Peter Drucker once said that business has only 2 functions: innovation and marketing. The logic makes sense: R&D teams create the products and Marketing defines the value proposition to distribute them at a profit.
BUT as everyone knows most products either flop at launch or fail to achieve their profit targets.
According to Simon Kucher & Partners the best innovators optimise the chances of success by integrating marketing, manufacturing, finance and legal into the R&D process from the start. They recognise that the process of product (including service) development is not just an investment in R&D to be led by the product development team. The objective is to develop new or improved products that can delivers the profit or margin goal the business needs – to drive the P&L.
The best innovators understand that innovation and marketing is an integrated function. Marketing develops the problem statement, identifies the product solution (the development brief) and force ranks the features of the product by the value they add to customers and ultimately what it costs to deliver these features, ranking those features with highest value and lowest cost first and ruthlessly pruning the ‘must haves’ from the ‘nice to have’ features to avoid over-engineering. The aim is to develop a compelling value proposition for customers. Marketing identifies the market potential of the product and defines the pricing strategy for the new product/service in the marketplace. The innovation team develops and designs the product working with Marketing and Manufacturing so that it can be manufactured at a cost that can turn a profit. This typically means finding ways to deliver the highest valued features at the lowest cost. The lower the cost the higher the profit and the more disruptive the product can be in the market. Finance works with Marketing to model and validate all volume and pricing assumptions needed to deliver the profit or margin target. And Legal makes sure the product meets all regulatory standards and is safe to use
Throughout the process, the integrated team is focused on 4 parameters: Value, Price, Volume, and Cost. Any change in one of these parameters must be signed off by everyone.
The best innovators understand the relationship between price, value, cost of their products in the hands of the customer – what customers want and what they are prepared to pay for. They segment their customers and option their products to calibrate price and value. They invest in building the market, value, and pricing capabilities of their Marketing Teams to bring these insights to the product development table. They manage their R&D teams and marketing together during the product development cycle. .
The best innovators launch new products that deliver target profit targets more often than they fail. And when they fail, they fail early and learn from their mistakes.
The best innovators understand that their Investment in R&D as an investment in building capabilities to deliver sustainable revenue growth and profit – as the integrated human and organisational capital that drives enterprise value.