Successful Innovation Means Managing the Losers

Most companies in the innovation game can proudly point to their winners--those new products/services that launched success fully and exceeded expectations for re venue/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 issue of the Client Communiqué 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:
> Revenue return/dollars invested--including both headcount and hard costs of innovation. This measure provides an indicator as to how well you are allocating resources. Actions derived from this metric could include a change in the project staffing model or changes to the timing of the hard costs (patent application, field tests, etc.) to help lower overall project costs without affecting positive outcomes
> Average number of projects/innovation employee--often, companies take the approach that "every idea is a good idea." So many development projects are started that the staff cannot devote sufficient resources to any to effectively move them forward. "Addition by subtraction" can result by limiting, or even capping, the number of development projects allowed in the pipeline at any time. A second benefit of this approach is how potential development projects are screened and justified, which is likely to become more rigorous and disciplined
> Average project duration--companies that struggle with innovation have trouble saying "no." The slimmest glimmer of hope is enough for the sponsor (often an executive) to keep the project alive. The pipeline remains clogged, and the best bet opportunities cannot receive the critical mass of resources they require to move forward. A metric to address this issue is a hard target for average project duration. This metric results in more frequent and disciplined project review. Even a goal to decrease average project duration by 10% will result in quicker "go/no go" decisions and better overall resource utilization

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 1980's, 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 organizations. The remaining 25% of projects are less constrained. Sponsorship can come from anywhere within the organization. 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:
> Stage One: Concept Definition--the purpose here is to articulate the logic behind the development concept, as well as the assumptions that justify the project investment

> From the technical perspective, the basic science/engineering hypotheses are introduced. The sponsor also provides a road map as to how the technology would be developed and scaled up. What assumptions would have to be tested? Where are the potential barriers? And what is the technical project plan for development?
> From the market perspective, some broad definition of the target market and potential benefit must be provided. To whom would this product/service be sold? Why would customers prefer it over existing solutions? Why not? Typically, this information is gathered through secondary data and/or a few conversations with potential customers to gauge desire to have an alternative solution
> Stage Two: Proof of Concept--the purpose of the proof of concept gate is to provide evidence that validates the concept behind the development project. Broad financial metrics are introduced to begin to flesh out the potential return on the innovation
> Proof of concept from the technical perspective means that the science/technology works. Whether in a lab or pilot plant environment, prototypes can be produced to meet the form and function requirements outlined in the concept design
> From the market perspective, positive reaction to the concept must be proven. Through some combination of qualitative market research ("what if" testing) and quantitative research methods, a sense for market acceptance, potential size of market and share, and broad price/value relationship versus existing alternatives must be established
> Stage Three: Commercial Viability--at this stage, the purpose is to assure the concept has "scalability"
> From a technical perspective, the ability to manufacture the product on production scale (or replicate the service model) must be proven. And, the economics or doing so must remain in parameters set earlier in the concept definition stages
> From the market perspective, the concept must pass "beta testing." Prototypes should be accepted by target customers and the perceived benefits realized. Reactions of target customers at this stage will provide guidance to the timeframe and aggressiveness of the launch and ramp-up, along with the financial ramifications

> Stage Four: Commercial Positioning--the purpose of this final development stage is to define the most viable positioning of the product/service prior to launch. This stage serves as the bridge to the commercialization steps
> From a technical perspective, the positioning step proves that the product/service can be produced, packaged, and delivered to the target customer in a form that meets the promise of the concept for the customer and provides value relative to existing alternatives used by that customer
> From a market perspective, the parameters for launch must be established. These include all aspects of the offering, including price points, packaging, etc. Often, these are established by launching the product/service on a small scale (i.e., in a couple of test markets) and making the necessary modifications in the offering prior to broad commercialization
> Stage Five: Launch--the launch stage represents the handoff of ownership of the project from the development group to the mainstream organization. Product or market segment management takes ownership. Business plans are developed, including revenue goals, operational strategies, sales/marketing/channel strategies, etc. to bring the innovation into the mainstream of the business

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 commercializing the winners.