The Challenge of Capturing Value through Innovation: Unsophisticated Customers, Pt. 2
In Pt. 1 of this series, we introduced a business executive who reached out to Blue Canyon after reading CoDestiny and explained that he and his firm were grappling with the challenge of capturing value from innovations offered to customers who seem to care only about price. We described the first of two case studies, Show Them the Money, to offer additional insights that will be useful to firms that are still facing this challenge. To read this blog, please click here.
Since the publication of CoDestiny, the challenge of capturing value associated with innovation has become even more widespread and more complex. Blue Canyon has been involved in countless engagements and discussions with executives facing this problem, and in the process we have identified new challenges that have to be overcome in order for firms to capture the value they are delivering to their customers through innovation. In Pt. 2, we continue with the second experience, Unsophisticated Customers.
Another firm that Blue Canyon had worked with in the capital equipment industry recognized the opportunities associated with a generation of smarter equipment that had the potential to yield cost savings to customers that purchased and utilized it. This firm understood that data-driven innovations resulted in performance improvements over the life cycle of operations.
In their own testing, they found that this new generation of smarter equipment was projected to yield 25-30% savings in operating costs over its life cycle, with a relatively short payback period. In this instance, the challenges of skepticism weren’t overwhelming, as the savings were in well-understood value pools, ones that were already on the radar scopes of this firm’s customers as important cost elements to be managed. And in a few pilot programs that this firm conducted for interested prospects, they were able to deliver savings consistent with that projection. As a result, they were able to make some good initial sales.
However, the problems began to surface shortly after that. In a relatively short period of time, they began to hear reports of disappointment from their customers, the early adopters who were crucial to the eventual success of these new products in the broader marketplace. One customer shared, “After the hype comes the inevitable disappointment. We were sold on big savings, but what we are seeing barely moves the needle. I’m afraid it’s an expense that can’t be justified.” Another customer commented, “We track this week by week, and we were expecting a big improvement. I’d defy anyone to point out on the tracking chart when we installed the new equipment. It’s just the same as before.”
The mystery of this disappointment was rather quickly solved. An individual characterized the problem as that of “unsophisticated customers,” while a more charitable individual described the problem as that of “failing to recognize that while the equipment was very smart, there weren’t operators in place that were trained—and that had the time—to take advantage of it.” That same executive went on to comment that, “We did a great job of designing the equipment, but we didn’t think through how it would be used in customer settings, what would really be required of our customers to fully take advantage of it.”
Once again, this revelation is not particularly unusual. Changes are required in business models and operations of the customers to implement the innovation. Understanding the new skills, competencies, training, time, and incentives that will be required to ensure that change will take place is as much a prerequisite to success as is the technology associated with making equipment smarter.
This firm was able to implement a solution that resolved the challenge of those “unsophisticated customers” by moving responsibilities out of the day-to-day operating environment to a central site manned by experts who had no other responsibilities than that of ensuring that the potential of the savings offered by this smart equipment was in fact realized. This step added an additional cost of the overall solution that the firm brought to its customers, but the gains nonetheless remained more than adequate in terms of the ability of this equipment to create value for the customer and the supplier alike. So, even in instances in which skepticism can be overcome, it’s important to think through everything that will be required to ensure that the benefits of an innovation are fully realized in the real world.
Capturing the value associated with innovation remains a challenge for many firms. Far too often, businesses still hear the message described in a case study in CoDestiny: “If an idea costs a dime more, it gets rejected out of hand.” The problem isn’t going to go away, and, as the case studies described here illustrate, new dimensions of the problem surface almost every day. Understanding how to overcome skeptical customers and ensuring that good ideas remain good ideas when translated into the real world are among the steps that firms can take to address this ongoing challenge—to make sure that the value they are trying to create can be translated into value that is captured for their shareholders.