The Board's Newest Role

IT'S NO SECRET THAT MOST new products fail, in industries from high tech to groceries. Just think of the Iridium satellite phone, Pontiac Aztek and New Coke. Moreover, apparently successful products can leave a lot of money on the table. The crux of the problem is that companies spend the bulk of their innovation funding and staff time on product development, building functional features, and making such classic trade-offs as size vs. weight vs. speed vs. power vs. flexibility. Little if any of their innovation investment goes to designing and testing the business model surrounding the product, making economic trade-offs such as customer selection vs. unique benefit vs. profitability vs. profit protection. Most managers work with a limited playbook of business designs, and their default commercialization approach is to funnel new technologies into existing business designs.

Successful business designs address customers' underlying decision-making processes, not just their technical requirements. The key to commercial success lies in understanding these customer dynamics and in designing the business as brilliantly as you design the product.

By business design, I mean a linked set of choices about what unique benefits to provide to high-value customers; how to capture value from these offerings; which activities to perform in-house and which to outsource; how to create strategic control over your profit streams; and which organizational architecture will best execute the business.

  As a way to think about innovation, imagine Warren Buffett asking: "Exactly where is the competitive advantage?" The answer rarely lies in having the best technology. Consider Apple's iPod. Apple was not first to market; its early models had inferior battery life and competitors quickly copied the click wheel feature. But what has made iPod successful relative to other MP3 products is the business design around it, including the iTunes music store, which provides affordable, legal access to single music tracks across record labels, piracy protection for the music labels, and a seamless downloading experience.

A similar example is Toyota's hybrid Prius. The first-generation model had few technical advantages over Honda's hybrid cars, was small and had ho-hum styling. But Toyota's thoughtful business design, notably its targeting of high-income, eco-conscious customers and a value proposition that included styling plus cool electronics (not just energy savings), helped Prius stake out an early leadership position.

This dynamic applies to business- to-business markets as well. DuPont's Tyvek product line is the most prominent brand in a number of otherwise commoditized markets. The patents on Tyvek expired years ago, but DuPont has built a proprietary manufacturing process and scale economies, a great brand, a unique training system, a network of specialists, and superior distribution programs. DuPont took a single material and created pull from the end-user by developing and executing separate business designs for markets as diverse as construction and chemical protection garments.

Innovation in business design is the responsibility of senior management, of course. But boards of directors can play a critical role by urging management to expand and improve the organization's business innovation capabilities. Most technology- based businesses have clear processes to define research priorities and to pace technologies through development. Boards should ask whether their companies have implemented a parallel business design innovation process consisting of equally rigorous customer, channel and economic testing.

The point is not for directors to get embroiled in project management details, but rather to ensure that senior management addresses the following questions while there is still the lead time to experiment and adjust:

What is the business design we're building around this new product? Have we tested it against at least two alternative business designs?