, but none of the improvements to the product significantly improved sales.

Outcome-driven Segmentation

A new group of researchers then came in to understand what customers were trying to get done for themselves when they “hired” a milkshake, and this approach helped the chain’s managers see things that traditional market research had missed.

To learn what customers sought when they hired a milkshake, the researchers spent a day in a restaurant analyzing who bought milkshakes. They realized that almost half of all milkshakes were bought in the early morning. Most often, the milkshake was the only item these customers purchased, and it was rarely consumed in the restaurant.

The researchers then interviewed customers who purchased a morning milkshake to understand what they were trying to get done when they bought it, and they asked what other products they hired instead of a milkshake on other days when they had to get the same job done. Most of these morning milkshake customers hired the milkshake to achieve a similar set of outcomes:

  • They weren’t yet hungry, but knew that if they did not eat something now, they would be hungry by 10:00.

They also faced constraints:

  • They were in a hurry, and they were often wearing their work clothes, and had only one free hand.

Other times, when these customers looked for something to hire to get this job done they bought bagels, bananas, sandwiches or doughnuts, but none of them performed as good as the milkshake. It could take as long as twenty minutes to suck the viscous milkshake through the thin straw, addressing the boring commute problem. It could be eaten cleanly with one hand, and the customers felt less hungry after consuming the milkshake than after using most of the alternatives.

Outcome-driven Innovation - Jobs-to-be-done - Milkshake

The researchers observed that at other times of the day, it was often parents who purchased milkshakes for their children. In that circumstance they hired milkshakes as a quick way to pacify their children and to feel like they were loving parents. The researchers observed that the milkshakes didn’t do this job very well, though. They saw parents waiting impatiently after they had finished their own meal while their children struggled to suck the thick milkshake up the thin straw.

Segmenting the market along demographic or psychographic lines indeed provides information on individual customers. But the same busy father who needs a viscous, time-consuming milkshake in the morning needs something very different later in the day for his child.

Competitive Analysis

Who is the fast-food chain really competing against in the morning? In the customers’ minds, the morning milkshake competes against boredom, bagels, bananas, doughnuts, instant breakfast drinks, and possibly coffee. In the evening, milkshakes compete against cookies, ice cream, and promised purchases in the future that parents hope their children won’t remember.

Knowing what job a product gets hired to do can give product managers a much clearer road map for improving their products to beat the true competition from the customer’s perspective. Segmenting a market based on product type or customer type doesn’t work as you might be competing with nonconsumption as well as other product categories.

That’s why we emphasize outcome-driven innovation as part of Lean Product Management methodology.

If the restaurant chain implemented innovations that really helped get the jobs done and discarded improvements that were irrelevant to the jobs that the product is hired to do, it would succeed—but not by capturing milkshake sales from competing quick-service chains or by cannibalizing other products on its menu. Rather, the growth would come by taking share from products in other categories that customers sometimes employed, with limited satisfaction, to get their particular jobs done.

Eight Steps to Outcome-Driven Innovation

We can therefore define innovation as the process of identifying solutions that address unmet customer needs.

Historically the innovation process begins with ideas to then progressively mitigate risk. However, that doesn’t work quite well. The outcome-driven approach to innovation begins by first identifying all the needs that exist in the market and to then create products and services that address them. So, we start with Market and needs, then we define our market strategy, then we generate ideas for solutions and then we design the product strategy for selected ideas. This way we can mitigate viability and desirability risks before any big investment is done.

If you want to grow in your core market, enter a new market or discover new markets this is a method you can use:

  1. Define the Customer
  2. Identify Jobs, Outcomes and Constraints
  3. Identify Opportunities
  4. Segment the Market
  5. Target the Market Opportunity
  6. Conduct Competitive Analysis
  7. Formulate the Innovation Strategy
  8. Define the Solution

1 – Define the Customer

Outcome-driven Innovation - Define Customer

People buy products and services to get a job done. Customers want a job done (e.g. transportation 50 Km from home), not the product (SUV, motorbike, public transport, electric, hybrid, diesel, …)

So, a customer is someone who wants a job done.

2 – Identify Jobs, Outcomes and Constraints

The second step in the outcome-driven innovation process is to get from customers the needed information to discover opportunities and to create valuable solutions. Here we gather main job the customer is trying to get done, the jobs steps and the outcomes for each job step.

Outcome-driven Innovation - Jobs-to-be-done

Customer needs are the outcomes, which are the metrics customer use to measure success and value when getting the job done.

Outcome-driven Innovation - Needs - Jobs-to-be-done - Outcomes

3 – Identify Opportunities

Outcome-driven innovation - Discover Opportunities

In this step we want to discover where the market is underserved and overserved so we can reveal opportunities for growth, innovation and efficiencies. Outcomes that are important and unsatisfied represent opportunities for improvement of underserved markets, while those that are unimportant and well satisfied represent opportunities for cost reduction of overserved markets.

Outcome-driven Innovation - Underserved Needs - Outcomes

These insights are critical to success in operational, sustaining and disruptive innovation. We will be able to identify the best opportunities only when we know all the desired outcomes for all customers.

4 – Segment the Market

In the milkshake example we could see how the same person belongs to two different markets depending on what job they are trying to get done with the product. We have bored commuters in morning and stressed parents in the afternoon.

Outcome-driven Innovation - Market Segmentation

Traditional market segmentation doesn’t work because customer differences can’t be explained by customer or product attributes. Customer segments exist because people are executing the job-to-be-done. Using our Outcome-Driven Innovation process, we can discover underserved customer segments that will generate new sources of growth.

5 – Target the Market Opportunity

Once we have segmented the market based on underserved outcomes, we must decide what segments we want to pursue and what is the size of the market opportunity. Of course, we want to target those segments which bring the best opportunity for growth, innovation and cost reduction.

Outcome-driven Innovation - Target Market Opportunities

An effective targeting strategy adds functionalities and performance – but not necessarily cost – in segments that are underserved and reduces cost and functionality in segments that are overserved.

6 – Conduct Competitive Analysis

Outcome-driven Innovation - Competitive Analysis

As we explained in the milkshake example, comparing your milkshake with competitors’ doesn’t help. Don’t copy the competition; stay ahead by helping your customers get their jobs done better. Using outcome-driven innovation process, you can determine where competitors’ products fall short. By attacking their weaknesses and exploiting your strengths, you leapfrog the competition.

7 – Formulate the Innovation Strategy

Is it best to improve an existing product or launch a new one?

Outcome-driven Innovation - Innovation Strategy

Using outcome-driven innovation, you can determine if you can improve your existing products to address all the customers’ unmet outcomes, if a new product is needed to help customers execute the job-to-be-done better or if a new market can be created to compete with nonconsumption.

8 – Define The Solution

Now, you can have the great idea.

As we mentioned before, ideation is not about brainstorming lots of ideas. Instead, the goal is to create the best solution to get your customers’ job done better. With outcome-driven innovation you can decide what customer, job-to-be-done, segment, outcomes you want to focus on.

Knowing where to focus creativity is the key to successful and accountable innovation. To successfully generate breakthrough products, companies must identify and address their customers’ most underserved outcomes.