Monday, November 7, 2016

Pivoting Profitably

By: Don Cresswell, SmartOrg

The best laid schemes o' Mice an' Men,
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!
 - Robert Burns

New product development and innovation is an exercise in forecasting the future and adapting to the ever-changing present.  When you conceive of a new product or an innovation to improve an existing product, you necessarily make assumptions about the future of your capabilities (including your technology and your productive capacity) and of your potential market.

You cannot truly foresee the future.  Your predictions are only estimates.  As time passes, you discover that some of your assessments have been correct and others have been mistaken.  The key to the success of your product development and innovation is your ability to recognize what is different now from what you predicted and to pivot from your original plans to adapt to the present reality.

Two Stages of Forecasts

At the beginning of a product development or an innovation project, you build your forecasts in two stages.  The first stage is building forecasts on product descriptions and market data.  You create a description of the new product using the assumption that it will be successful, both in production and in the market.  You then test this ideal “if successful” version in the market by comparing it to existing products, consulting surveys of market demand for your proposed improvements, and asking potential buyers their opinions.  From this market information, you create initial sales projections for the product and evaluate whether it will be financially viable.

The second stage happens when you have your product development plan in place.  The product development plan imposes real-world limitations on your ideal product, based on where you believe your technology will be and what production resources you will have when you introduce the product.  These factors of technology, capacity and timing change your ideal product description to a more realistic version.  You then have to test this new version against market information again to revise the sales forecasts and reevaluate the financial viability of the product.  If the sales forecasts indicate the product will fulfill your financial goals you go ahead with development.

From Forecast to Development

As development progresses, you learn how the product will function in the real world.  Prototypes and alpha units help answer whether the product will meet its performance targets and whether it will meet its production cost targets. 

As the achievable characteristics of the product become better understood, you can test the actual market response and learn:

·         Is there a need for a product with these actual performance levels and features?
·         What are consumers willing to spend on this product?
·         What features/performance levels would induce them to spend more?
There are a number of ways your plans can go wrong when your assumptions meet reality:
·         The product can’t do what the initial specifications called for
·         Consumers need more performance or different capabilities than initially assumed
·         Production costs are more than initially assumed
·         Consumers won’t spend as much as initially assumed
When you find your plans have been derailed by problems like these, where do you go from there?

Which Pivot Is Profitable?

When what you are doing (or are planning to do) won’t work, you have to look for something that will work and pivot to that course.  In product development, your alternatives include:

·         Adopt different production methods or cost structures
·         Specify different feature sets
·         Target different market segments
·         Employ different sales structures
·         Cancel this development project and redirect your resources to better projects

How do you choose?  Which pivot will be profitable?  There are several steps to evaluating whether any potential pivot will rescue your development project, and which ones are most profitable:

·         Identify areas where pivoting can yield an upside.  The first step is to look at all of the areas of your project where making a change can make a significant impact on its ultimate success.  Which factors have the biggest uncertainties affecting the project outcome?  Which ones can move the project farthest and fastest to the upside?  Which ones don’t make much difference?

·         Rapidly model and re-model alternatives.  Make sure you have a way to model the project outcomes from changing each of the most important factors.  You need this to tell you what the impact of each change and each combination of changes will be on your project’s financial viability.

·         Evaluate the cost and difficulty of executing each pivot.  Understanding the practicality of each change helps determine whether a given pivot is possible to execute under real-world constraints and how much each pivot strategy changes the project’s cost structure.

·         Forecast profitability and present value of each pivot.  Assessing projected increases in returns against changes in costs, you can evaluate the profitability and the net present value of those pivot strategies you believe are achievable.  This lets you compare strategies and choose the pivot that has the biggest upside.

Benefit of Pivoting

The Monte Hall paradox says that if you choose a particular door of the three the host offers you on Let’s Make A Deal and he then opens one of the other two doors to show a worthless joke prize, your best strategy is to switch your choice for the other unopened door.  This is mathematically sound: you had a two-in-three chance of choosing incorrectly when you made your initial choice, and you have a one in two chance of choosing correctly once a losing door has been opened.  You increase your odds of winning if you switch because you have newer, better information than when you made your original choice.

Pivoting has a similar benefit.  The experience of carrying out development and performing market testing yields real-world data about your project and product.  This newer, better information supports better decisions about future courses of action.  Don’t cling stubbornly to your initial assumptions and projections if reality has told you they’re not correct.  Always be prepared to pivot to a new course if the evidence tells you it’s the right thing to do.

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