Successful Innovation Means Managing the Losers

Most companies in the innovation game can proudly point to their winners, those new products/services that launched successfully and exceeded expectations for revenue/profit/market share. However, those same companies often express frustration/dissatisfaction with their overall return on innovation investment. Frank Lynn & Associates has worked with many companies that are considered innovators in their industries. This article shares some lessons learned from the firm's experience with those leaders.

Lesson Learned: Even the leading innovators express frustration with the process. We see three common issues that create dissatisfaction: metrics, project initiation, and the innovation process. Inappropriate metrics result in misplaced expectations, even the most successful innovators should expect fewer "hits" than "misses." Misguided project initiation clogs the development pipeline with so many low-probability projects that the winners cannot be funded properly. And, poor process management sustains the ultimate losing bets in the pipeline for too long. Resources are fragmented across too many non-productive projects, again under-funding the high-probability opportunities.

Lesson Learned: Successful innovators have established metrics that highlight the process. Most companies measure innovation based on the outputs. For example, a common benchmark demands that 20% of company revenues are generated from products/services launched in the last three to five years. This may be an appropriate strategic goal, but it does not measure the effectiveness of the innovation process. (Even the poorest process can meet this revenue goal if enough resources are thrown at it).

We have found that the most effective metrics provide actionable insights to the process of innovation. Some of the better practices include:

Lesson Learned: Successful innovators actively manage the source of development projects. Historically, companies tended to take an "inside out" approach to innovation (i.e., "let the inventors invent"). The result was that the vast majority of projects had little direct relation to a market need. While these projects often resulted in neat new ways to use new technologies, they were usually considered ahead of their time. (A good example is a mainstream technology used in warehousing and distribution today, RFID (radio frequency identification). When introduced in the mid 1980s, they were generally met with market indifference).

As the "market driven" buzzword took hold, many companies moved to the other extreme. Every development project has to have justification from the marketplace. While hit rates on innovation did improve, this approach lost the "quantum leap" advances, too many of the projects resulted in small incremental improvements in features/benefits. These were certainly welcomed, but not market changing.

The most appropriate approach is a combination of the above extremes. We use a benchmark of 75%, 75% of the projects initiated should be market driven. These projects are targeted from the outset to deliver a specific benefit to a specific market segment. The desired competitive advantage for the innovator is stated as part of the justification for the project. Effectively, these 75% of projects are sponsored by the marketing/sales organisations. The remaining 25% of projects are less constrained. Sponsorship can come from anywhere within the organisation. The inventors are allowed to invent, and while the hit rate on these projects is substantially less than the market driven ones, the payoff can be substantially higher.

Lesson Learned: A key differentiator that separates innovation leaders is the discipline in process management. A world class innovation process requires disciplined management. State of the art today is the "stage gate" process. Development projects are managed through a series of stages. Each stage culminates in a review and "go/no go" decision. Only those projects that pass through this gate are funded to the next stage. The discipline introduced through this review process assures that the development pipeline is kept lean, and resources are skewed to the highest probability opportunities.

While the concept of a stage gate process is easy to envision, what separates the successful innovators from the rest is the set of inputs used at each stage. Assessment of both technical and market feasibility are intertwined. A typical stage gate process would consist of the following stages and inputs:

Summary

If we look at the big picture, we find that the most successful innovators understand the importance of managing the process. In doing so, they address each of the drawbacks discussed above. These companies understand that the metrics must address the process. They are driven to initiate projects primarily from the "outside in." And, they are disciplined in managing the low-probability opportunities out of the pipeline as soon as possible. The result of these disciplines is that innovation leaders differentiate themselves as much by treatment of the losers as by generating a wealth of ideas or commercialising the winners.

Carl Cullotta, Vice President and Principal of Frank Lynn & Associates directs the firm's building and construction practice group. He has managed numerous engagements with global companies during his 22 years with the firm.