The Four Knowledge Paths to Innovation

von Graham Horton

Discovery-driven innovation processes such as Lean Startup and Hypothesis-Driven Entrepreneurship are currently very much en vogue. They aim to solve the problem of reducing the uncertainty involved in developing successful new-to-the-world offers. In order to better understand the importance of discovery-driven innovation and how it compares to other types, we have developed the matrix shown above.

The matrix distinguishes between the innovation goal and the route needed to achieve that goal, each of which can be either known or unknown. The resulting 2×2 structure yields four quadrants, each of which represents a different type of innovation project.

• Quadrant I. Here, both the innovation goal and the route to achieving it are known. Incremental innovations are usually located in this quadrant. Customer feature requests and suggestions by members of the public obtained from idea portals are of this type. For example, suggestions such as „introduce a decaffeinated iced coffee“ or „bring back coconut syrup“ at My Starbucks Idea specify the goal, and Starbucks (presumably) knows how to go about implementing them directly. The metaphor of Quadrant I is that of a cook following a recipe. The strategic risk involved is concentrating on the wrong goal, so that while it might be achieved efficiently, it leads to an innovation which is ineffective, outdated or even irrelevant. This error has been likened to „straightening deck chairs on the Titanic.“
• Quadrant II. In this quadrant, the innovation goal is known, but the route to achieving it is not. This may occur when a customer asks for a solution that is outside the domain of expertise of the supplier. This would have been the case if the proverbial buggy whip manufacturer had been asked a hundred years ago to supply steering wheels to an automobile manufacturer. In this situation, a company might ask a university or a consultant for help. The metaphor is that of a student studying from a textbook. (The illegal practices of wilfully infringing a patent or reverse engineering a competitor’s product also belong to this category.) The strategic risk is choosing a poor source of information.
• Quadrant III. In Quadrant III innovation, a company does not know what the end result will look like, but it does have an established procedure for developing it. This is the case, for example, when the next model of a successful automobile is to be developed; the manufacturer does not know the final product, but has a tried and trusted method for getting to it. The metaphor for this type of innovation is thus the manager running an traditional engineering project. The strategic risk involved in this case is shooting at the wrong target, i.e. setting the wrong goal at the outset of the project and developing a product that nobody wants. The Edsel, Webvan and Segway are three well-known examples of products that did not meet their marketing goals for this reason.
• Quadrant IV.  In the last case, neither the final product nor the route to finding it are known. This is the situation in which startups usually find themselves. The metaphor in this case is the scientist searching for new knowledge using an iterative process of hypothesis and experimentation. The Lean Startup approach proposed by Steve Blank follows this method. For established companies, we call this approach Discovery-Driven Innovation. The strategic risks involved here are asking the wrong questions or misinterpreting the answers received.

The largest opportunities for growth are usually to be found in Quadrant IV, since it is here that new markets meet new types of solution. However, the Lean Startup in its current form is insufficient to meet the needs of established companies. This was our motivation for developing Discovery Driven Innovation, which follows the basic hypothesis-driven method but also takes into account the additional issues that established companies have to deal with.

The motivation for the Lean Startup as described by Steve Blank is that startups which are in Quadrant IV use methods which are appropriate for Quadrant III: they set up and execute a waterfall innovation process without either knowing the customer needs or possessing an appropriate solution for them. We believe that the model presented here helps to explain this difference a little better, while at the same time taking two further types of innovation into account.

Refining the Windermere Hierarchy

von Graham Horton

In a post from 2008, I described the Windermere Hierarchy, a model that explains on what basis buyers make a selection when they have different offers to choose from. The model states that there are four criteria, which are ranked in the customer’s mind. These are (in descending order of priority):

1. Functionality
2. Reliability
3. Convenience
4. Cost

The Windermere model suggests that customers will make their purchasing choice based on the highest priority criterion which does not satisfy their requirements. Thus, if none or only one of the alternatives available meets all of their functional requirements, they will choose the alternative that meets the most. However, if more than one alternative satisfies their functional requirements, they will make their purchase based on reliability. Similarly, if more than one alternative satisfies both their functional and their reliability requirements, they will choose based on convenience. Finally, if more than one alternative meets criteria 1, 2 and 3, the customer will choose based on cost. In this case, in the customer’s mind at least, the product has no distinguishing features – it has become a commodity which can only be sold by price discounting.

The model can be used to identify what kind of innovation is appropriate for a given product, because knowing at which stage it is in its market, it is known on what basis customers will make their purchasing choice. This in turn implies that the criteria 1 to 4 represent a long-term dynamic of a market: products that provide a new solution will initially see improvements to their functionality. In the second phase, reliability will be improved, in the third convenience, and finally innovations will be sought that reduce costs.

I believe it is of interest to look at each of the criteria more closely. This will enable us to identify different sub-criteria, which may give better suggestions for innovation goals. In the following, I describe three variants of each criterion.

Functionality

• Range of Features. This refers to the number of features the product has. Innovation in this category means adding a feature to the product, thus increasing its functionality.
• Intensity of Attribute. This refers to the numerical value of any given feature of the product. Innovation in this category means increasing a positive value, such as horsepower for an engine or the brightness of a lamp.
• Appropriateness for Usage. This refers to how well the features of the product match the needs of the customer. This may include attributes such as the flexibility or modularity of the product’s functions. An example would be allowing the product’s functions to be reconfigurable according to the current mode of use.

Reliability

• Longevity of performance. This is the most common meaning of reliability and is typically what is covered by a warranty: For how long will the product perform at the required level without interruption?
• Trust in supplier. The customer may need the supplier for the entire lifetime of the product, for example for maintenance or updates. They therefore need to trust that the supplier will be willing to provide these services in a fair and customer-friendly manner. For example, manufacturers of premium tableware often guarantee the availability of a design for ten or more years, so that customers may continue to own a complete set, even when the inevitable breakages occur in the home.
• Availability of support. Similarly, a product may become valueless if no support ceases to be available for it. IT systems are one such example.

Convenience

• Ease of Use. Customers prefer simplicity of operation. One famous example is IDEO’s design for a radically simple-to-use heart defibrillator. The classic counterexample were home video recorders, which were so complicated to program that only a small fraction of the customer base ever managed it.
• Accessibility of Product. How easy is it for customers to get information about the product or view the product itself? This might include travel time to the nearest stockist, in-store availability of a model for „test-driving“ or no-questions-asked refunds if a product fails to satisfy a customer’s needs.
• Simplicity of Appropriation. How easy is it for the customer to acquire the product? Does it require complicated searches or bureaucratic procedures? Given the opportunity, customers will choose the easier route. Amazon’s patented „One-Click-Buying“ is an example of an innovation in this area.

Cost

• Financial Costs. These are the most obvious type of costs. They include not only the purchase price, but also maintenance and repair costs.
• Physical Costs. These are other resources that are required or consumed in order to use the product such as storage space, personnel or toner for laser printers.
• Intangible Costs. These include psychological factors such as management attention and stress incurred by using the product, as well as factors such as the negative impact on office climate or brand image.

The Windermere hierarchy is a valuable tool for predicting the future basis of competition; by refining each of its core categories, better innovation choices can be made which in turn can prolong a product’s competitive advantage.