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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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