The Innovation Blog

Innovation clients frequently ask us how to make better decisions when pursuing breakthrough innovation.  Decision making in pursuit of breakthrough and transformational innovation is significantly different that which is for sustaining or incremental innovation (where frames of reference, past benchmarks, etc. exist).  There are five key decision points along the journey.  At each point, beliefs, assumptions, SWAGS, etc. will get tighter, and more useful.  

Today I'm going to address the second decision point.  Once you have had full range of beginning ideas, and selected a manageable number to fully describe and turn in concept outlines, how should you decide which ones to take into a more rigorous process of creating "Business Visions"?  The creation of Business Visions involves significantly more thought, time and effort.  It involves an escalation of resource commitment, and therefore is deserving of some thoughtful selections from within the existing range of possibilities.  And it is early in the game.  So what criteria to use?

The Creative Realities "SNIFF" Test©.

Five criteria should be considered at this stage.  All five require the use of judgment, rather than any real metrics.  Because for "breakthrough" innovation, there is no frame of reference, no empirical data, etc.  Here are the criteria to consider, we recommend using a 5 point scale to make judgmental evaluations of each:

Strategy:  How well does this fit with our strategy and further our Vision?

Need: How well does this address an important consumer/customer need?

Impact: Opportunity Size. Have we envisioned a sizable enough market with money to spend? 

Feasibility:  Can it be done technically within our timeframe?

Feel:  Most important -- What does your “Educated Gut” say?

As you consider these criteria, it is easy to simply select those few that have the highest average ratings on these criteria.  But before you do, look at what the ratings are telling you.  Used properly, they can identify the key areas of strength and weakness.  Before you make your decision, consider each criteria and ask yourself "How could I make this concept stronger in this criteria?  And how would that affect the other criteria?  Problem-solve your way to the strongest form of the idea before you make the decisions.  Then make them in an informed manner.

Take a "SNIFF".  What does it tell you?

SNIFF Test ©2010 Creative Realities, Inc.

Sooner or later, no matter how obviously brilliant your idea, someone is going to ask "how big is it?"  And in too many situations, this question will be asked way too early in the process (but that's a subject for another day).   As a result, I'm even hesitant to provide folks here with a way to answer the question.  Because providing a financial estimate too early in the process is more often a Kiss of Death than a useful bit of information.  Why?  Because if the topic under discussion is an incremental innovation, everyone probably already knows the answer (whatever 1-2% more of the existing sales would be).  In the case of breakthrough innovations, the answer is a much more subjective question because there is no existing frame of reference for the answer.  New ideas have new markets, new customers, new value propositions, new purchase behaviors, etc.  So at best, providing financial information is a S.W.A.G. (Silly or Scientific Wild Ass Guess).  Breakthrough innovation should be looked predominantly through a strategic lens in the early stages.  Stay Loose until Rigor Counts!

But sooner or later, continued development of even Breakthrough ideas will require some sense of "is this going to be worth it from a sales point of view or not?"  That's where S.W.A.G. comes in.  We've done a lot of work with S.W.A.G.s over the years, and recently while surfing the net to stay current on the existing school of thought on this, I ran across a posting from Christian Buckley of Red Hill Partners on The "Defendable Swag".  Basically, he raises six important questions, and frames the question for people who are seeking venture capital.  His logic runs very closely to our experience.  So I've taken the six questions and turned them into a nifty little spreadsheet in Excel that allows us to work with our client teams to think through a defendable financial estimate or S.W.A.G. 

Here's a summary of Chris' questions and our financial estimation formula.  Remember, for breakthrough, with no frame of reference, you're going to have to look for a place to begin with some logical support.  It may be some similar product or service in an adjacent world, or some other financial metaphor or analogous world.  Once you have that, you're ready to start Swagging!  In my view, using a multi-level thought process helps make this approach "defendable."  Here it is:

1. What is your Total Applicable (or Available) Market -- TAM.  You're looking for the big segment here.  Large enough that there is usually some form of data available.  If not for your exact market category, then for the one you are using as an analogy/stalking horse.
2. What is your SAM (Served Available Market).  That portion in which you are actually competing either with someone else, or alternative, "lead user" ideas (ideas developed informally to solve the problem because your product isn't available to them).  In the formula, assign it a percentage of the TAM.
3. Geographic Reach.  We have used this two ways.  In the normal case, you may be limited to the U.S. market and your information is Global.  So determine what percentage of the global market is represented by the U.S. for this or a similar category, and use that percentage to modify the global data.  Recently, we went exactly the other way.  We had TAM and SAM data for the U.S., and we had a useful analogy for the Global markets we expected to play in, so we inserted a formula that "plussed up" the U.S. data.  Depending on what your TAM database is, you may wish to place this above the SAM percentage in your formula, using this as you maximum modified TAM and then reducing that by a competitive number.  Either way, the thought process helps you understand your potential.
4. Primary distribution within that reach.  There's an old saying in retailing:  "You can't sell from an empty shelf."  That's how distribution affects the next part of your calculation.  In packaged goods, we use percent ACV - All Commodity Volume.  ACV is the term that represents the total annual sales volume for retailers in a geographic area.  It's not just about your product category.  It helps account for big stores versus little stores, etc.  So in packaged goods when we talk about distribution as a percent of ACV, what we're really describing is that percentage of the total "shelf space" we will reach in a geography with our distribution partners/system.  
5. Who are your key Partners for sales and marketing within those channels.  Good question.  It will be important to know and plan this, especially as you look to scale your business.  Do you have the necessary relationships to scale by developing the needed channels of distribution.  It's a great question when preparing a venture capital brief.  We don't include this in our SWAG number.  We would consider it more as a discussion point.
6. Anticipated Share.  Christian uses the question "What will it cost you to capture 10 to 20 percent of that market?  Again great question.  It goes to other parts of our financial model.  For our purposes, identifying how big the revenue could be for this innovation, we're more concerned with adjusting our numbers by a reasonable percent share.  Emphasis on the word reasonable.  Unless you are a monopoly, your consumer/prospect has other places to go.  Be reasonable here.  10-20 percent is normally as big a share as you should plan on for your base.  Then you can apply Christian's question to later business plans indicating the size of additional investment needed to capture larger shares.

So the formula becomes:

• TAM x % = SAM
• SAM x % Geographic reach = Geographic SAM
• Geographic SAM x % Distribution (or ACV) = Total Solution Opportunity
• Total Solution Opportunity x % Share = Your Anticipated Business Volume

We add another level to our SWAG to estimate "ingredient" products/services.  We call it "Client Interest."  So if the Anticipated Business Volume is for a total product or service, and we are providing a piece of that, we need to again reduce our SWAG by understanding what piece we provide.  Are we 50% of the Value/Cost or is our interest limited to 5-10% of the finally delivered product/service?

Remember it's called a SWAG for a reason.  As your innovation process progresses, your guesses need to get more rigorous and better supported by new information.  In the meantime, it's an "educated guess" and it's a nice defendable SWAG because of the thought you put into it.