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Archived updates for Wednesday, December 14, 2005

Improving Innovation Success Rates

In "Spurring Innovation Productivity" James P. Andrew and Kermit King of The Boston Consulting Group identify three broad options for boosting net present value on innovation:
  1. increasing the potency of ideas,
  2. lowering the cost of commercialization, and
  3. improving the success rates.

"Few of our benchmark clients suffer from a scarcity of potent ideas," they write. "Mathematically, each percentage-point improvement in a success ratio will have a much greater impact on NPV than a proportional improvement in controllable cost. The greatest gain, then, comes to companies that concentrate on improving their innovation success rates."

They suggest that businesses start by assembling a straightforward catalog of innovation projects undertaken over the past three to five years, including the source of the idea (external, marketing, or R&D), the type of innovation (maintenance, extension, or breakthrough), the budgeted and actual investment, in terms of both money and allocated personnel, the termination date or time to market launch, the incremental sales and contiribution planned or realized, and the implied returns. Using these metrics, their clients typically find that

  • Investment dollars and project mix tend to be skewed toward small-increment product extensions rather than breakthroughs.
  • Areas of heavy investment are often the least productive.
  • External sources for ideas deliver higher returns.
  • Termination rates for unsuccessful projects are too low.
  • Unfocused budgeting criteria often lengthens payback.
  • Actual prioritization of projects is sporadic.

Using this historical information, an organization can then develop an effective innovation strategy that avoids the following traps they have observed in their work:

The Denominator Trap: Many companies greatly overestimate their ability to access and switch out a competitor's installed base, and they therefore include that entire base in their estimates of market size.

The Sustanability Trap: Companies often fail to include in their launch plans the costs of sustained support, multiyear promotion, and desired pricing moves. When a new product comes up for a second year of support, it is often the first budget line to be cut.

The Suhstitution Trap: Because innovation can succeed at the expense of existing products, screens must estimate cannibalization as objectively as possible.

The Uniformity Trap: No two new-product launches are identical.

The Tactical Trap: Innovations must be assessed in their full strategic context. Less obvious credits and costs, though material, can easily escape inclusion in a company's analysis of launch economics.

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