The Innovation Stage-Gate

The Innovation Stage-Gate is an adaptation of the standard Stage-Gate product development process, originally developed by Bob Cooper and colleagues [Cooper, et al., 2002a, 2002b]. The use of the Stage-Gate has become the gold standard in corporate product development processes, where it is used to manage alignment, budgets, schedules, and stakeholder input for new product development. When Stage-Gate‘ systems are implemented well, they are cross-functional, incorporating representation and input throughout the product development process from all key functions: Engineering, Marketing, Sales, Service, R&D, Finance, and IT.

In a Stage-Gate‘ system, new product development moves through a serial process: Beginning with requirements and moving from high-level design to detailed design, implementation, testing, launch, and finally post-launch assessment. Review occurs at the gates that mark the end of each phase. The review process provides opportunities for each function to raise concerns as the project develops, and it assures that resources are appropriately allocated across functions to support agreed-upon objectives. A key benefit of the Stage-Gate‘ approach is the alignment of objectives, resources, and timing across the company. Periodic, defined review points provide assurance to all that the larger investments required in the later, more expensive phases of the project will only be made if key risks are addressed in the earlier stages.

Implementing such a process—and maintaining its discipline—is usually organizationally difficult. A Stage-Gate‘ requires people to defend their decisions to a larger audience, to make public commitments, and to take on work to prepare for meetings, all of which people naturally resist. If exceptions are permitted, they become the rule, so managers of Stage-Gate‘ often brook no exceptions. The Stage-Gate‘ approach has a history of working well for new product development within existing businesses; it is, in fact, the core innovation practice in most industrial corporations.

The traditional Stage-Gate‘ does not work well for startups, however. This is because it assumes clarity at the start—clarity about customers and their needs, about timelines, about business models, and about budgets. This clarity just doesn’t exist for a startup. The baseline questions of what will be built, for whom, and (at least roughly) with what resources simply cannot be answered for new ventures, which operate under conditions of much greater uncertainty than is present in traditional product development. For the startup, everything is unknown. Lean Startup is designed to accommodate that uncertainty through an iterative learning approach.

At first glance, Lean Startup and Stage-Gate‘ can seem antithetical. Lean Startup is focused on the rapid iteration of a new business concept to find a fit with the market, a process that might be termed successive elaboration (aspects of all the stages happen simultaneously). This is in contrast to a traditional Stage-Gate‘, which generally follows a process of successive refinement (the target concept becomes more fully developed at each stage). The Innovation Stage-Gate seeks to bridge the two and to address the concerns that naturally arise with Lean Startup.

Conflicts may arise from several sources. There may be basic business concerns (for instance, whether ventures of this sort are a good use of the company’s resources) or organizational issues (uncertainty about who in the organization should be accountable for the venture and its innovations). There may be strategic concerns (whether the team is working in the most appropriate opportunity spaces) or methodological concerns (whether the venture’s approach to innovation even makes sense). The Innovation Stage-Gate seeks to resolve these issues by containing the chaos inside well-defined stages.

In many ways, the Innovation Stage-Gate‘ is simply an unraveling of the key areas of focus in the Lean Startup triangle. The Value Hypothesis, the Business Model Hypothesis, and the Growth Hypothesis become gates, worked on sequentially rather than all at once. Lean Learning Loops happen within all of the stages, with different sets of assumptions and different types of MVPs. As with traditional Stage-Gate‘, the gates provide opportunities for managerial oversight, staged release of funds, and cross-organizational input.

Figure 4.1 provides an example of such a process, one that has been successfully implemented at Goodyear Tire & Rubber Company [Ganguly and Euchner, 2018]. This version of an Innovation Stage-Gate‘ system starts with defining clear opportunity spaces (Phase I); uses design methods to discover new ways of creating customer value (Phase II); considers different business models for capturing value (Phase III); and incubates the business at a small scale (Phase IV), before fully launching the business (Phase V). Each of these phases brings distinct challenges for internal ventures and for the corporations that host them.

The first two phases develop the venture’s Value Hypothesis. In Phase I, the venture team focuses on identifying appropriate innovation platforms. This phase addresses the need for strategic alignment; it assures that the innovation team is fishing in waters that matter for the company as a whole. The work in this phase produces a clear statement of domains within which the company would like to innovate, and why.

Phase II focuses on developing the customer value proposition (CVP). The work in this phase anchors the venture in a deep understanding of customer needs. The focus on the customer prevents distractions; it keeps the team from wandering around the wilderness. Customer focus also helps established companies to unlock from things that they think that they know (which just don’t happen to be true) and to explore opportunities with new eyes. The deliverables for this phase are a customer brief, a value proposition that responds to targeted needs in that brief, and an estimate of the customer value that will be created with the value proposition.

In Phase III, the focus shifts to the Business Model Hypothesis. The main challenge to a new venture within an established business is the company’s tendency to default to its core business model—and to actively resist new business models. The goal of work in this phase is to explore the range of alternatives, test business models appropriate to the CVP, and select the one that delivers the most value. This work includes experiments that are conducted “with-market” (before the business is incubated), not “in-market.” With-market experiments are conducted out in the real world, with real people and in real contexts. They are usually focused on specific issues necessary for success, not on the overall viability of the business. Business experiments accelerate learning at low risk. The deliverables for the business model phase are the identification of a few alternative business models, a risk analysis for each model, and a profit and loss statement for a single customer that demonstrates the viability of the business.

Once the CVP and business model are identified, the venture begins developing its Growth Hypothesis. In Phase IV, the Incubation phase, the business is tested in-market, on a small scale. The purposes of incubation are to validate the business model in the real world and to develop alternative Growth Hypotheses. Critically, the learning that happens in incubation also helps to clarify any risks to the core business. For incubation to be effective, it must be managed with governance mechanisms that keep the focus on learning. The key deliverables are the demonstration of profitability in practice and the development of alternative growth plans to build the business.

Finally, in Phase V, the venture turns its attention to scale. This is the point at which many internal ventures fail. Executing a growth plan often requires, in addition to capital, the ability to leverage key assets of the parent corporation. This need creates the potential for significant conflict and political threats to the new venture. Unfortunately, many ventures are smothered by the core business or starved of resources because insufficient planning is devoted to organizing for scale. The deliverable for this stage is a specific plan for scale, including a clear negotiation of the roles and rights of the new venture in relation to the core.

Each stage of an Innovation Stage-Gate is characterized by iteration. At each step, many hypotheses, of different types, are posited and proven or disproven. The process relies on Lean Learning Loops using prototypes (though not necessarily MVPs) to test clearly stated hypotheses. It can feel chaotic and hard to track. The results at one stage may require cycling back to earlier phases (although this is less common if the earlier stages have been thoroughly developed and tested). Pivots are still relevant, but they take place within a phase.

The entire focus of an Innovation Stage-Gate is learning: Learning about customer needs and new ways of meeting them; learning about business risks and how to allay them; and learning about the business in the market before moving to scale. Many ideas fall by the wayside during the process, as assumptions about the world and about the business are disconfirmed. But if an innovation team is deliberate and honest with itself, real opportunities emerge. An Innovation Stage-Gate provides the framework for this learning, one that lets it happen within a traditional corporate structure.

Innovation Stage-Gate Deliverables

Like a traditional Stage-Gate, the gates of the Innovation Stage-Gate are associated with specific deliverables that are reviewed before the project moves to the next phase. An Innovation Stage-Gate developed at Goodyear demonstrates what kinds of deliverables are useful.

Focus

The first phase of the Innovation Stage-Gate is Focus. At this stage, the innovation team is concerned with defining an opportunity space that makes sense for the company. The opportunity space depends on the target industry, on general trends affecting that industry, and on the potential of emerging technologies to disrupt current ways of serving customers. A corporation is likely to be more successful—and has more of a right to win—if it considers the opportunity space in terms of the assets it brings to the table, as well. Those assets may include brand, existing distribution capabilities, technical know-how, an established customer base, or an infrastructure that can be used for new ventures. A good innovation practice considers the potential to repurpose assets to create a competitive advantage.

Within any opportunity space is a large set of potential strategic questions. A strategic question defines the particular corner of the opportunity space that the innovation team will explore during a given engagement. It needs to include enough definition to define the perceived problem; clarity about who, in particular, experiences that problem; and why it might be a good time to reexamine current ways of doing things. A good strategic question is focused but provisional. As the team learns, the question may be refined. It is, however, an essential starting point.

One example of a strategic question is, “How can our company use digital tools to improve document management practices in community hospitals?” Another might be, “How can we use digital technology to help commercial trucking fleets improve uptime?” Each of these strategic questions defines (in a very broad sense) the specific customer (community hospitals, commercial trucking fleets); what is new (digital technology); and the problem space that needs to be addressed (document management, uptime).

The deliverables at this phase of development are (1) a clear Point of View about the future and (2) a set of well-developed strategic questions based on the Point of View.

Value Creation

The second phase in the Innovation Stage-Gate, Discovery, is focused on the creation of new customer value. During this phase, the team seeks to identify and validate important unmet customer needs, especially those that might be met in new ways with the emergence of new capabilities.

The focus during this phase is entirely on creating customer value (not on capturing value for the company). Customer insight works best when it follows the practices of design [see Kelley, 2002, 2005]. Design starts with careful observation of customers in their natural habitat, often using the tools of ethnography to uncover important unmet customer needs.

Once the team has a good idea about who its customers are and what they need, it moves on to developing a Customer Value Proposition (CVP). The CVP is developed by looking creatively across the set of validated customer needs and focusing on the most important of them. The goal of a CVP is to solve a problem for a specific customer set that matters. A good CVP has the form:

• For <a customer segment>,
• Who <is experiencing a specific problem>,
• We offer <description of proposed solution>,
• Which delivers <specific benefits>,
• Unlike competitive offers, our offer <cite important differentiators>.

The CVP should be tested with the targeted customer set using some form of prototype before proceeding to later stages.

A CVP may appear to be perfect for the market, and it may have gotten great feedback. But before proceeding to develop a business model, the team should estimate the customer value that the CVP actually creates. Without this knowledge, it will not be clear which business models are viable and which of them are capable of capturing fair value for the company. Customer value creation can be estimated in three steps:

1. (a) Identify categories of value creation, such as lower costs, faster cycle time, improved quality, reduced inventory, increased customer satisfaction, or others.
2. (b) Estimate the range of value created in each category. These numbers will, by necessity, be a bit rough, but they set the bounds of potential value created.
3. (c) Develop the value equation (which aggregates the value in quantitative terms). Once the value equation is written, it can be instantiated with data on the current state and with estimates of the potential value creation in dollar terms.

The deliverables at the Value Creation phase include (1) a Customer Brief that describes in some detail the customers, their personas, and their most compelling needs, (2) the Customer Value Proposition, and (3) an estimate of Customer Value Creation.

Value Capture

The amount of value captured for a given value proposition will depend heavily on the business model adopted. The difference in value capture can be as much as a factor of five for different business models used to address the same customer problem. It is valuable to consider multiple business model alternatives in some depth prior to settling on the one to implement.

The first deliverable in this phase therefore is the identification of at least three alternative business models, together with the pros and cons of each. Rough financial models can illuminate which model might have the most financial leverage. Once the alternative models have all been studied, the team selects one for detailed risk analysis and modeling.

The second deliverable in this phase is a business case but not a traditional business case. It is useful at this stage to develop a Single Customer P&L. The Single Customer P&L is focused on understanding what it will take to make the business profitable. It is concrete, in that it focuses on a single customer or type of customer, and it provides a base from which the business’s potential can be extrapolated. This intermediate business case can require a lot of experimentation, but the insight it yields is well worth the time.

The Case for Incubation builds on the Single Customer P&L to show the potential of the business for the company. It summarizes the business proposition, the business model that will be pursued, what has been learned to reduce the risk of that business model, and what is still to be learned. The incubation case is what launches the business into the market on a small scale.

The deliverables at the Value Capture phase include (1) three alternative business models, (2) the Single Customer P&L, and (3) the Case for Incubation.

Incubation

Incubation is entering the market at a manageable scale. It answers two questions: (1) Is the business profitable in practice? and (2) is there a viable plan for bringing the business to scale? The data on sales, profits, and lessons learned in the test market answer the first question. The answer to the second question depends on decisions about how to build the business. Alternative scenarios can help illuminate the best path. For instance, the team may wish to include in the analysis a scenario that minimizes losses as the business grows, a scenario that maximizes market potential, and a scenario that builds the business through acquisition or partnerships.

Incubation is often the longest phase, as the team works to acquire customers and develop the operations necessary for long-term success. The deliverables of the Incubation phase are: (1) a P&L demonstrating that the business will be profitable, once it is brought to scale, and (2) alternative business-building strategies.

Staffing the Innovation Stage-Gate

Making an Innovation Stage-Gate work in practice takes people with the skills and resources to succeed. Gina O’Connor, who focuses on “The People Side of Breakthrough Innovation,” has mapped out the skills innovators must have in two dimensions. The first dimension of her matrix deals with the organization. It includes the working level, the platform (opportunity space) level, and the portfolio (executive) level. The second dimension deals with the innovation process, which she divides into three stages: Discovery, Incubation, and Acceleration. Discovery includes the Focus and Value Creation phases above; Incubation includes both the Value Capture and Incubation phases; and Acceleration is focused on bringing the venture to scale (see Figure 4.2).

O’Connor has observed that notably different skills are required in each of the phases of innovation, which is why she has structured the process as she has. The skills of Discovery are primarily drawn from the disciplines of foresight and design. The skills for Incubation are drawn from the disciplines of business and entrepreneurship and include the practices of Lean Startup. The skills for Acceleration are those required for sales and operations.

O’Connor’s main point is very clear: Inside large companies, you need to establish and staff an innovation management system based on an Innovation Stage-Gate. Without such a system, you may occasionally succeed, by dint of the will of a few extraordinary people and a bit of luck. But with a well-staffed and managed innovation function, you create the potential for sustained and repeatable success. An excerpt of my interview with Gina O’Connor is included in this chapter [O’Connor and Euchner, 2017].