How to Cut Out Unnecessary Innovation

(page 2 of 2)

There are other problems. Some companies have well-formulated templates to help simplify NPV calculations. Those templates almost always implicitly assume that an idea conforms to the company's current business model. But if a company is using a new business model, some of the underlying assumptions about capital investment, margin structure, inventory turnover, and so on can be wildly different. A simplifying template can be a straitjacket for teams seeking to introduce new business models.

A Different Approach

It's natural to want to have a simple way to compare multiple projects quickly. But taking an overly simplistic approach can sometimes be wrong. Instead of focusing on a single metric, companies should consider the answers to the following five questions:

1. What is the upside potential?

Of course, you would rather invest in a project that could produce huge returns than one with limited upside potential. Make sure you run multiple scenarios, and consider the "fringe" scenarios carefully. Is there any way a modest investment could identify whether an outlier is possible?

2. How much risk remains?

Any to-be-launched project will have a degree of risk, or uncertainty. Again, you should prefer a project with lower risk to one with more risk.

3. What resources are required to reach the next learning milestone?

Ideally, companies can learn more about the critical risks with modest incremental investment in time and dollars. A project with huge risk but huge potential might be worth keeping alive if you can learn about a critical unknown cheaply and quickly.

4. How well does the idea fit important qualitative criteria?

Making decisions based purely on numbers that are nothing more than educated guesses is silly. Properly applied, qualitative metrics can be a useful way to identify attractive opportunities early.

5. How much does the idea contribute to the overall portfolio's balance?

Modern portfolio theory suggests that reaching the ideal balance between risk and return means investing in diversified assets with different kinds of risks. For innovation efforts, that might mean an approach to reach a new customer segment, or use a new business model, or rely on different technologies. If companies don't consciously seek to diversify their innovation portfolio, they often end up with a narrow focus.

These kinds of questions can help companies identify when it's time to pull the plug on a project. When you can't shake residual risk, when tests grow increasingly expensive and learning increasingly scarce, and when it's getting harder to see the upside potential, it might be time to move on to another project. Making these decisions quickly can help companies maximize the return on their investments in innovation.

Reprinted by permission of Harvard Business Press. Adapted from The Silver Lining: An Innovation Playbook for Uncertain Times by Scott D. Anthony. Copyright 2009 Innosight. All rights reserved. Scott will be introducing more ideas from his book on his Innovation Insights blog at HarvardBusiness.org.

Scott D. Anthony is the president of innovation consultancy Innosight and the author of The Silver Lining: An Innovation Playbook for Uncertain Times (Harvard Business Press, 2009).

Business Exchange

Track and share business topics across the Web.