Boosting Innovation Productivity - BCG · 2014-03-05 · Boosting Innovation Productivity In 1877, Thomas Edison handed a crude sketch to his machinist, John Kreusi, with the command

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Boosting Innovation Productivity

BoostingInnovation 4/16/03 3:32 PM Page 1

Boosting Innovation Productivity

In 1877, Thomas Edison handed a crude sketch to hismachinist, John Kreusi, with the command “Makethis.” Within days, Kreusi delivered a prototype of thephonograph. Upon hearing his first recorded sen-tence, Edison reportedly was “never so taken aback.”He dreamed about dozens of applications and com-mercial success.

Following that breakthrough, however, were 21 yearsof stalled product development, patent struggles, and

Thomas Edison’s sketch for the first phonograph, signed by Edison and hisresearch assistant, Charles Batchelor, and machinist, John Kreusi. Courtesy ofthe U.S. Department of the Interior, National Park Service, Edison NationalHistoric Site.


failed attempts at commercialization. Mistargeted as aparlor novelty or a complex dictation machine, thephonograph languished until the right market andconsumer proposition were found. The inventionneeded to be easy to use, with a clear application,affordable hardware, and available software.

Good ideas—even breakthrough insights—oftenprove disappointing. Today the course that managersmust run to make ideas profitable would test even theindefatigable Edison. The average cost of taking newproducts to market has more than doubled in the pastdecade. Failure rates for some kinds of products trackbetween 60 and 85 percent. Many CEOs have scaledback internal new-product development, reasoningthat acquisitions offer an easier road to growth.Judging from our research, the average R&D projecthas a negative net present value (NPV). At manymajor companies, the need for increased innovationproductivity and incremental growth has reached acrisis. Some companies, however, are rising to theoccasion. Through both benchmarking and work with client companies, The Boston Consulting Grouphas identified practices that lead to accelerated, innovation-led growth. By adopting these practices inthe context of a disciplined approach to innovation,companies can increase R&D returns dramatically.

To boost innovation NPV, managers have three broadoptions: increasing the potency of ideas, lowering thecost of commercialization, or improving the successratio. Mathematically, each percentage-point improve-ment in a success ratio will have a much greaterimpact on NPV than a proportional improvement incontrollable costs. Further, few of our benchmarkclients suffer from a scarcity of potent ideas. Many,however, lack the discipline to filter, focus, and followthrough on them. The greatest gain, then, comes tocompanies that concentrate on improving their inno-


vation success rates. That means isolating the verybest ideas and driving them exclusively and emphati-cally to market.

Data-Driven Diagnosis

Before reworking your innovation process, you willneed to determine your current status and perfor-mance. In our experience, very few companies have asolid grasp of the quality or mix of the projects intheir portfolios. Also, any number of factors, bothinternal and external, can conspire to thwart manage-ment’s hopes for even the most attractive set ofopportunities. Difficulties can arise in design, produc-tion, and sales; issues can also stem from shifts in thecompany’s objectives, shifts in markets, activities bycompetitors, and changes in customers’ preferencesand demands. In many companies, the commercial-ization processes are riddled with problems. Often,the criteria for approving projects at each stage ofdevelopment are superficial, inconsistent, or politi-cally subverted. In many cases, doomed, “walkingdead” projects linger on, draining resources fromother, more promising efforts. And fatal flaws (soobvious postlaunch) pass through successive screensundetected.

Where, then, should you begin? We like to start bycreating a database that lays bare the strengths andweaknesses of a client’s new-idea machinery, as well asits inputs and outputs. The database consists of astraightforward catalog of innovation projects under-taken over the past three to five years, identifying foreach project

• the source of the idea (external, marketing, or R&D)


• the type of innovation (maintenance, extension, orbreakthrough)

• the budgeted and actual investment, in terms ofboth money and allocated personnel

• the termination date or time to market launch

• the incremental sales and contribution realized orplanned, and the implied returns

The value of such information is immense. Compa-nies that have taken the trouble to assemble it havefound two broad benefits. First, it provides a retro-spective picture of actual performance that manycompanies don’t have the ability to see in one place.Certain indicators—such as stubbornly low hit rates,low percentages of sales from new products, and lowrepresentation of breakthrough products comparedwith the rest of the industry—can provide a wake-upcall and a rationale for change. Second, the data offerdiagnostic insights into root causes and opportunitiesfor improvement. Here are a few typical findingsfrom our client work:

Investment dollars and project mix tend to be skewedtoward small-increment product extensions rather thanbreakthroughs. Most launches represent only minorvariations on existing products. In one industry westudied, seven of ten recent launches were modestbrand extensions, unlikely to win new customers orincrease underlying demand.

Areas of heavy investment are often the least produc-tive. One client was startled to find that an area thathad consumed 70 percent of a five-year investmentdelivered less than 20 percent of launch output andonly 15 percent of new-product sales.


External sources for ideas deliver higher returns.Although there has been much discussion of the ben-efits of collaborating with suppliers, few companiesfully realize the potential of such relationships.Universities, independent research labs, and entre-preneur/inventors can also offer important insightsand refreshingly new kinds of products. And informa-tion about competitors can provide invaluable “new”product concepts.

Termination rates are too low. At most companies,fewer than 10 percent of projects active at the begin-ning of the year are killed by the end of the year.Many projects linger in limbo, burning dollars andprecious technical resources. Most companies eitherhave no rules in place for discontinuing projects, orfail to observe the rules they do have.

Unfocused budgeting criteria can lengthen paybacktimes. When companies set R&D budgets largely onthe basis of concrete project proposals, they achieveshorter payback times. Conversely, the longest returntimes are found in companies that don’t have disci-plined processes in place up front to ensure that lessattractive projects don’t get funded.

Actual prioritization of projects is sporadic. Compa-nies that establish clear priorities among productdevelopment projects report three to four times higher returns on their programs, with far fewer projects behind plan, than companies that do not prioritize. Yet many companies do not prioritize theirprojects at all, and many others allow their prioritiesto shift frequently because of factors such as projectfragmentation and long cycle times. Worse, in onerecent study, we found that even companies that doprioritize their efforts actually allocate resources onthe basis of those priorities in only half the cases.


Delivering Higher Success Rates

Any plan designed to boost innovation output mustinclude both clearly delineated processes and tar-geted investment allocations. Our experience sug-gests that the following six actions can contribute sig-nificantly to accelerating innovation-led growth:

• Install a proprietary innovation process, alignedwith your innovation strategy and structured withstandardized milestones and go/no-go criteria, toprovide oversight of the innovation portfolio.Then use it.

• Ensure that your innovation strategy includes clearpriorities among the projects in your portfolio andthat you are disciplined about allocating resourcesaccording to those priorities.

• Assign full-time teams from across functions tonew-category product launches, and systematicallytrack the time invested in each project.

• Create a multiyear launch-support model to en-courage early adoption and continuing purchases.

• Align compensation and rewards with projectgoals. Also, be sure to include initiative and creativ-ity in your evaluation system, and use innovationawards to motivate people.

• Seek outside alliances to achieve world-class capa-bility across disciplines.

To improve your success rates significantly, you willneed to pay special attention to project evaluation cri-teria. Naturally, the specific criteria in your company’sinnovation-screening methodology will have to be tai-


denominator is often less rigorous, yielding share esti-mates that seem conservative but in fact may be grossly optimistic. For example, in our experience,many companies greatly overestimate their ability toaccess and switch out a competitor’s installed base,and they therefore include that entire base in theirestimates of market size.

The Sustainability Trap. Among product innovations,there are the duds, the flashes in the pan, and theeternal flames. To be successful, a product must buildvolume rapidly to maintain the attention of the salesforce, the distribution channel, and customer organi-zations. It must also show repeat-purchase strength toprovide a stable annuity throughout its life cycle.Keep an eye on repeat-purchase characteristics: Do

lored to your business. Moreover, the need for precisedata will increase as a project proceeds. But a robustmethodology will allow you to dismiss an inadequateidea partway through the process, without having toassess it against all possible criteria. And an effectivescreen will provide the confidence you need to re-direct your investments to fewer, bigger, better, andmore successful ideas. (See the exhibit “ProductLaunches Must Clear a Common, Rigorous Business-Case Screen.”) Following the right process will alsohelp your organization avoid several of the traps wehave observed in our work.

The Denominator Trap. When screening for a prod-uct’s potential, marketing teams focus intently on pro-jecting market share. But sizing of the target market

Returns InvestmentsStrategicOptionValue

NetPresentValue

+

Addressable market

sizeShare

potentialMarket

structureUp-front

investmentsOpportunity

costsx

Industry size

Size of the targetcustomer base

Geographicbreadth

Starting positionand brand strength

Product appeal

Relevant installed base

Repeat rates

Productdifferentiation

Sales and distributioncoverage

Pricerealization

Mix of product,price, and segment

Distributionmargins

COGS

Marketingsupport

Operatingexpenses

•

•

•

•

•

•

•

•

•

x

•

•

•

•

•

•

+

• Development,tooling, andproductioncapital

Launchspending

•

• Impact onothercompanyinitiatives

• Impact onpotentialacquisitions

• Cannibalization

–

• Entry for new sector or geography

• Competitivematching orblocking

=

• Base case

• Success case

• Failure case

• Country by country

• IRR

SOURCE: BCG analysis.

Product Launches Must Clear a Common, Rigorous Business-Case Screen


patterns of repeat purchasing emerge when you testyour product’s concept and use? Have you looked atthe performance of analogous launches in the indus-try over several years? Does the launch budget includea multiyear plan for sustaining growth? In our experi-ence, companies often fail to include in their launchplans the costs of sustained support, multiyear promo-tion, and desired pricing moves. When a new productcomes up for a second year of support, it is often thefirst budget line to be cut.

The Substitution Trap. Because innovations can suc-ceed at the expense of existing products, screensmust estimate cannibalization as objectively as possi-ble. Companies rarely do this systematically; generally,they make such estimates only as an afterthought, if atall. One company we looked at recently was planningto introduce three new products, ranging from highlyto moderately innovative, into a market in which italready held the leading share. Unfortunately, thecompany had no real understanding of where thenew products’ volume would be sourced from. Aquick analysis of likely industry and segment growth,competitors’ activities, and previous analogouslaunches demonstrated that for two of the products adisproportionately high volume was likely to come atthe expense of current offerings. That insightprompted the company to make substantial changesin both the new products and their launch timetables.

The Uniformity Trap. No two new-product launchesare identical. What worked last time probably won’twork this time. Too much can change, even in a shortperiod of time. This is especially the case when a com-pany is entering adjacent or unfamiliar segments orbusiness areas—as many companies are currentlydoing in an attempt to find ways to grow in today’ssluggish economy. Launch economics must take into


account such factors as the likely inclinations ofpotential launch customers, probable levels of pricerealization over time, possible competitive responses,the availability of sales and distribution support, andsales and service costs—all of which vary across prod-uct categories, channels, and countries.

The Tactical Trap. Innovations must be assessed intheir full strategic context. Less obvious credits andcosts, though material, can easily escape inclusion ina company’s analysis of launch economics. For exam-ple, credits might include first-mover advantage, thebenefit of bringing a fuller line to distribution, or theoption value of building a platform for furtherlaunches. (Although we don’t advocate launching aproduct on option value alone, it does convey a posi-tive benefit and can be an important factor when acompany is choosing among products with similarNPVs.) Costs might include the opportunity cost ofdiverting resources from other initiatives, as well asthe cost of competitive retaliation. For example, weassessed one client’s innovative entry into a concen-trated segment. Research showed that the concepthad strong appeal. We then tested identical concepts,substituting another leading player’s brand. Theresults were substantially higher, suggesting that ourclient should anticipate a heavy penalty from a fast-following competitor.

Taking Bold Action

Determining an ideal screening methodology isimportant but insufficient. You must reconcile theideal with your company’s reality. Even the most suc-cessful companies suffer from an accumulation ofprojects that are approved singly but unanticipated inthe aggregate. Worse, the structures intended to con-


trol such proliferation can themselves proliferate. The result can be a byzantine, redundant, and incon-sistent control process that delays time to market,encourages circumvention, or both, causing successrates to plummet.

Bold action is often needed to improve the flow ofinnovations. The system must be cleared of sclerosisbefore healthy project circulation can begin.

Here is a four-step plan:

Use insights from the data-driven diagnosis to set cleartargets for innovation. They should include the per-centage of sales derived from new-product volume, amix of targeted investments in breakthrough andmaintenance projects, and a balance of short- andlong-term development in the pipeline.

Establish two oversight mechanisms to increase successrates. One is a governance model of impartial reviewand intervention by an empowered oversight commit-tee. The other is a project evaluation screen incorpo-rating the items outlined in the exhibit above. Thereview must be central, senior, periodic, and decisive.Evaluation criteria must be comprehensive andapplied with discipline and impartiality.

Deploy the oversight committee and the project evalua-tion screen in an inaugural project-portfolio review.Current inventory, as well as projects in the pipeline,should be evaluated on their own merits in the con-texts of product mix and sustainability discussedabove, and in the light of strategic goals.

Redeploy the resources freed up to accelerate the mostattractive projects. Good projects can’t get to marketfast enough. Often, more resources, correctly


deployed, will get them there sooner. Create valueand momentum by immediately redeploying re-sources to the best projects in your portfolio. Avoidthe temptation to bank the “savings.” The goal is notmerely another cost-cutting initiative but more inno-vation and growth.

* * *

Boosting your innovation productivity doesn’t neces-sarily require substantial incremental investment orthousands of hours of analysis. It does requirecourage, hard work, the right processes, and a toler-ance for risk. Bringing impartiality and rigor to theprocess will transform your innovation from a ran-dom lottery to a more bankable investment. The spirit of Edison—dazzling insight and prolific out-put—can be matched with management, discipline,and speed to market.

James P. AndrewKermit King

James P. Andrew is a senior vice president and director, andKermit King a vice president and director, in the Chicagooffice of The Boston Consulting Group.

You may contact the authors by e-mail at:

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2003. All rights reserved.


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Boosting Innovation Productivity - BCG · 2014-03-05 · Boosting Innovation Productivity In 1877, Thomas Edison handed a crude sketch to his machinist, John Kreusi, with the command