Winning at New Products

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THE INNOVATION CHALLENGE

HOW TO REALLY INNOVATE… AND DO IT IN RECORD TIME

Most companies have ambitious growth goals. The problem is that there are only so many sources of growth. Four of these—market growth, market-share increases, new markets, and acquisitions—are proving difficult or expensive. Markets in many industrialized countries and industries are mature and increasingly commoditized; gains in market shares are expensive; and acquisitions often don't work… witness share-price declines after major acquisitions are announced. New markets—India and China, for example—pose special problems; moreover, those firms that have entered Asia have already realized many of the benefits. Even traditional product development—for most companies, this means line extensions, improvements, and product modifications—seems depleted, and only serves to maintain market share.¹

The dilemma is this: Shareholders and executives want a steady stream of profitable and high-profile new products—bold innovations that have a huge impact on the company's sales and profits and really move the needle. But management practices and today's competitive and financial environments are steering companies in a different direction… toward smaller, less risky, and less ambitious initiatives. Indeed, recent pronouncements in authoritative publications have declared, perhaps prematurely, that innovation is dead!² Part of the cause for the trend to less ambitious innovation is a preoccupation with short-term profitability, driven in part by the financial community. A second cause is that, even with a longer-term focus, it's really difficult to create that game-changing innovation these days—many markets and sectors simply appear barren!

Coupled with this goal of bolder innovations is the goal of speed. The implicit objective in new-product development (NPD) is "faster, better, cheaper." But is this goal realistic or is it simply a paradox—a contradiction in terms? It's difficult to create highly profitable new products, yet maximize short-term results. Bold innovations often take years to develop and cost millions to commercialize.

There is hope, and that's what this book is about! We see exceptional innovations and exceptional companies everywhere today. The trouble is, they are the exception—a minority of new products and companies. Odds are, you're not one of them. But these companies and big new products do provide a model, and by studying them, we learn their secrets to success.

Today, we see a handful of leading firms adopting new methods that achieve both bold innovation and in an accelerated fashion: They prove that bold and fast are both possible. These leading firms have adopted new methods and practices, some quite radical—in effect, they have reinvented their idea-to-launch methods, approaches, and processes—to make it more agile, flexible, adaptive, and accelerated. Indeed, some of the changes these firms have implemented represent the most significant change to our approaches in new-product development since the inception of gating processes three decades ago.³

In the next pages, you'll see a remarkable example of a big winner that was undertaken with record speed. We'll also probe into the reasons why and how, seeking lessons from this innovation. In so doing, you'll gain insights into the approaches, behaviors, and practices that made this new product so successful, so fast—lessons and insights that you can apply to your own business. The rest of the book then drills down into the details of these best practices—how to come up with big ideas, pick the winners, and drive them to market in record time, so that you and your company, too, can be a best-in-class innovator.

The Most Successful New Product… Ever

Apple's iPod was the most successful new product ever launched, according to most metrics.⁴ The speed of iPod's sales growth after launch in 2001 was staggering, with Apple reaching 50 million iPods sold globally in only 4.5 years after introduction. By contrast, it took Sony 10 years to sell 50 million Walkman units. And compare iPod's fast market growth to wireless phones, which took 12 years to reach sales of 50 million units, or digital cameras or cell phones, which had much slower starts. Apple also drove the MP3 market, whose cumulative sales reached 200 million units by the end of 2006, of which Apple was responsible for one quarter (and hit a 70 percent market share in the United States). Sales of the iPod peaked in 2008 with annual sales globally of an amazing 54.8 million units that year. By 2016, with sales slowing down as the iPod moved into the later stages of its product-life-cycle, Apple had sold half-a-billion iPods!⁵

Not only was the Apple iPod the most successful new product ever launched, it also reinvigorated the company, propelling Apple from a struggling, marginalized computer company in the late 1990s to the most valuable publicly traded company today (as of 2017). Some of you might remember Apple's challenges through the 1990s—how the firm's computer business faced tough competitors, such as IBM and HP, and suffered a number of product failures and disappointments. Its future back then was very much in doubt. So, by 1997, Steve Jobs was invited back as de facto head of the business after an absence of more than a decade.

Only a month after 9/11, and in the midst of an anthrax terrorist scare, Jobs went on stage to announce the first iPod.⁶ And the rest is history: The iPod was the first of a series of inspirational i-products from Apple, including the iPhone and the iPad, which changed the way we communicate—some even say "changed the world"—and certainly skyrocketed the company to greatness.

How Did Apple Pull Off This Amazing Coup?

Contrary to popular belief, Apple was not the innovator in this industry—it did not invent the portable MP3 player. Indeed, when the iPod was introduced in November of 2001, almost fifty companies were selling portable MP3 players in the United States; many were Asian companies relying on the Internet to market their products.

The iPod grew out of Steve Jobs's digital-hub strategy. People were plugging all kinds of devices into their computers: digital cameras, camcorders, MP3 players. The home computer was becoming the central device, the "digital hub."⁷ While Apple's programmers were busy creating software for editing photos and movies and managing digital music, they, like so many users, discovered that the early MP3 players were very much lacking.

Jobs thus asked his top hardware man, Jon Rubinstein, to see if Apple could develop a better music-playing device that would link into Apple's computers. But the challenge was a formidable one technologically: He was just about to give up when Toshiba, one of Apple's hard-drive suppliers, showed him a new 1.8-inch hard drive they had just prototyped. Rubinstein immediately recognized it as the key technology for the first iPod. And in less than nine months, the iPod team had a product ready to go: The iPod was assembled from off-the-shelf parts—a Toshiba hard drive, a Sony battery, and chips from Texas Instruments.⁸

Apple's success, where others failed, was due to a brilliantly conceived innovation strategy that was superbly executed. In broadest term's, Apple saw the growing market need, and then identified and solved the major problems with existing MP3 players—size, storage capacity, user interface, and the shortage of legally downloadable music. In solving the problems, Apple leveraged its unique strengths perfectly: its ability to vertically integrate and deliver an "amalgam of hardware, software, and content that made buying, storing, and playing music virtually effortless."⁹ Apple achieved this success by relying on its legendary expertise in hardware and software but without going into the music business."¹⁰ Apple also positioned the iPod cleverly, targeting its loyal customer base of young, media- and tech-savvy people (Apple's original target market) with a "cool and hip" product, almost a fashion statement. And the firm used its effective distribution-channel system, and maintained its high-quality image and avoided price discounting.

Sony, which had dominated the portable music market since the introduction of the Walkman in 1979, possessed many strengths and competencies as well: size, brand name and image, distribution and market presence, technology, and manufacturing capabilities. But it elected a strategy that missed the boat. As if Sony did not learn anything from its failed Betamax strategy years before, instead of attacking the embryonic but growing MP3 market, it rejected the opportunity, and instead tried to defend its languishing digital mini-disc player and establish it as the next device to supplant the declining CD player, the Discman. And so Sony and the Discman faded from the growing music marketplace.

Apple's successful iPod "imitation strategy" had a huge impact on the company's fortunes. Its revenue more than tripled from 2001 to 2006, while profits went from a $20 million loss to plus $2 billion in five years; and the iPod was the first of a series of breakthroughs that created the Apple we know today… another case of brilliant innovation strategy, flawlessly executed (and to Sony's chagrin, a case of a poorly conceived strategy doomed to failure). Strategy rules again!

Lessons Learned

Examples, such as Apple's iPod, are often cited but seem out of reach for most corporations. But a more careful examination of the iPod's success reveals no magic here, but simply bold innovation at work. And there are some lessons for us all here:

But Is Bold Innovation Dead?

Innovation in America is "somewhere between dire straits and dead," according to Peter Thiel, a founder of PayPal and the first outside investor in Facebook.¹¹ He goes on dismissively to say of this generation's inventors: "We wanted flying cars, instead we got 140 characters."^* A world where all can use Twitter but hardly anyone can commute by air is less impressive than the futures dreamed of in the past.

The anecdotal evidence is damning: The recent rate of progress all around us seems slow compared with that of the early and mid-twentieth century. Take kitchens.¹² In 1900, kitchens were primitive things: no refrigerators, only ice boxes cooled by blocks of ice delivered on horse-drawn wagons, and stoves powered by wood or coal. Most households lacked electric lighting and running water. By 1970, middle-class kitchens in North America and Europe featured gas and electric stoves and ovens, fridges, food processors, microwaves, and dishwashers. But today, fifty years later, things have scarcely changed: Digital displays are on every kitchen appliance, but the appliances are basically the same as in the seventies. The breakthroughs happened in the first part of the century. The same is true of many industries—from automobiles to aircraft, from polymers and chemistry to construction materials and methods, from agriculture to food processing. It seems that only the IT industry—the software and hardware industries we associate with Silicon Valley—are truly innovating.

United States spending on R&D—both by companies and by the federal government—saw regular growth between 1950 and 1980, growing with the economy, according to professor of innovation and strategy at Babson College, Jay Rao.¹³ But starting around 1980, this spending decreased and has remained flat ever since. "Unfortunately, there are fewer and fewer executives who are willing to spend more on R&D and long-term return," says Rao. "High-frequency trading and short-term incentives are killing innovation on all fronts. But for the venture capitalists, there are very few executives who are investing for the long term."

There are also challenges in conceiving, developing, and launching bold innovations. Whether you are a CEO, a marketing director, or a design engineer, you know that developing a truly differentiated new product is rare these days for most firms. Research shows that one of the foremost keys to profitability in new-product development is developing and launching a unique superior product with a compelling value proposition.¹⁴ However, this creation is easier said than done: Markets are mature and increasingly commoditized, and hence it's difficult to create that breakthrough or game-changing new product—there seems to be "little headroom left." In many huge industries, such as food, consumer packaged goods, chemicals and plastics, or engineered products and heavy equipment, it is difficult to find opportunities for bold innovations. And disruptive technologies, a potential source of product innovation, are also scarce in most industries—those radical technologies that characterized so many industries, from plastics to automotive to home appliances, throughout much of the twentieth century.

Even today's high-tech industries struggle for the "next great innovation." New technologies, such as cell phones, digital cameras, software, or laptop computers, do emerge and dramatically generate new sales and profits. However, as these markets mature, users' needs change quickly and competitors launch new product after new product; thus it's difficult to sustain product competitive advantage in this leapfrog world.