Business Model Strategy: One widget at a time

The whole of your business model can be analysed by imagining one widget at a time. Usually, design thinkers and product managers want to wait until a new product is in the market before testing the financial impact that it has had on the business.

Business planning
William Stout Architectural Books, in San Francisco for DMI conference.

I’m proposing that for your new product development projects that you include an accountant in your early team and that as part of the story-telling process you include financial models of how the new product would work for the business.

Continue reading Business Model Strategy: One widget at a time

Five cubicle grenades about design

Using design thinking in your business is all about organisational culture. To change culture, you need to change conversations. To change conversations you need a conversation starter or maybe a “social object”.

When was the last time you talked with someone in your organisation about ethnography, deep empathy, future thinking, prototyping, end-user focus or niche marketing? A great way to start these sorts of conversations is to drop a cubicle grenade which prompts a story or a question. Try this:

  1. Print one of the cartoons below on an A4 sheet and put it somewhere visitors to your workspace will see.
  2. Talk to people about it, ask them what they think of it, ask them what they think of the idea behind it, tell them about why it matters to you, how you found it or who made it. – Tell them a story.

Cube Grenade” is a new word for an old idea. An object or picture that prompts a meaningful conversation. Each of the cartoons below have the potential to prompt conversations about design thinking, stories about users, a narrative about your brand, insights and even empathy:

1. The Hughtrain:

SomethingtoBelievein112.jpg

2. Quality:

QualityIsnt112.jpg

3. It’s not what the software does:

114446615687-thumb.jpg

4. Wolf vs. Sheep:

91355_the_price.jpg

5. Dinosaur:

dinosaur001.jpg

These cartoons are all by Hugh Macleod. Hugh is a seriously talented copywriter, artist, strategist and creative business person. I’m pretty excited about his “end-user cause” based approach to marketing Stormhoek Wines (and other clients like Microsoft). In future posts we’ll come back to Hugh’s work to look at how you can use the design thinking tools of empathy, research, prototyping and story-telling in more and more creative ways.

Hugh has recently invited readers to use twitter to suggest which of his cartoons are their picks for publication as fine art prints. You can tweet him your thoughts at @gapingvoid.

Of course, all the images above are absolutely copyright to Hugh MacLeod. You should check out his blog to find out more about how you can use, share and enjoy his work.

Easiest way to value your intellectual property

You might not want to hear this, but if you can’t put a dollar value on the benefit of your design project then you may not have a project at all. You may have a registered trade mark to protect your brand design. Maybe even a patent or design registration to protect your product designs. But how much intellectual property is there really in your business? And how much is it worth?

In previous posts we’ve mentioned accurate but hard ways to value your intellectual property using financial analysis. There is also a fast and easy way of valuing intellectual property. I call this approach Naked Valuation™ because you are going to compare your business to a similar business without your intellectual property.

This technique will help you make the business case for design thinking more easily by quickly providing additional economic evidence that investment in design will increase the value of your business. To get started, ask:

“If I copied all your land, buildings, equipment & machinery, and then employed dozens of well trained but totally inexperienced laborers to do your jobs. Then what can you do today that they couldn’t do?”

The answer may well tell you a lot about where the real intellectual property is in your business.

Asking yourself this question about the comparable “naked” business will often bring up the value of relationships, channels to market, designs, production problems you’ve solved, trade secrets, tweaks to your systems and even deep knowledge by a couple of key staff.

Whether it’s product design, brand design or innovation processes. Each time you invest in design you are going to add value to the assets that are hardest to copy. It may seem easy to replicate intellectual property such as a physical design or a logo but once you realize that the IP is infused into every element of your business its easy to realize how hard it is to replicate.

To perform a Naked Valuation™ on a product instead of a business, simply identify the value of an asset with the trait that you are valuing and compare it to a similar asset without the trait. For example:

  • Coca Cola sells for $2.69 for 1.5 litres at my local store, the private label store brand sells for $1.39 for the same volume. A value on intellectual property of 48% of the total price.
  • A 2009 Lexus ES sells for $41,000 whereas a Toyota Camry from the same manufacturer with the same design sells for $32,000. To be fair the Lexus includes upgrades that if added to the Toyota would cost around $3,000. Even so, the branded premium is still $6,000 or 15% of the total price.
  • A nice New Zealand Sauvignon Blanc will retail for $30 whereas an unbranded “cleanskin” version of the same wine could sell for as little as $10. For a brand and reputation value of 66% of the total price.

There are lots of other reasons for these price differences and the total return on intellectual property is a function of both price and volume. Even so, the insight remains… to get a quick test of the value of a piece of intellectual property, look for the nearest substitute without your intellectual property and compare the economic value of the two.

Metrics to help you build the case for design

The big consulting firms (McKinsey, Booz Allen and BCG) would all love to get you to use more metrics to analyse innovation. Partly because it allows them to apply their existing left-brain analytical skills to your right-brain creative design challenges. Everyone has their own take on the role of metrics in design. Whatever side you take there is a lack of easy metrics that you can use to quickly explain to your CEO and CFO why design is important to your company’s growth.

Below are the top 5 metrics that you can pick up today to benchmark your business against your competitors. These are not the only metrics but they are the ones that you’ll be able to use to make a strong case for investing in design:

1. Vitality Index

Sales from products created in last 3 years / Total sales

2. Contribution margin

(Sales – Direct costs) / Total sales

3. Return on assets

Net profit before tax / Total assets

4. Brand value

Expected net annual cashflow from your branded products / Your target annual return on investment percentage

5. Return on intellectual property

Total sales / (Market capitalisation – Physical assets)

Warning, these are not measures that you will be using to manage your design process. Later on, we’ll cover metrics such as delivery in full on time as specified (DIFOTAS), Return on innovation investment (ROII), Time to market (TTM) and a whole host of activity measures.

Next week we’ll calculate the numbers for these metrics for a couple of example companies so that you can compare your own performance.

Slides to help you build the case for design

Frog Design, Ideo, Stone Yamishita
I’ve learned a lot about presenting complex ideas from watching how design firms pitch themselves.

Powerpoint is a dangerous tool. Nevertheless, it’s useful to see how the top design and innovation firms describe what they do. Below are examples of how these design and innovation firms present to a general business audience. A couple of them were made for specific events so don’t get too distracted by the detail.

You can certainly take your time with them but the goal is to absorb an overall picture of what would work for yourself to use as a tool in describing your own work to your CEO, CFO, engineers and even the marketing team.

Adaptive Path: Subject To Change: creating great products and services for an uncertain world

 

Frog: Design In The Age Of Convergence

Ideo: Design Thinking

Stone Yamashita: The Worlds Largest Innovation Lab

Each of these presentations is a different take on the core issue of how we describe end-user centred design, design processes and design thinking to a business audience. Which do you feel are the best and worst?

Forecasting for new product development

It’s hard to forecast the impact of a new product on the whole business, but it’s important to try.

Each of the levers in the post on accounting for design will affect key parts of your company’s financial statements. To convince the CFO of the value of your project you’ll be forecasting scenarios based on the proposed investment in research, design and innovation. These scenarios can be as simple as guessing the number of units that you will sell of the new product or as complex as full financial models of the entire organisation based on discount factors for out-years.

If your CFO is seeking basic forecasts then your financial analysis of the project will be persuasive. If however, your CFO asks for scenario plans and mock-financial statements then you’ll want to enroll the help of a sympathetic accountant or financial analyst.

The first question that person will ask you is would you like your forecast “bottom up” or “top down”? The right answer is “both”.

  • Bottom up forecast start from your existing production and supply. They then build up to forecast the possible future sales.
  • A top down forecast starts with the potential market demand and builds down to answer the production and supply that would be needed to meet that demand.
  • The flaw of bottom up forecasts is that they are often boring and do not build a sufficient case to invest in break-through innovation. We see this most often in clients as, “We grew at 10% per annum for the last five years so I guess we’ll keep on doing that.”

    The flaw of top down forecasts is that they risk being “pie-in-the-sky” and ignoring the organisation constraints. We see this most often in clients as, “The Chinese market for this product will be USD$10 billion so we only need to get one percent of that and we’ll have a run-away success.”

    Work with your ally to create forecasts that both stand robustly in the present and aspirationaly in the future. The most powerful technique we’ve met to achieve this is future-casting five years ahead aspirationally and then looking back from there brutally to see each step involved.

    The second question your sympathetic accountant will ask is: “How are we going to account for the non-cash impacts of your project?” The safest answer at this stage is “We’re not.” Any brand benefits from a new product should be treated as a windfall.

    Podcasts from the UK Design Council

    Design thinking was cool in the 1990s and early 2000s. There were a lot of conferences talking about how important a “design mindset” was to business problems. I was lucky enough to be close to the center of this explosion in creativity within business.

    Design Thinking in Business
    The Intersections conference in 2007 was a landmark event in Design Thinking

    The UK Design Council ran a great conference in 2007. Even years later, the presentations still make powerful listening.

    Continue reading Podcasts from the UK Design Council

    How far has the economic case for design come?

    Your business case for investing in design will include both qualitative and quantitative evidence. This blog focuses on the economics of innovation so we won’t spend to much time on qualitative arguments like case studies, war stories and theoretical arguments. Instead, the focus is on ways that you can make a compelling financial and economic business case for design.

    Design Thinking in business
    The business value of design thinking is being more and more widely recognised.

    In 2007 by Brian Gillespie (who had just attended the DMI Conference “Improving and Measuring Design’s Role in Business Performance“) cried out for more case studies and more qualitative examples. He wanted to see more effort put into articulating the role of design in:

    • Influence on the purchasing decisions
    • Enabling strategy (new markets)
    • Enabling product and service innovation
    • Reputation/awareness/brand value
    • Time to market/process improvement
    • Customer experiences
    • Cost savings/ROI
    • Developing communities of customers
    • Good design is good for all: triple bottom line accounting for social, environmental, and business impact

    Since 2007 a lot of evidence has emerged on each of these and we’ll be reviewing them in turn over the next couple of weeks and including a few new areas where design can add value. Paste any of your favorite examples of end user centred design and design thinking adding practical economic value in the comments below and we’ll include them as we go.

    Accounting for innovation

    It’s surprisingly easy to use accounting to measure the impact of design. In accounting terms, the impact of your design project will be similar to the “economic” impact we discussed last time, but the language you use to articulate the impact will be very different.

    From a design perspective, you’ll need to apply some empathy to your use of terminology. It might not be fun, but like driving a car on a windy road, you’ll need to treat your accountant the way they want to be treated. If you’re going to get the best from them.

    Accounting gives us a language to measure the results of innovation.

    Wherever you are from in the world the technical accounting terms might differ but, your finanical controller, Chief Financial Officer and accountant will be interested in any project that can:

    1. Increase your revenue
    2. Lower your cost of goods sold
    3. Deliver a higher contribution margin (and gross margin)
    4. Lower your overheads from capital costs
    5. Create more earnings before interest in tax (EBIT)
    6. Ensure ongoing positive cash-flow

    Each of these areas are important to design and innovation. What you might notice is missing is the word “profit”. This is because in today’s business climate:

    Profit is an opinion, cash is a fact.

    Designing the business case for a new product is an integral part of bringing something new to life. For an idea to be sustainable it needs to fit into the company’s aspirations, investment profile and business model.

    Videos to help you build the case for design

    The Technology, Entertainment and Design conferences are an amazing collection of speakers, attendees and energy. What really makes them special for me is the arbitrary 18 minute format that forces every speaker into a high-energy summary of their best material.

    These summaries make the TED talks ideal ways for you to expose people in your organisation to new ideas in an easy, punchy and quick way.

    Picking a top five is a hard task but I’d suggest that you do make the time to watch a couple of these and send the links to your colleagues.

    Sir Ken Robinson on why schools kill creativity:

    Tim Brown on creativity and play:

    Paul Bennett on design in the details:

    William McDonough on cradle to cradle:

    David Kelly on human centered design:

    You can download mp3 versions or save these videos by visiting www.ted.com. I’ve found the best way to foward them on is to copy and paste the links to the page for each particular talk that you want to send to someone. Then they can choose the format to watch or download. For example:

    1. http://www.ted.com/index.php/talks/ken_robinson_says_schools_kill_creativity

    2. http://www.ted.com/index.php/talks/tim_brown_on_creativity_and_play

    3. http://www.ted.com/index.php/talks/paul_bennett_finds_design_in_the_details

    4. http://www.ted.com/index.php/talks/william_mcdonough_on_cradle_to_cradle_design

    5. http://www.ted.com/index.php/talks/david_kelley_on_human_centered_design