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Books, Articles and Consulting Services by Catherine Kitcho, The Launch Doctor |
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From Idea to Launch at Internet Speed:
How to Identify and Develop Profitable Opportunities |
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Chapter 2 Realistic Criteria and Fast Decisions Whether you are an entrepreneur hoping to start a successful new business venture, or an employee of an established company who's involved in developing and launching new products (or new business units), the process of idea screening and validation is very much the same. Appropriate idea screening criteria need to be formulated, and the appointed decision-makers must have a process that allows them to use the criteria to make their decisions quickly. This chapter will help you understand the basics of the idea screening and validation process and will show you how to create decision criteria, as well as how to enable streamlined decision-making. The Basics As described in Chapter 1, the phases of the new product cycle include idea generation, idea screening and validation, development and launch. Successful new products come from good ideas. Ideas for new products may come from many sources, and the person responsible for idea generation is called the idea champion. Screening is done by a group of decision-makers other than the idea champion, who have the authority and responsibility to approve new products. The idea champion generates the idea and does research to "validate" the idea with the customer and market environment. Validation means doing research in order to answer all of the business questions that are related to the decision criteria that the decision-makers will apply during the screening process. This requires that the idea champion understand the criteria before the validation work is done. The idea champion then presents the idea to a group of people who screen it and make a decision according to these criteria. The decision-makers can decide to accept, reject or postpone the idea, or to have the idea champion do further validation and resubmit the idea for a future decision. In concept, the process is quite simple. The challenge, however, is to keep the process simple. An idea may pass through the screening process several times. The initial pass may be a high-level screen that is designed to weed out the ideas that aren't worth researching further. Ideas that make it past the first screen would be funded for more research and idea validation. An initial screening decision may be made on the basis of a very high-level look at the market potential, without doing much research or validating the idea with a customer. If an idea makes it past the first screening decision, then the idea champion would do more extensive research, after which the second screening decision would then be made on the basis of the validated idea. Figure 2-1 illustrates an example of a screening and validation timeline. The more decision points there are, the shorter the time intervals should be between them, certainly no more than 30 days between the first screening decision and the second. Opportunities are fleeting in the Internet Era. How many ideas do you need? What constitutes an idea? For the purposes of this book, I define "idea" as a new concept for a product or venture. A concept has not been developed into a product yet. Ideas as they exist in a person's mind or imagination are in different phases of evolution. The person who has the concept may have some idea of what this product or service would do and who might need the product or service. Sometimes the idea is an enhancement of an existing product or service but would provide different functionality or serve an entirely new market. Not every idea that an individual dreams up will be successful, and many of them are rejected at some point during the screening or validation process. That's why it is advisable to develop as many ideas as possible, so that some will survive all the way through the process. Many companies encourage or even reward employees for developing new ideas for products. Even for an entrepreneur, original ideas may be subject to many obstacles along the way, including outright rejection. Several of the entrepreneurs that I have worked with over the years have ended up developing business ideas that are completely different than the ones that they started with, because the business concept, market conditions, or technology solution did not turn out as originally envisioned. At TRW-ESL, the president was so concerned about having a sufficient number of new ideas to sustain enough successful new ventures, he launched a new strategic initiative called "2020", in which the top 100 or so managers in the company participated in a year-long series of off site meetings for the purposes of generating new business and product ideas. The goal of this program was to visualize and reinvent the company's activities, products and services for the future. This initiative helped begin the "idea pipeline" for the new ventures incubator, and at least 15 new ideas resulted from the work done by the 2020 participants. Once established, word about the incubator spread and employees submitted an additional 15 ideas over a three-year period. With 30 total ideas, we had an adequate pool of possibilities to explore. A review body needs to screen and approve ideas Whether it is a committee of one, or a formal group of seasoned executives, someone other than the idea champion needs to screen ideas objectively. This review body should be cross-functional, with representatives from finance, marketing, and engineering or development. You may also want to include someone from the sales organization who has current and specific knowledge of your customer base. Tony Lustig is the CEO of Red Oak Software, a company that makes a data exchange solution for the semiconductor market. "Typically, the business development or product development organization has the charter of pursuing new opportunities and creating new products for the company," says Tony. "However, the CEO needs to establish the overall strategy and direction for the company, which in turn fosters an environment where new business and product ideas are continuously infused into next generation systems that can leap-frog technology." A dedicated group focused on screening new ideas can also be very effective if there are resources and budget to support it. At TRW-ESL, we had representatives from finance, business development, engineering, and a senior manager from one major line of business as an "at-large" representative. We often invited consultants that the company had retained to help us evaluate specific markets and industries. It's important to have many different perspectives represented within the group of decision-makers. Although sometimes the finance person would be asking marketing questions and the engineering person asking finance questions, it does help to have enough people to raise the important business issues, without having so many people that the process bogs down. Submitting and screening ideas should be part of a single process Every company has some sort of process, formal or informal by which employees - and even customers - can suggest ideas for new products or ventures. Sometimes customers can suggest them as well. In many companies, ideas just evolve until they get the attention of management and receive some funding, and sometimes one of these ideas ends up as a launched product. Such ad hoc efforts have produced notable products, but the effort needs to be a bit more organized in the Internet Era; the market and economy are simply moving much too fast. Ideally, there should be one new product process that encompasses both the submission and the screening of ideas. Otherwise, there are isolated 'silos' of new product efforts; the ideas may never be validated or screened properly, and the company can miss out on some new opportunities. Once ideas have been submitted, they must be screened. A screening process should have a minimum of two decision points. For each decision point, there needs to be a set of decision criteria that are applied to the idea. A decision should be made as to whether or not further validation of the idea is needed. Each successive decision point should have increasingly more stringent criteria associated with it. An early decision point should be established to eliminate ideas that have little or no chance of success. This initial decision point serves as a reality check, and the criteria applied should be very general and high-level, such as: Is there a market? Would anyone buy this? Can we build this? Is this within our core business? These questions are qualitative in nature, not quantitative. Based on his experience in managing new businesses, Tony Lustig believes that there is no substitute for a formal in-depth review. "Once an idea passes this hurdle, then more formal discussions or a presentation can be scheduled," he says. Here are the questions we used at TRW-ESL for an initial screen:
Figure 2.4 shows the decision points we used at TRW-ESL. Initially, we set up two decision points. Decision 1.0 was the "reality check", designed to filter out the ideas that didn't warrant more study. If an idea passed Decision 1.0, then the viability phase began and lasted about 60 days, culminating in Decision 2.0. At that point, a complete business plan was presented for consideration. Ventures were then "launched" after a successful 2.0 decision, which meant that we would begin the spinout process to engage investors and strategic partners. Later on, we added Decision 1.5 as a checkpoint for market validation, because we needed more detail about the customer need and market size. When the market study was done, then a presentation was made to the board members, who assessed the market viability of the idea at Decision 1.5. If the market environment was favorable, then the rest of the business plan was developed in the second half of the viability phase. Having this additional decision point prior to spending money on a full business plan worked much better for us at TRW-ESL. Adding a third decision point to your process will give you a much better sense of the market and profit potential for your idea. The preceding is an example of a process that we initiated and then modified to more closely fit our objectives. Decision points can be added or removed as business conditions change. It may take some trial and error to find the right number of decision points. Bear in mind, however, that the more you have, the longer it may take for ideas to move through the process (and the more meetings your review body will need to have!) Criteria need to be established and understood Screening criteria often take on a life of their own, with their meaning and application a mystery to everyone except the inventor of the criteria. Resist the temptation to have your local decision-analysis expert set up the selection criteria. You need to keep criteria simple and understandable for the idea creators as well as those who will be applying the criteria as judges or review authorities. If you can't describe the meaning of a criterion in two sentences or less, then it's too complicated. When idea champions present their ideas to decision-makers, the event takes place in a 30-minute or one-hour session. There is not enough time to hear what the presenter has to say, ask questions, and think about your reaction, while referring to a long and complicated list of criteria. It's not good for the idea champion or the decision-makers. Criteria should be established by consensus; the decision-makers agree to use the criteria and apply them during the idea review process, and the list of criteria must be communicated to the individuals or organizations that submit ideas for review. Everyone needs to be on the same page and working from the same list. This may seem like an obvious step, but it is often overlooked, leading to incorrect assumptions and missed opportunities on the part of the decision-makers as well as the idea champions. Which criteria should I use for my company? The best criteria are those that fit your company's strategic objectives and that will help generate revenue and profit. You need to find the right specific criteria that will enable you to select the ideas that measure up to your standards. There are a wide variety of business criteria that can be applied in evaluating new product and venture ideas. I believe there should be at least three major measures of a new idea: financial, marketing-related, and strategic. Will the idea generate revenue and profit for the company? Does the idea address a real customer need and is the market ready for the idea? Does the idea fit the way you do business, and do you have the ability to take it to market? In this book, I have described six major criteria that relate to these major measures, and there is a chapter on each one that explains why it is important and how to apply it to your situation. THE SIX MAJOR CRITERIA
"Venture capital investors use various criteria depending on their fund and portfolio requirements at the time," says Joe Becker, President and CEO of Dolphin Ventures, a Silicon Valley venture capital firm. "However, when investors look at the executive summary of a business plan, they want to see a large and growing market, a solid management team, and potential for high return on investment. During the due diligence process, more detailed market, management and technology criteria come into play." Even established or mature companies should view their new products as an investor would: is this new product idea worth the money, people and intellectual property it will require, and will the return on that investment improve our bottom line and enable us to reach our business goals? Criteria need to be refined and improved After a few ideas have made their way through the process, you may decide that your work is done, and you can use the same criteria for every new idea that comes along. Not so. Marketing and economic changes occur rapidly and affect how your company does business and how you serve your customers. Strategic goals also change in accordance with the economic environment and business performance. Venture capital investors annually re-examine their venture selection criteria, according to Joe Becker. "Some of the changes are dictated by the nature of the fund itself; it may be targeted for certain types of technologies or companies. In general, it's a good idea to evaluate the changes in the overall marketplace and adjust the criteria if necessary." Whenever you make any changes in marketing strategy or technology direction, you should revisit your criteria and update them so that you can identify the ideas that will best fit your new environment. Over a three-year period, the TRW-ESL new ventures board made modifications to the decision criteria at least four times per year, to fit our evolving strategic direction. Just like business plans, the new idea criteria for your company need to be a dynamic reflection of your business. Fast decision-making is essential If a decision can't be made regarding a new idea in less than 60 days, one of your competitors may make it to market before you do. In the Internet Era, fast decision-making is essential for survival because no part of the new product cycle can afford to be delayed while someone studies tradeoffs for several weeks. You should do whatever you can to streamline and simplify your decision-making process. Decision-making is also very personal and individualized. The decision-maker must have a clear idea of exactly what is being decided. Is it to commit funds to the idea in order to study it? To approve the idea so that it can move on to the next phase of validation? Or the biggest one: to send the idea through the product development process? The decision-maker must also have the right level of authority, understand his or her responsibilities, and apply the decision criteria appropriately and consistently. Sounds complicated, doesn't it? There is, however, a simple and fast way to do this. When we started this process within TRW-ESL, a typical internal R&D proposal took about 9 to 12 months to make it all the way through the approval process. It was clear to the president that we had to come up with a much speedier way to identify and evaluate ideas for new ventures. We simplified the process by keeping the number of decision points to a minimum. We condensed the decision criteria to bulleted lists. Most importantly, we reduced the number of people involved in the decision-making process so that we could reach consensus more quickly. Tony Lustig recommends that an internal champion own the new business idea and drive it forward to the go/no-go decision point. "This person should have the motivation and monetary incentive to pursue the new idea, and to see it through the rest of the product life cycle." In this scenario, the new product champion could also do pre-screening of ideas, presenting the most promising ones to senior management for final approval. This serves to speed up the initial part of the idea screening process because more research will have been done before the idea is presented to the decision-makers. Another way to streamline the early part of the idea selection process is to have a staff of people who can pre-screen the ideas using the high-level criteria set by the decision-makers. "Venture firms receive so many business plans and executive summaries that they must have people on staff who can read, screen and sort them into a "short stack" of the most promising opportunities - like a triage process. There's another advantage to this approach, in that these people can compare several ideas simultaneously so they are better able to compare and rank them - the ideas are fresh in their mind," according to Joe Becker. If your company has multiple ideas to consider, this may be worth doing as well. It will be a better use of the decision-makers' time to evaluate only the most promising opportunities. Decisions may have several possible outcomes There can be several possible outcomes for each idea that is considered. The idea can be rejected outright, with no merit and no reason to consider it in the future. The idea can also be rejected for now, and perhaps reconsidered at a future date. At TRW-ESL, we referred to this outcome as putting the idea "in the freezer"; we would then thaw it out later (hopefully before freezer burn). According to Tony Lustig, "Sometimes an idea can be postponed, and later re-evaluated under a different scenario - such as a different business model, product configuration, or target customer." Another possible outcome is to take a new idea and bundle it with another one that has been submitted for consideration; many powerful new products or product/service combinations have been created in just this way. For example, when pagers were first introduced to the marketplace, someone realized it would be a good idea to add text messaging as an additional service. That proved to be a significant differentiator for the companies who were able to offer both paging and messaging. Sometimes an idea meets the majority of the screening criteria, but there is some information missing, so the idea is sent back to the originator for some refining. Of course, every now and then a good idea just sails right through the process, is approved and is ready for the next step. Regardless of the decision, it needs to be documented in some way, especially if the idea will be revisited later. This can be done through minutes of the meeting that is held, or a database of ideas that is updated, or whatever is appropriate within the company's infrastructure. Okay, it's approved. Now what? Once an idea makes its way through the screening and validation process, it's time to find an organizational home for it so that it can be developed into a product or a business. In the early days of the new venture process at TRW-ESL, we decided to find a line manager or business manager who could act as an "idea sponsor" so that the development could take place. Later on, when the executive decision was made to spin all new ventures out of the company, the designated home shifted to a strategic partner or new spun-out entity. Sometimes established companies decide to use an external strategic partner as a home for a new idea, or to spin it out as a separate division or company, just as we did at TRW-ESL. Then, things become more complicated. If either of these situations exists, there needs to be significant communication and discussion about how to set up the business entity (and if it's a partnership, negotiations are also involved). That takes a considerable amount of time. As soon as the decision is made to take the idea external, then a business operational plan or a partnering plan needs to be generated as soon as possible to avoid missing the market window. Every idea that is approved needs an organizational home and someone to manage it who has the time, the commitment, the budget, and the responsibility to turn it into a product. If you're an entrepreneur, you have the same issue. You must have a development team in place and ready to go once you obtain your funding. Using realistic decision criteria The next six chapters (Chapters 3 through 8) focus on each of the six major decision criteria, their importance, and ways to customize them for your own company. At the end of each chapter is a list of factors to include in building your own criteria. Also at the end of each of these chapters is a list of conditions for rejecting or postponing a new product idea. This will help you understand how to apply the criterion to your internal and external situation. If you're an entrepreneur, these chapters will give you insight as to the considerations your investors may use to evaluate your ventures and business plans. After the idea is approved, more decisions need to made Once an idea is approved, there are many other decisions that need to be made during the remainder of the new product cycle. Decision-makers will need to choose the right marketing strategy, business model and partners, and will also need to find ways to speed up the product development phase. Those topics are addressed in Chapters 9 through 14. Further decisions are made during the launch phase, and Chapters 15 through 17 include launch solutions appropriate for the Internet Era. Your decision-makers will be quite busy through the whole product cycle, and once they have been through it from beginning to end, you will find ways to improve the process for the next new product. Chapter 18 focuses on how to build your own repeatable new product process. |
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