On one of my first major projects, I had fought for using for domestic manufacturers to produce some of our components. While the management team believed that we couldn’t get a competitive price in the U.S., I insisted that we price all of our parts domestically. The result? Most everything we priced was four-to-10 times more expensive in the U.S. than through our international suppliers. While there were arguments to be made that the savings weren’t worth the opportunity cost (time between ordering and getting the product in the door, for instance), it was almost universally impossible to make our margins work using domestic suppliers.

Since those early fights, I hadn’t really thought about domestic vs. offshore supply chain. Every project in which I’ve been involved has used an offshore provider in order to be price-competitive. I realized that I had moved on from the ‘Buy American’ value that had been passed down from my grandfather, a foreman in the famous Homestead Steel Works.

It’s not just in physical product development. At a presentation I attended at AlphaLab last year, one of the portfolio companies, a social networking web site geared toward a specific audience, openly discussed their use of Indian programmers. It struck me at the time — for a city like Pittsburgh that is so rich in IT talent, it still made sense to offshore the work.

I’m truly conflicted about this issue. On one hand, I think it’s important to support U.S. jobs in order to maintain a robust economy. On the other hand, few startups can raise the type of capital, and make workable margins, using domestic labor and suppliers. How can entrepreneurs pass on the opportunity to increase their product margins, which will make their companies more likely to be funded, financially successful, and viable? Is this an ethics issue or values issue? Do entrepreneurs really have a choice?

Green M&M

During the Spanish Civil War, Forrest Mars, Sr. saw some soldiers eating little chocolate pellets surrounded by a sugar shell, preventing the little pieces of chocolate from melting. He perfected the process, patented it and, along with Bruce Murrie, began production in 1941 exclusively for the military. The candy hooked thousands of GIs and the company began selling to the general public after the World War II ended, establishing M&M’s (Mars & Murrie) as one of the best-selling chocolates in history.

In nearly 70 years, the product has grown from a treat for soldiers to one of the most extended products in the world, with multiple fillings, flavors, customization options, colors and sizes that are sold in stores ranging from gas station stop-and-gos to the massive M&M’s Store on the Las Vegas strip.

What can entrepreneurs learn from Mars and Murrie? The customer’s vision (and money) drives product direction, not the entrepreneur. If Mars had stuck with his original product vision, the product would be relegated the memories of those who fought in World War II. There never would have been the addition of peanuts in 1954, peanut butter in 1990, the blue M&M in 1994 or a wall of “My Color” M&M’s anywhere. Certainly, there never would have been a customer-driven rumor that green M&M’s are an aphrodisiac, which has led to product extensions itself (bags of green M&M’s sold on Valentine’s Day, the sultry female M&M character featured in much of the company’s advertising). While there’s market research behind the moves that M&M’s makes, customer demand drives the vision of what the next M&M innovation will be.

One of the greatest challenges that inventors face is internal. Many inventors, who have invested countless hours and dollars perfecting their product, become so closely aligned to their own innovation vision that they lose sight of the customer. They restrict the vision of the market that they’re creating, which turns off potential customers, investors, champions and referrals. This eventually leads to game-changing technologies dying on the vine because the inventor thinks they’re smarter than the market.

Inventors and entrepreneurs must realize that they lose control of their product the minute they develop it. As soon it goes from concept to execution, the customer dictates whether or not the product is viable and what improvements should be made. Customers are smart. Follow their lead. And always remember that it was the customer, not the inventor, that created the green M&M.

Six Sigma is an incredibly rigorous process focused on statistical measurement in order to make improvements in the delivery of a product or service. I was originally drawn to it as a way to solve some of the process problems I had faced in my own area, expecting that it could be used to address nearly any challenge.

What I learned is that, as powerful a tool as Six Sigma can be, it is also easily manipulated to measure the wrong things to solve the wrong problems. There were countless examples of companies applying Six Sigma to problems customers didn’t care about, which, in the end, wasted gobs of time and money. The point that our instructor hammered home was, “define what is a defect based upon what is important to customers.” This, frustratingly, is often not something easily quantified. Why? For two reasons: sometimes the customer isn’t very forthcoming about what they want; and sometimes the customer just doesn’t know until they see it.

For these very qualitative challenges, enter Design Thinking, defined as a process for practical, creative resolution of problems or issues that looks for an improved future result. The goal (improvement) is the same, but attacks the challenge from a very different perspective. I see Design Thinking as the methodology that creates the “aha!” moment that converts the prospect into a customer.

My favorite quote from the article:

To survive, many businesses will have to figure out how to incorporate both approaches. Design thinking offers tools for exploring new markets and opportunities; Six Sigma skills can be applied to improve existing products. Companies that adhere strictly to one or the other risk failure. “The practices that make for success at one time can trap firms and contribute to their downfall at a later time,” says Bob Cole, a quality expert and professor emeritus at the Haas School of Business at the University of California, Berkeley.

What if you’re a new company? What if you’re developing a new product in a start-up?

I would challenge that most new-product-oriented entrepreneurs see the world from the Design Thinking perspective, developing their innovation based upon a Design Thinking insight (“How can I improve upon this product/process?”, “Can I do something that works for a different consumer preference?”). Many of these entrepreneurs are heavily invested in their own vision of the product, seeing it more as a Picasso painting than something that will be competitive in a market depending on what the consumer (not the inventor) chooses to believe is important.

However, successful new product start-ups focus equally on the types of issues that Six Sigma raises (“What are the potential defects in this product?”, “What will the design be such that manufacturing errors are nearly non-existent?”). The discipline of Six Sigma methodology helps to take the qualitative vision of the product and turn it into something that can sit on a store shelf.

In any product development project, make sure to equally entertain the Picasso side and the engineer side of the brain. Talk to people about their own preferences to get a better understanding of what the market might consider buying. Ask yourself questions and develop a framework that assesses exactly why the product can fail (both mechanically and in the marketplace). Without the intense scrutiny from both the Six Sigma and Design Thinking lenses, a lot of time, money and energy might be invested in a product destined to fail.