When Less Is More: A Twist On "lean" Innovation

I have seen numerous comments and discussions on the role of innovation during this downturn

. At their core, the conversations still seem hopeful, but with a lot more tension. Since effective value innovation is a core concern at Transcend, we periodically monitor its evolution and have found the following trends:

Innovation continues to be viewed as an internal growth engine.

Short term focus and increased risk aversion make the tradeoff between line extensions and breakthrough products more difficult.

Incorrect price/value relationships are the primary cause of innovation failure.

o Pricing

o Lack of compelling value proposition

o Cost to product too high.

As we continue to track the impact of these trends, we have seen decreasing numbers of businesses able to successfully navigate the 'new' environment. There is a much higher perceived risk in chasing game changers, even though these have always had tremendous ROI in the past. Even the small minority of companies who are flush with cash or credit are reluctant to push the envelope. Too often organizations seem to rely on the extremes: the majority based on creative with huge risk, but leverage or an overly engineered process designed to promote accountability, but consistently produces only singles or doubles. In looking at the trends above, one thing stands out above all: understanding what drives value in your industry.

This is even more important today with the fundamental restructuring and deleveraging of many industries across the global. Radical shifts in perceived value and its associated price have shifted, permanently perhaps, to a much, much higher slope. This is a key point for any company relying on reigniting its innovation effort the old ways of doing business will yield either too much wasted cash in search of the big one, or an unacceptably mediocre rate of return. Simply put, the innovation portfolio needs to be shaped, first and foremost, by a strategic evaluation of where the companys competencies and capabilities fit in the new landscape. This is important since there is a resource view of strategy at play here there is only so much cash to go around when placing bets.

Therefore, tools such as industry value curves, market share velocity vectors, and old fashioned value maps come into play. You want to exclude those performance features/attributes which have a high probability of now being marginalized. The portfolio then needs to be viewed in the following light: what portion of cash goes to generating breakthroughs, versus what portion goes to more predictable line extensions & cost reductions. Projects can then be classified by both.

Projects can then be classified by both their strategic role and probable cash return this is where the risk management comes into play. Innovation portfolios should be managed as an options pool, with a stochastically driven rate of return. The management team can then evaluate various options and approve a portfolio they are comfortable with. This also has the byproduct of generating management metrics for stage gate reviews.

by: Joseph V. Marigliano

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