The Demand-driven Innovation and Growth Model

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The Demand-driven Innovation and Growth (DIG) model is a systematic and repeatable process for identifying and then exploiting profitable growth opportunities. DIG focuses not on better products but on creating a change in the everyday lives of consumers.

Demand-driven Innovation and Growth (DIG)
1. Focus closely on what people do, not what they say
2. Make your offerings highly relevant
3. Develop a plan and a strong bias for action

DUG 1 Focus closely on what people do, not what they say

The traditional starting point for a business is typically summed up as: ”Find a need and then develop products or services that meet that need.” That sounds good until you consider what to do when people aren’t even aware of their needs and don’t know how to express them? In other words, how do you measure demand demand for an entire product category that does not exist yet?

With that in mind, a better approach to coming up with innovative products that would otherwise remain hidden opportunities is to ask these kinds of questions:

What are people actually trying to accomplish in their business or personal lives each day?

What kinds of items typically find their way no to their daily ”To Do” lists?

What are their main priorities each day?

What is the context within which all of these things need to get done–physical, social and cultural?

The idea here is to immerse yourself in the daily life experiences of your customers. By doing that, you come up with the three main building blocks–their goals or aspirations, the activities they engage in and their respective priorities. Once you understand the customer’s goals, activities and priorities, you can then get a clearer picture of their actual needs and frustrations.

So how does all this happen in practice? There are usually five steps involved:

1. Start by building your customer knowledge database: identify all the customer’s activities, goals, priorities, needs and frustrations. You may do this by getting them to keep a diary, by interviewing them or simply by observing them.

2. Next group these activitits into meaningful clusters: assemble clusters of similar tasks or those thet have common themes and priorities. In practical terms, if you can come up with around ten or so key goals that describe how your product fits into the lives of your customers, you’ll be doing well.

3. Now layer in your prior customer research to this common framework: all the information you have about customers that has been buried in market research reports nobody ever has time to read. By cross refencing all of your research with what you have found out about the overall demand landscape, you can make an estimate of the size of demand in each cluster.

4. Evaluate each demand cluster with respect to its strategic value: perhaps in terms of the relative priority customers assign to each cluster, the fit with existing distribution channels and possibly market attractiveness. Determine how much competition there will be from alternative product offerings in this step.

5. Analyze how your current brand fits into the big picture perspective: whether there are differences between how people actually use your product and how it has been positioned. If there are differences between planned use and actual consumption, then you can decide whether that unplanned use is an indicator of an even better way to sell your product or service in the future.

People as a rule do not seek products or services. Products or services are merely means to get things done or to spend time their way, to enjoy and experience life. The moments and episodes of experiences are where we find pleasure. Hence it is extremely important to explore people’s quests beyond needs and wants.

–Erich Joachimsthaler

Beyond basic needs and wants lie more passionate quests to fulfill desires, pleasures, and cravings. Attaining a deep understanding of the behaviors of customers in context helps explore these powerful forces in our lives. Ultimately, we cannot appeal to customers effectively unless we tap into their dreams, urges and fantasies.

–Erich Joachimsthaler

The demand landscape maps the inersection of behavior (activities, projects, tasks and to-dos driven by goals, needs,urges, sensations, hopes and desires in the social-cultural context) with the capacity of an innovation to fit in and embed itself in the way in which people operate every day. The main insight governing the construction or mapping of the demand landscape is that people cannot tell us what they do not know and have not experienced. It is far more important to experience and watch what they do. Each activity in which a customer engages has associated with it a whole host of needs. In order to see further, you have to dig deeper.

–Erich Joachimsthaler

DIG 2 Make your offerings highly relevant

Once you understand what potential customers are genuinely interested in doing, you’re then ready to start thinking in more detail about what growth opportunities are available to you.

Bear in mind that you’re trying to uncover hidden opportunities that customers themselves cannot see and that conventional market research does not uncover. To achieve that, you need to step back a little and look at things through the lenses of three entirely different perspectives:

1. The customer perspective: from the context within which the customer lives, what are their everyday concerns? Customers generally have limited resources, so if you look at the trade-offs they are willing to make, this can be helpful. You should also look at adjacencies for hints. For example, a Japanese company developed an odd-tasting liquid with medicinal properties that sold well in Japan but not in Europe until it was positioned as a breakfast alternative for people on the go. By taking full advantage of this adjacency, sales took off.

2. The market perspective: what groups of customers are doing to increase their overall product satisfaction. Here, you’re trying to look at potential products from unexpected andles, so you need to think about substitutes (What would they use if your product was not available?), enhancers (What do they also buy at the same time to improve their overall experience?) and naysayers (What do those who do not buy your product use in order to achieve roughly comparable things?)

By looking for opportunities from the perspective of the broader marketplace in this way, you might be able to turn the market figuratively on its head and come up with some original ideas and concepts. Keep in mind though that you’re trying to do here is probe the potential opportunities available by coming from unexpected directions rather than attempting to develop me-too products. This is an entirely different specialty than attempting to reverse engineer what has succeeded for others.

3. The industry perspective: which in essence requires that you do three things:

Challenge the existing industry assumptions.

Examine any changes in the environment.

Explore alternative business models.

What you’re looking for here is changes in the underlying dynamics of the industry that open up new commercial opportunities that have never before been feasible or practical. The fundamental challenge is to find ways to change the industry’s prevailing business model to something that is much more relevant and applicable to the everyday lives of customers. Sometimes the marketplace itself will throw up obvious discontinuities, while at other times the availability of alternative business models that were never before possible may be the catalyst for change.

Opportunity Space Sweet Spot
1. Customer Perspective
2. Market Perspective
3. Industry Perspective

Overall, what you’re trying to engage in is some structured thinking about potential new opportunities. This is not brainstorming in the conventional sense where you generate lots of ideas in the hope of having a few gems worth keeping. Rather, it is a systematic approach to generating innovative yet practical ideas.

In and of themselves, opportunities do not create value. For that to happen, the right opportunities have to be executed. This is why it’s vital that you not only identify potential opportunities or innovations but also that you then go on and structure and calibrate this opportunity space in a rational way. You have to formulate a strategic blueprint for action if these opportunities are to bear fruit.

What you’re really trying to do is to develop the most viable ”growth platforms” of the future. A growth platform is a collection of innovative products, services, capabilities, tools and methodologies that combine to create customer advantage for your firm. Growth platforms typically arise:

When new products are used by customers in entirely unanticipated ways.

When people start structuring their daily lives around using your existing products in new and different ways from those first envisaged.

When you start delivering on your customer’s new or unarticulated needs.

One important element of introducing structure into the opportunity space is to identify the ‘’sweet spot” for your firm. The sweet spot is where you should compete. It’s where you have the customer’s permission to be. Or another way to look at it is that it is where the opportunity is optimized for your firm. A great example of hitting the sweet spot is Steve Jobs and the introduction of the iPod. The iPod could easily have been positioned as an accessory to an Apple Computer, but instead Steve Jobs adroitly positioned the iPod as a separate growth platform altogether. He then struck deals with other companies to license their material and design products around the iPod. The end result was that the iPod has become a highly successful consumer product in its own right rather than something buried in the accessory section of a computer manufacturer with a 5- or 6-percent share of the market.

So how, exactly, do you go about structuring an opportunity space and trying to identify the market sweet spot? There are usually four steps involved:

1. Determine the logic used by the marketplace: or in other words analyze the marketplace and see what patterns are emerging. Explore everything from the perspective of understanding customer behavior. Use the consumer perspective to evaluate their needs, wants and patterns of behavior. See if you have a growth platform warming up in the wings that has the potential to transform the very behavior that is currently driving the consumer’s problems or consumption. Observe and immerse yourself in the customer’s point of view so you can decipher what signals the marketplace is sending.

2. Explore all the alternatives: which may require some trial and error tests to be made. Cross the traditional boundaries and try some different things and some novel ways to structure the demand landscape. Think about any unexploited opportunities in depth. If you’re very fortunate, one or more potential new growth platforms will come into focus as you do this.

3. Define your demand-first growth platforms: something that leverages what you do well to deepen the relevance of your product or service, your brand or your capabilities. A viable growth platform will increase the chances that customers will assimilate what you offer into their everday lives. Growth platforms create customer experiences that are transformational rather than incremental. It may be helpful to think of your growth platforms as laser beams that focus what you offer (your capabilities, products and services) on specific clusters of customer demand.

4. Evaluate your opportunity space: so you can build a solid business case for moving forward. Quantify the level of demand so you can say what the size of the opportunity is. Link the growth platform to people and segments of the market so you get a feel for what will be involved. Link everything you know in a structured way so the overall size of the commercial opportunity can be made apparent.

In God we trust. Everyone else bring data.

–W.Edwards Deming, quality guru

Essentally, this stage of the DIG model provides the discipline that tenders the opportunity space useful. From an innovation perspective, the lesson is this: rather than innovating in product, technology, or service, or new marketing tactic, the structuring of the opportunity space calls for innovating around a demand-first frowth platform–a focus on how it transforms people’s everyday lives or work. This starting point for strategy, innovation and marketing is far more meaningful and valuable for the firm than existing practices that call for innovation out of context and projecting a new design, product, or technology into consumers’ everyday lives from the inside of the company out.

–Erich Joachimsthaler

DIG 3 Develop a plan and a strong bias for action

Companies that do not explicitly define, structure, analyze, and prioritize their opportunity spaces often chase romantic dreams about big ideas and breakthrough new products or services but fail to realize those dreams. They try to fast-track innovation; they focus on mere improvements of individual products and waste precious energy and resources because their offerings don’t truly hit the mark. And worse, they miss the biggest opportunities for growth that an unbiased demand-first, outside-in perspective provides.

–Erich Joachimsthaler

The key strategic questions that arise at this stage are:

Which growth platform should we focus on initially?

Why?

What should our sequence of action be moving forward from here?

How can we best achieve and sustain customer advantage?

What product innovations will be necessary?

How should we allocate our resources so as to genuinely achieve customer advantage?

There is a danger that having got thus far with the DIG methodology you then regress to considering your array of possibilities from a onedimensional point of view. You have to be aware that your natural tendency now will be to slip back into the mode of driving change from inside your organization–changing this or that because customers will be sure to like that and so on. You’re far better off if you stick to the model and start asking the tough questions. This step is centered on activating and then harnessing new growth platforms. You now need to go from thought to action. Thus, in this third stage, you need to be thinking about corporate strategic issues at the same time that you’re considering what is happening in the everyday life of each customer. This balancing act is difficult, but once you get over any starting gate glitches, you can then develop a definitive strategy that will guide your way forward.

What’s required is a strategic blueprint for action. To come up with a robust strategic framework, there will be three key considerations:

1. Objectives–What exactly are we trying to achieve?
Your objectives are obviously your organization’s primary goals. These need to be simple and measurable. They also need to be realistic, but at the same time make you stretch. Strategic objectives can take any of a wide range of forms, and may include targets of profitability, head count, market share, shareholder return, etc. The more details you embed in your objectives the better, so include relevant detail about time horizons, impact on the customer experience and so forth.

2. Advantage–With what resources and capabilities do we achieve this objective?
Most firms equate this with the concept of competitive advantage. This for them becomes a matter of looking at leveraging core competencies better than others. The DIG model, by contrast, requires firms to think solely in terms of customer advantage. Look at what you can do to become more absorbed and assimilated into your customers’ lives. Look at which daily customer activities you will enrich and what resources you will be using to provide that enrichment.

3. Scope–In what domain will we compete?
Traditional thinking about a firm’s scope concentrated on deciding in which product categories or industries the company would compete. From the perspective of the DIG model, scope is defined in the context of the customer experience. Scope therefore becomes a question of deciding which specific customer needs your firm intends to serve. You products and services are the tools you will use to meet those needs. They have to be carefully considered. Providing customer advantage is of paramount importance. Scope is all about embedding links between what you offer and the everyday lives of your customers.

Note that your strategic blueprint has to be specific and well-formulated. Not only does it need to be lived by your firm, but it also needs to be well received by customers. The only way this will happen is if it connects with every relevant touch point in their everyday lives.

It’s not enough just to come up with a strategic blueprint. You also need to create a corresponding experience and activation plan to go with it. To generate these kinds of detailed plans, two different perspectives will be required:

Experience and Activation Plan
Map the desired customer purchase experience
Analyze the point of purchase transaction

Perspective #1
Map the desired customer purchase experience

To define this in dethail, you have to:

Understand how customers become aware of you.

Know where and how customer choices are made.

Understand how people purchase your products.

Have a good feel for how your products are used.

Overall, you need to analyze and research the entire customer experience from beginning to end.

perspective #2
Analyze the actual point of purchase transaction.

Doing this will generate a touch map that incorporates all of the various ways customers ineract with your organization. Such an assessment helps define the relative importance of each touch point and how each contributes towards the desired ideal. Analyzing the point of purchase transaction itself itself can also be worthwhile. Having considered this, you may look at ways to simplify the purchase process, to reduch the steps to purchase, to integrate digital technologies into the transaction, and more. This analysis might also highlight one or two levers or marketing activities that could be worth deploying more fully because of their effectiveness. This perspective is well worth integrating into your plans moving forward because it allows the all important issue of customer perceptions to be brought to center stage. These perceptions strongly influence customer choices and preferences, so they are important to bring into your future plans.

Once you’ve armed yourself with refreshed and accurate information on these perspectives, you can then draw up your detailed blueprint for how to get into action. Your blueprint should now have some kind of definitive logic that will guide the way forward.

As a case study of how this happens in practice, consider the example of State Street Boston Corporation. State Street (established in 1792) was a financial institution focused primarily on asset custody–keeping accounts and tracking securities held by institutionsl investors. When Marshall Carter was appointed as State Street’s CEO in late 1991, he arrived just at a time when the focal point of the industry was changing from transaction processing to information services. Carter was smart enough to note that the balance of power was rapidly shifting from the institution to the customer, and he wanted State Street to become positioned so that it could take advantage of these new opportunities that were arising.

Carter started by exploring the everyday world of customers. He noted that there were three distinct phases where these people needed detailed financial information:

1. Pretrade: where they were analyzing the market.

2. Trade: actually making a purchase.

3. Postrade: where investments are tracked.

Historically, trading had generated 60 percent of State Street’s revenues, pretade services 24 percent and postrade 16 percent. Carter realized that as information became more valuable, State Street’s traditional revenue streams would obviously slow down. Carter therefore decided to refashion the firm from an outside-in perspective. More specificall, Carter decided to place a balanced emphasis on the entire investment process from pretrade, to trade and then postrade.

Carter and his management team came up with a three point strategic blueprint for State Street:

1. State Street reorganized its sales and service teams so customers could build strong personal relationships with one person who could access all of State Street’s capabilities. There was no need for customers to get familiar with different people in the organization if they wanted to access other services provided by the firm.

2. State Street developed and projected a strong brand strategy. This was not based on the concept of being a one-stop shop for investment advice, because that’s what other firme were already trying to do. Instead, State Street foused more intensively on serving institutional investors worldwide. State Street also developed a communication strategy that emphasized this area of expertise and focus.

3. State Street launched a new suite of products, capabilities, tools,technologies and services that expanded the company’s lines of business quite significantly. These value-added offerings were in the pretrade, trade and postrade sectors. They were all designed to help institutional investors gather information and then manage their portfolios more efficiently.

Defining opportunities in terms of needs and wants–even unmet, latent or unarticulated needs–is too narrow and simplistic a perspective. It misses the point, failt, fails to anticipate the future, and tends to short-change the innovation and growth process. Managers become fixated on attributes and improvements of the feature set, and fail to generate a comprehensive understanding of the complicated, multidimensional daily experiences that people are living or working around. Whether it is a high-level and complex industrial purchase transaction or a simple emotional consumer purchase, managers never fully understand the real motivational forces of consumption and purchase. The company obsesses ove serving customers, or winning the product innovation game, but misses what matters to people altogether.

Within nine months of this demand-first-based strategic repositioning, the newly refocused State Street Corporation realized not noly analysts’ revised expectations but Carter’s higher aspirations for total return for shareholders. It broke dramatically out of its sluggish bank-PE ratio of 14 to 16 times earnings into the 22 to 30 times earnings ratio more commonly associated with high-performance, high-growth information technology companies like Bloomberg and data processing companies like ADT. Today, State Street is the number one servicer of U.S. mutual funds, the number one investment manager of U.S. mutual funds, the number one investment manager of U.S. pension assets, and the number one provider of foreign exchange services worldwide.

The strategic blueprint is the unique set of instructions that a company creates for itself to ensure discipline and to activate its growth platforms and guide the processes that follow.

A well formulated strategy expressed in terms of objectives, advantage, and scope ideally captures the way forward for a firm–how it should grow, where it will grow, through which growth platforms. It defines what job needs to get done by every member or unit of the firm. The activation plan brings a company full circle in terms of perspective from the outside in to the inside out.