WORKSHEET #18: Developing Priorities for Product and Service Innovations

The purpose of both Step 2 and Step 3 is to develop an expectation for how long a product and service innovation is likely to remain unique in the future. By "unique" here, we mean that less than half of the industry competitors would have the innovation. Step 2 gives you an approximation of the difficulty of copying categories of innovations. Step 3 seeks to put more quantification into this effort and is a preferable approach.

Step 1:

Using the definitions in the Glossary of Terms in Diagnose/Products and Services/Ability of Competition to Copy and in Analysis 44, classify each remaining potential innovation into Function, Reliability or Convenience.

Step 2:

Array all benefits producing Positive volatility into categories of the Customer Buying Hierarchy.

  • List each specific benefit producing Positive volatility along with its percentage share of Positive volatility.

  • Assign each benefit to one of the four categories of the Customer Buying Hierarchy (Function, Reliability, Convenience, Price).

  • Sum the total volatility percentage attributable to each of the four categories of the Customer Buying Hierarchy.

  • These results give you an indication of which benefit categories produce the most lasting results in the marketplace. These results should be similar to the results in Step 3.

Step 3:

Estimate the average life of a typical innovation in each of the four Customer Buying Hierarchy categories.

  • List each innovation over the last three to five years that competitors have introduced. Include improvements in Reliability and Convenience categories.

  • Determine the time in months from the introduction of the innovation until more than half the competitors in the marketplace had their own version.

  • Assign each of these innovations to one of the four Customer Buying Hierarchy categories.

  • Calculate the average term, in months, that the innovations in each category remained unique, that is, where less than half the industry's competitors had the innovation as part of their programs.

  • These results give you a first approximation of the likely term of uniqueness for an innovation in each of the four Customer Buying Hierarchy categories. These results should be similar to the results in Step 2.

Step 4:

To prioritize potential innovations, begin with the rank ordered list you developed in Worksheet #17: Creating Potential New Products and Services.

Step 5:

Estimate the annual sales volume in units of product or dollars that the innovation will create or save the company in the current market.

Step 6:

Calculate the volume the company needs to cover the company's costs for this innovation.

  • Compute the gross marginal costs of each innovation, including both variable and fixed operating costs (people and purchases) and additional capital costs (net assets employed). To make the investments comparable to other costs, you might calculate the cost of investments as the cost of an annuity that would exactly liquidate the investment over the life of the product, at the company's cost of capital. For example, assume that the company must make a $1,000 investment, that the investment will have a five year life with the product, and that the company's cost of capital is 10%. Rather than including the investment at $1,000, count $264 as an additional capital cost in each of the five years of the product's life.

  • Estimate the marginal contribution margin percentage, or operating profit percentage, that the gained or saved revenues will produce, after any price changes the innovation causes.

  • Multiply the contribution margin or operating profit percentage times the revenues gained or saved to produce the gross contribution or pretax profit from the innovation.

  • Subtract the gross marginal costs from the gross contribution margin or pretax profit to produce a net annual contribution or operating margin to the company from the innovation in the first year of the innovation's life.

  • Where this net contribution or profit is negative (i.e., the company is in a loss position), calculate the higher net contributions or profits that will follow in ensuing years.

Step 7:

Confirm, from the conclusions of Steps 2 and 3, that the innovation is likely to be unique long enough for the company to arrive at a positive cumulative contribution or operating profit on the innovation. Discard those innovations that fail this test.

Step 8:

Rerank each remaining potential innovation by the net contribution or operating profit each makes to the company. This produces a list of innovations that are attractive to both the customers and the company. The company would prefer to implement these innovations in order of their net contribution to the company.

Step 9:

Evaluate the company's ability to implement the remaining innovations in the coming year. Plan to implement those innovations where the company has the ability to implement in the next year.

Step 10:

Calculate the total expected annual volume improvement that the innovation program should produce over the next year.

Step 11:

Convert the volume change expected from the innovation program into the expected market share change the company anticipates for the coming year and compare this result to company expectations.

Basic Strategy Guide Users Return to Step 18