A cost-benefit view of innovation

The business bookshelves are crammed with tales of technology breakthroughs and huge financial returns from amazing new inventions. Yet how many attempts to create new products through innovation and technology actually lead to commercial success?

“The majority of products in most companies are cash traps -- they will absorb more forever than they will generate,” declare James P. Andrew and Harold L. Sirkin, innovation and operations experts at the Boston Consulting Group and the authors of “Payback.”

The book is, above all, a detailed road map showing business leaders how to manage innovation projects and judge early on whether they are headed for success or failure, before the company has sunk squillions into irrevocable cash traps.

There is need for such a map, the authors insist. A survey they conducted last year of 1,090 executives in 63 countries showed that just under half (48%) were dissatisfied with the return on their investments in innovation.

Fundamental to success is consistent use of the “cash curve,” a chart in which the horizontal axis measures the time it takes for the innovation to either succeed or fail on the market. The vertical axis measures the financial payback or loss. From beginning to end, the time required for any innovation project is broken into two main spending periods: “commercialization” and “realization.”

It is not as complicated as it sounds. Andrew and Sirkin explain clearly and concisely how to use cash curves, making the book accessible to even the most math-averse reader.

A successful innovation project requires careful weighing of start-up investment, time to market, time to volume production and eventual support and reinvestment costs. There is no simpler way to manage such projects to ensure a profit, the authors contend.

The idea is to plot an initial planned cash curve for each innovation project and then follow costs and time to market closely, superimposing a “real” cash curve representing actual performance over the projected one.

If the real curve starts to fall well below the projected one, you are entering a cash trap. Then comes the time when you’ll have to kill the project or dramatically revise it.

To show how companies can learn and profit by keeping their eyes glued to the cash curve, the authors cite Microsoft Corp.’s change of approach between the first and second generations of Xbox video game consoles.

The first Xbox, launched in 2001, cost more to develop and took longer to reach payback than anticipated, and was beaten to market by more than a year by the rival PlayStation 2 from Sony.

Learning from its initial mistakes, the software company decided on a different strategy for its second Xbox launch in 2006. It worked with more outside contractors to build enough products in time to meet hoped-for global demand.

This time, Microsoft quickly reached payback and sold more than 10 million units before PlayStation 3 appeared on the market.

The choice of going it alone or seeking partners to build and market an innovative product can dramatically influence its eventual success or failure.

At other times, companies may decide simply to license out their knowledge or technical know-how, choosing to greatly reduce both risks and costs.

So how to decide? The authors provide a checklist of circumstances to help executives pick the right innovation model for any project.

Even if companies manage innovation projects effectively, they can fail if they allow even minor first-generation design flaws to damage their overall brand before the product can take root in the marketplace.

Samsung Group provides an example of how early intervention from the top can lead to success in spite of early product glitches.

Back in 1995, when the South Korean company was seeking to become a leader in the global mobile phone market, Chairman Lee Kun-hee learned of defects in new mobile phones he had sent out as gifts.

He immediately ordered the destruction of $50 million of faulty components in a factory courtyard “where employees smashed and burned them. Lee sat beneath a banner reading, ‘Quality Is My Pride,’ and watched in approval.”

If innovation is to thrive, chief executives must reward risk-taking and accept the inevitable setbacks. And they must surround themselves with knowledgeable and outspoken managers who won’t hesitate to point to falling cash curves and dare to terminate their pet projects without fear of being fired.

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Richard Evans is a contributor to the Financial Times of London, in which this review first appeared.

*

Will it bear fruit?

“Payback: Reaping the Rewards of Innovation”

* By James P. Andrew and Harold L. Sirkin

* Harvard Business School Press, $29.95, 256 pages

Source: Publisher

Los Angeles Times