A more realistic way to profit from innovation

Most big companies' innovation processes look like this: sort through a host of new-venture proposals, select the one with the biggest payback and lowest risk, and fund it through launch. Establish ongoing "go/no-go" checkpoints to ensure the venture is meeting its projections and, if it's not, kill it.

While it sounds reasonable, this kind of process contributes to the poor return on innovation investment in many businesses. So say Rita Gunther McGrath of Columbia Business School and Thomas Keil of Helsinki University of Technology in an article in the May Harvard Business Review ("The Value Captor's Process" - link $$).

The key defect in standard innovation processes is a belief that the initial business plan for a venture is unalterable and that the only success is fulfilling the business plan as originally conceived. This leaves no room for the reality of an innovation process--which is that there may be several possible successful outcomes, and achieving any one will add value to the company.

McGrath and Keil suggest several other ways to extract value from new ventures if "Plan A" doesn't come about:

• Recycling. To entrepreneurs, shifting course based on new possibilities or issues discovered during the development process is second nature. To large companies, it's a very difficult task. Of one new-business venture, the authors write, "The applications that turned out to be significant profit generators were not on the original list of possibilities."
  
  
• Spinning off/licensing. If your company can't make a go of it, perhaps an outsider can, with the company potentially retaining some ownership.

• Spinning in. If the venture doesn't stand alone, it may be a useful extension to an existing business unit.
  
  
• Salvaging. At worst, put the learnings and technology gained in the venture to work somewhere in the company.

The authors also focus on an alternate approach to new-venture planning. They write:

An alternative to the go/no-go approach is to make learning a central purpose of the venture plan. In a discovery-driven plan, measuring progress consists of validating assumptions as quickly and cheaply as possible and then revising the plan as necessary at key milestones.

Such planning allowed Texas Instruments to enter the RFID market very early, testing the market and value propositions inexpensively and cautiously, but then being prepared when large-scale markets for the products emerged. "Had TI based its decision to invest in the venture on whether the market size and potential payback were sufficiently large and the level of risk sufficiently low," write McGrath and Keil, "the company probably would not have funded the initial effort."

(Photo by lusi via stock.xchng)

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