Intro to Demand Innovation Framework

“A company’s most important strength is new thinking.” — Peter Thiel

Startup founders are inherently driven by impact. The more impact they create, the higher the return. Impact is created through innovation that forges new demand categories and solves real world problems previously unachievable. Successful entrepreneurs are Demand Architects capable of developing solutions that alter and generate consumer demand.

Innovation requires never ending curiosity and immense persistence, discipline and focus. Through combining learnings from top startups and from my experience as a founder and advisor, I began developing an innovation framework that consists of four stages:

01 Imagine > 02 Create > 03 Capture > 04 Expand

Here is a brief introduction to the “Demand Innovation Framework”, which will hopefully inspire entrepreneurs and investors to create more impact in the world.

Stage 01 [Imagine]

Demand Engineering vs Supply Optimization

The first stage sets the vision for all new thinking. True innovation is measured by how much demand is introduced into the marketplace. Demand Engineering is driven by value (or uncovering opportunities) whereas Supply Optimization is driven by goals — see table below.

Our brains are naturally drawn to Supply Optimization because it provides a familiar frame of reference through existing solutions. But it also leads entrepreneurs to over emphasize problems through existing supply and forecast outsized market opportunities. Innovative entrepreneurs are problem obsessed who dare to stare deep into the demand vacuum and uncover new opportunities from an existing market.

“A demand innovation mindset forces the brain to fully immerse into real problems with a well defined market and reimagine the outcome.”

Case Study: Steve Jobs revolutionized the personal computing landscape not by examining the supply chain or how to improve upon their competition. The first iPhone was such a departure from any existing phone that it would require Jobs to fully immerse himself into the problem pool and imagine a different future for personal computing. The first iPhone started a revolution that forever changed the entire playing field and how we access information.

In contrast, despite Apple’s continuous usage of the word “revolutionary” in recent marketing campaigns, they have begun adopting a Supply Optimization mindset in focusing on chasing the competition and maximizing growth over value. This mindset has caused Apple’s lack of innovation in recent years as they play catch up with A.I., Voice Tech, AR and the list goes on.

Stage 02 [Create]

The Value Funnel

Innovation is intertwined with our primal desires like love, safety, wealth and knowledge. These primal desires are fulfilled through the enablement of creation and experience — e.g. we create wealth to experience a better life or we build a house to experience security. The four categories of innovation that are consistently found in top startups are Creation, Communication, Relationship and Experience. Together they form a funnel that helps turn “value thinking” into “value building” — see table below.

The funnel moves from active engagement (create) to passive participation (experience) with each category acting as the behavioral driver for the next category. Although it is not a rule for innovation, it is nonetheless helpful to use as a framework much like grids and lines for designers.

“We create to communicate, communicate to relate, and relate to experience.”

Stage 03 [Capture]

The Demand Equation

Product is the absolute value of what you offer, and your brand is the perceived value of your offering. A brand communicates to the world who you are and what you have to offer. Innovation involves creating (product) and capturing (brand) value. Companies cannot sell who they are if their offering has no value. Likewise, companies that fail to communicate their offering will not capture value they create.

The table below demonstrates the correlation between product and brand and the cost of capturing demand:

It is important to note that we don’t live in an era where brands simply tell us who they are without the substance to back it up. It is about how they are perceived which goes hand in hand with the real value they provide. And within the framework of innovation, that value begins with the product.

Stage 04 [Expand]

Balancing Growth with Value

The proof of innovation is the ability to dominate a specific market. Google for example has a monopoly in web search for years and they completely dominate in search engine ad revenues. The advantage of a monopoly allows a company to maximize growth, but growth can also diminish a company’s value when growth exceeds or even reduces the value it provides.

When Facebook first launched, it allowed college students to create their own social network and stay connected to each other after they graduated. It brought tremendous value to people with each new connection. Facebook became the catalyst to the always connected world and in the process became the monopoly of social networks.

Fast forward to 2019, the connected world is now the constant. Facebook has produced a new generation that has never been disconnected. Our online connections have exceeded our available attention bandwidth, and our Facebook feed is so cluttered that it is becoming less and less useful. The original delight of connecting with someone for the first time is canceled out by the explosive growth (/omnipresence) of Facebook.

The rule of diminishing value is such that marginal growth should not exceed marginal value. Explosive growth often marks the end of an era of innovation and the beginning of a vulnerable phase. Microsoft began loosing its reign to the likes of Apple and Google at the height of its growth with soaring profits while missing wave after wave of innovation from mobile to search and a lot more. The same fate will fall on Apple and Facebook as they step into a similar phase of maximum profits if they continue to stay stagnant on innovation.

“Innovate or die.”

Innovate or die, a belief that Jeff Bezos undoubtedly takes seriously when talking about the inevitable end of his own company Amazon. As companies grow, they must not stop investing value back into the market place with a culture of new thinking.

Notice that the story of Microsoft hasn’t ended yet. The close of one chapter is giving birth to another and it is providing us with a valuable lesson.

For the first time in 8 years Microsoft has caught up to Apple in market value and they did so by immersing themselves back into their primary market — the enterprise sector. The Week discusses Microsoft’s Surface Hub 2 but it reveals so much more about their current innovative thinking. Remember in Stage 03, we stated that Market Value (/Demand) = Product x Brand. Microsoft’s mission led thinking is finally bringing to life products that are differentiated and a brand that is noticeably more innovative.

These are exciting times for innovation. What projects are you working on, and how could you apply the Demand Innovation Framework?