8.4 Approaches to Developing New Products and Services: Design Thinking, Lean Start-up and Open Innovation
Key Takeaways
Design thinking seeks solutions at the intersection of desirability, feasibility and viability.
A common design thinking model runs through empathise, define, ideate, prototype and test.
In the lean start-up method a minimum viable product tests the riskiest assumption through the build-measure-learn cycle.
Open innovation, a term coined by Henry Chesbrough, is usually described in outside-in, inside-out and coupled forms.
Innovation accounting tracks actionable metrics such as retention and conversion rather than vanity metrics such as downloads.
8.4 Approaches to Developing New Products and Services: Design Thinking, Lean Start-up and Open Innovation
Executive Summary: Beyond the formal NPD process, organisations use several approaches to generate and test new offerings. Design thinking puts human needs at the centre; lean start-up methods test assumptions cheaply with minimum viable products; agile development delivers in short cycles; and open innovation draws on ideas from outside the organisation. Blue ocean strategy (Section 6.3) is a further approach for creating new market space. Choosing among them depends on how uncertain the customer, technology and business model are.
Design Thinking
Design thinking, popularised by the design firm IDEO and Stanford's d.school, is a human-centred approach to innovation. It looks for solutions at the intersection of three lenses:
- Desirability: do people genuinely want or need it?
- Feasibility: can it be built with available or obtainable technology?
- Viability: can it be sustained as a business?
A common five-stage model is:
- Empathise: observe and talk with users to understand their experiences and unmet needs.
- Define: frame the problem from the user's point of view.
- Ideate: generate many possible solutions without judging them too early.
- Prototype: build quick, cheap versions to make ideas tangible.
- Test: put prototypes in front of users, learn and refine—often looping back to earlier stages.
Design thinking is iterative and comfortable with ambiguity. Its weakness is that, without discipline, teams can keep exploring without committing; the Double Diamond (Section 8.2) helps by marking when to converge.
Lean Start-up
Eric Ries's lean start-up method treats a new venture as a series of experiments. The cycle is build–measure–learn: build a minimum viable product (MVP)—the smallest version that can test the riskiest assumption—measure how real customers respond, and learn whether to persevere or pivot (change direction). Progress is measured by validated learning, not by output.
Crowdfunding platforms illustrate the logic: a company can test whether customers will pay for a product before it manufactures at scale, and use backer feedback to improve the design.
Innovation accounting supports lean methods. Instead of judging an early venture on profit, it tracks actionable metrics—conversion rates, retention, cost to acquire a customer—and avoids vanity metrics such as downloads or page views that look impressive but do not show whether the business model works.
Agile Development
Agile methods, which began in software, deliver work in short cycles (sprints) with frequent customer feedback, small cross-functional teams and the ability to change priorities between sprints. They suit offerings where requirements are expected to change. Agile does not remove the need for budgets and governance; it changes them to funding teams and outcomes over time rather than fixed specifications.
Open Innovation and Co-creation
Open innovation, a term coined by Henry Chesbrough, holds that valuable ideas can come from outside the organisation and that internal ideas can be taken to market through others. Later research describes three forms:
| Form | Description | Example |
|---|---|---|
| Outside-in | Bringing external ideas and technology into the organisation | Licensing a university's technology; running an innovation challenge for start-ups |
| Inside-out | Taking unused internal ideas to market through others | Licensing an unused patent; spinning out a venture |
| Coupled | Co-developing with partners | Joint development with a key supplier or customer |
Co-creation involves customers directly. Eric von Hippel's research on lead users—customers who face needs before the rest of the market and often build their own solutions—shows they can be a rich source of breakthrough ideas.
Choosing an Approach
| Situation | Suitable approach |
|---|---|
| Customer problem poorly understood | Design thinking (start with empathy and problem definition) |
| Business model highly uncertain | Lean start-up (test the riskiest assumptions with an MVP) |
| Requirements likely to change during development | Agile development |
| Capability or technology lies outside the firm | Open innovation and partnerships |
| Industry is crowded and competing on the same factors | Blue ocean strategy (Section 6.3) |
| Product and market are well understood | Formal stage-gate NPD (Section 8.2) |
These approaches can be combined: a team might use design thinking to define a problem, lean experiments to test a business model and agile sprints to build the product, with stage-gate governance controlling investment.
Worked Illustration: Combining Approaches at a Regional Bank
A regional bank wants a better way for small-business customers to apply for loans.
- Design thinking: the team interviews owners and loan officers and learns that owners abandon applications because they cannot find documents and do not know the status of their request. The problem is redefined from "speed up credit decisions" to "make the application effortless and transparent".
- Lean start-up: instead of building a full platform, the team tests a simple online checklist and status tracker with 50 customers. Completion rates rise from 55 percent to 80 percent, validating the main assumption.
- Agile development: the full system is then built in two-week sprints, with loan officers reviewing each release.
- Open innovation: the bank partners with an accounting-software provider so that customers can share financial statements directly, rather than building that capability itself.
At each step the finance team released funding only after evidence was produced, which kept early spending small while the uncertainty was highest.
The Finance Professional's Contribution
Finance professionals support these approaches by funding experiments in small stages, defining the evidence needed before more money is released, distinguishing actionable from vanity metrics, and ensuring that external partnerships protect the organisation's intellectual property (Section 8.5).
A design team wants to test whether a proposed meal-kit service is something people genuinely want, whether it can be produced with existing kitchens, and whether it can make money. Which design thinking lenses are these?
Suitability, acceptability and feasibility
Empathise, define and ideate
Build, measure and learn
Desirability, feasibility and viability
A start-up believes small cafés will pay a monthly fee for an inventory app. Before building the full product, it offers a simple spreadsheet-based version to 20 cafés and tracks how many keep paying after three months. What is the purpose of this minimum viable product?
To replace the need for any further product development
To test the riskiest assumption cheaply with real customers so the team can persevere or pivot
To generate the maximum revenue possible before competitors enter the market
To satisfy accounting rules that require a prototype before costs can be capitalised
A mining company has a patented water-treatment process that it no longer uses and licenses it to municipal water utilities. Which form of open innovation is this?
Inside-out open innovation
Co-creation with lead users
Coupled open innovation
Outside-in open innovation
Sections you finish are checked off in the contents.