Hello, my name is Michel Santi and I am Professor emeritus in HEC in the strategy departement with two specifications: entepreneurship and innovation. This is why I am here. What is strategy for me? Well, first it is to ask the right questions. You can't have right answers if you don't ask the right questions. This is what I am going to do by asking two questions which seem essential to me for an innovator. The first question is: What type is my innovation, and, of course, what effects does it have? There are as many types of innovations as there are Professors writing about it. For some, you will find a poduct versus process type, for others an incremental versus radical one, or also a modular versus architectural type. You can find many different types. It seems legitimate to me to tell you what is mine. On one hand because I know it well, and on the other because I think it has two advantages: one; it doesn't have only one dimension but several, and two; it makes it possible to identify challenges by providing tools to be able to solve these questions. The first dimension of this model is the isolated versus systemic dimension. What is an isolated innovation? It is an innovation that works alone, for exemple a BIC [pen brand] the ball-pen tip. Well, this is a bit old for you, and you probably don't consider this to be a major innovation, but at the time it was. So, the advantage of this innovation is that it works alone. Why? Well... okay, you need a sheet of paper but that's it. Apart from that the product works on its own. So, the advantage of this innovation is that you are thrifty, you are the one making decisions. The disadvantage is that you don't have any particular allies, so you will have to work alone. You will also be the only one responsible for success or failure. Let's take another example, a metrology tool that enables to measure maximum or minimum dimensionings, matching the requirements specification in a production. If this metrology tool is next to the production line and works either with all the products or a randomly chosen pack, we can speak of an isolated innovation as the production system isn't at stake. If, however, this tool is linked to a production system, for example a visual inspection, and this system gradually eliminates the noncompliant products of the line and leaves the compliant products on the production system, then this is a systemic innovation. Because the innovation is integrated in the system. It is the case for a USB stick, one of the most beautiful innovations to me, it is so simple. Yes, you need to put it in a USB port and the software mut be able to handle it. So, in this case you can have allies, as you will not be alone and as the actors of the system will help you, but these actors can also be very reluctant to the innovantion and this will become a constraining system. You will need to convince them of the asset of you innovation. Also, according to the power relations existing inside the system, and some can be particularly powerful, they might take a part of the value created by your innovation, so eat a part of the value that you created through your innovation. The second dimension is creation versus substitution. Your innovation can create a new market. It is rare and pretty exceptionnal, I chose the example of Renault Espace which created a new segment in the auto industry. I could take the example of Google and others who at a certain time created a new market. What is the challenge? It is a real Pascal's gamble as no one knows what the market is and if it really exists. It is based on a latent need that we suggest to be real but is it really? If the latent need is real, it also suggests that your offer is adapted to this need. So there are two dimensions, and you will have to work on these two dimensions to ensure that this innovation has a future. On the opposit there are the substitution innovations representing - from my point of vue - 98% of the cases in terms of innovation. This is the general rule so it is the case of BIC of which I already spoke. This is a very different situation. This time, there are references for the requests, a market, competitors. Who are the competing actors? What are their posistions? And, above all, offers, as there are existing offers, offers which will be used for comparison. You will try to compare the innovative offers to the existing ones and to see what is better or not. So we have a reference system and you will be placed according to this reference system. In this case the key is the obstacles at the beginning of the sector where your innovation starts. For example the CE marking is an important part of these obstacles for any medical device. It requires at least six months and 100 000 euros, minimum. This obstacle is not directly financial as it requires time. And there are also obstacles to substitution. For example, if the client segment where you will work has a more or less important degree of appetence for the innovation. Some sectors are not very receptive to innovations, the building industry for example, whereas others will be very receptive to the innovation. So the obstacles to substitution will be way easier to overcome in this case. As I said, the substitution innovations represent the extreme majority, I said 98% of the cases, so I decided to add to the model I am suggesting you an extra segmentation, another dimension which distinguishes the innovations integrated in standard, in the reference offer. So they will improve standard, what Americans call the dominant design, the reference offer, by substituting to one of its elements, in the case of systemic innovations. In this case, the key on which you must work is the created value set compared to the components and the approval of partners of the system. The USB stick is part of this, of course. It doesn't reconsider the offer, It is simply about changing a little bit the structure and configuration, or, in photography, the APS system, which was a system improving the dominant design with the film roll, was an innovation that indeed improved the standard without changing the system. Second case; the innovation creates a new standard, which means that you can't integrate the system, or, to succeed, you are in direct competition with the existing standard, you must leave the old standard to succeed. Cohabitation is possible but is is rare. In this case, you enter a standards war, and you know that standards wars have two desadvantages; they block demand for a certain time, the market will wait to know what the standard is, who will win and, furthermore, to succeed, it requires a group of allies who will help the new standard work. So, if you are in this situation, look for allies to succeed and, if necessary, to start this standards war. In the end, there are six boxes fo the types of innovations that I suggest you, and each of these boxes have different challenges that you will have to handle, to which you will need to find solutions. Let's take the example of Meccano, the USB stick. It improves the existing standard without significantly changing the existing standard, or the existing system, should I say. It is the substitution of an element whithout any major change of the others. There is a structure issue. What makes it work? It is the approval of the actors of the existing system. In the case of a new standard - still in the systemic case - the existing system will need to be disqualified to be replaced by another. So the challenge is completely different. It's your role to find the new allies. It also has a very different risk level. Substitution without significantly changing the standard or the system is the lowest risk. Then comes the case of market creation. The risk is higher in the case of a standards war, of substitution, the failure rate is the highest, however if you succeed the potential profit rate is the highest. You must identify risk level of your innovation according to this scheme. Second question : what is the value created by my innovation? In my mind, this is not about financial value but value created by the costumer. So this is the notion that I suggest the Value in Use Perceived by the Costumer (VUPC). What is the value perceived by the costumer? It can be estimated starting with a trade-off, it is a compromise between the benefits that the costumer will perceive for your innovation and the sacrifices that the costumer links to your innovation. In the case of creative innovations we speak in absolute value, and for substitution innovation, in differencial value, benefits, sacrifices perceived by the costumer of my innovation in relation to the reference offer. So there will be differences. It would be ideal to do an analysis of this type of benefits and sacrifices, and an as much as possible quantitive analysis of the costumers, not only made by the innovator, because, as you can imagine, it will be very subjective. It is not always easy, but it is possible. And finally, last point, don't forget that what is perceived is much more important than reality. In some cases it can be favorable, the costumers will immediatly perceive the innovation and probably give it more value than it actually has, because it is well done, because it simplifies issues, because it is very ergonomic, etc. However, in some other cases, the perceived value will be way below reality. Why? Because, as it is often the case for technological innovators, they speak of performance level, of technical challenges, whereas what interests the costumer are the immediate benefits, the answer to his need. So it is not very complicated, if it is well identified, the percieved value will be below rality. Benefits are divided in three types: pain, time and money. Money: I think everyone understands, you will be able either to earn more money or to spare more thanks to your innovation. Time: I will make you spare time. This is the biggest argument of software producers, for example. It's their responsibility to prove it. Pain: I am going to solve an issue that has been until now relatively painful for you and hard to do. So I can suggest you either to do something much easier than what you've had to do until now, or to enable you to do something you couldn't do before with the existing offers on the market. These are the three big benefits, the more you manage to combine, the better will be the value, the better will be the perceived benefits of your innovation. If possible, try to translate them into numbers. It is not always easy, but often possible. As for the perceived sacrifices, there are two types of them. The first type is transfer costs. How much does it cost the costumer to transfer the offer that he had before to yours? What can these transfer costs be? It can be to change the equipment, it can be to change the method, or train the staff. This is what we call transfer costs. Sometimes, just the fact of changing can be a sacrifice for the costumer. The second level, and the second type of sacrifice are the perceived risks. What are the risks? The change of supplier? In big companies, the change of supplier and the introduction of a new one in the systemis often complicated even administratively. The risk to make the wrong choice for the future standard is a very important and essential point when you are in a standards war situation. Why would I choose your standard if I am not sure that it will be the dominant standard in the years to come? Because, if I choose you and you are not the future standard, I will have to start over and re-transfer to another actor. So I am very hesitant. And finally, last point, you are an unknown new actor when you enter the market, and unsustainability becomes an issue. It is easier to find a well-known actor who will be known to be sustainable, than a completely unknown actor. This is inherent to creators, you will find it hard to eliminate, unless you associate with an actor who is reputed on the market. This is the Gourville's times nine rule, innovators often overestimate, with a ratio of three towards the costumer, the benefits that the innovation bring, and they usually underestimate the sacrifices linked to the innovation. So be careful with self-centered analysis and try to have the views and opinions of the actors, of your costumers and your future costumers. So you know what to expect. If, once the analysis of the perceived sacrifices and benefits done, you combine them, you will obtain this small and relatively simple table. In the orange box "No Way", the perceived sacrifices are high, the perceived benefits are low, forget about it, it is not worth it to rework on this innovation. However, if you are in the maximum box, with high perceived benefits and low sacrifices,you must keep going. Go for it and try to be the cleverest in the implementation. There are two situations of indetermination, strong indetermination, and what's interesting here is that benefits are high, unfortunatly so are sacrifices. So, in this case you have to rework on the innovation to lower the perceived sacrifices. As innovators often ignored the perceived sacrifices, once they identify them, they can rework on their innovation to lower this part. I am more spectical about the part I called "wet firecracker" of low indetermination. The advantage is that the perceived sacrifices ar low, but as the benefits are too, it is essential to rework on the benefits. Can you recrate high benefits by changing your innovation? If not, you will quickly arrive to the "No Way" box. The advantage of the notion of Value in Used Perceived by the Costumer will also play a role in the definition of your primary targets. What I call primary targets are the targets you must start with, in marketing terms. If you place the different targets on this kind of scheme, you will identify the ones who will overestimate the value that is created for them. The VUPC notion doesn't apply in an uniform way to all the markets. Some targets will have a different position in relation to this Value in Use Perceived by the Costumer, and some can overestimate as it brings them a higher created value compared to others. These are the ones you must start with. They usually are vertical segments, such as a telephone operator, or a clinic, etc. The identified ones are the targets you must start with, it is your responsibility to improve this perceived value in use gradually by improving your offer, to open the market progressively to other targets. Last point on the value in use, don't forget, until now I've talked about value in use for the costumer, but often there is a range of costumers, so if you can use an integrator, this integrator will need to find a value for himself. If he uses a supplier, the supplier will also need to find a value for himself, and so on until the last costumer, where it is possible to break down between the buyer and the user. Sometimes, the user finds a high value but the buyer doesn't. So the key to make it work is to have created value for each step of this costumer line, for each actor. It can be different according to the costumer, or according to the line of costumers, according to the chain links of costumers, however, it must always exist. If not, your system won't work. I talked about these two keys which seem important to me, it is now your turn to practice on your innovation and to manage to define what the key challenges are and what the right solutions you can find are. Now it's up to you!
