Valuing Radical Innovation

Valuing Radical InnovationI’ve been involved in a lot of discussions over the last twelve months related to the creation of new business through radical or breakthrough innovation. Some of them have been on collaborative work with the innovative market research agency, BrainJuicer. The essence of the challenge can be summarized as: why can’t large companies create new businesses? Many of the potential reasons were described well by John Kearon, the Chief Juicer, in an excellent article.

More recently the topic of several interactions was how different companies approach the development of new business. This invariably involves innovation, through implementing new products, services or business models. One key aspect intrigued me. A few notable examples, who I can’t name but you would certainly recognize, set targets for the size of new business they want to create. They reject opportunities that fall below this threshold. For the sake of argument, let’s assume that our company, Fictional Products Inc, have a turnover of $1bn and set a new business threshold of $50m, 5% of turnover.

On the face of it and using traditional management logic of prioritization of resources against the biggest potential returns, this makes sense. Why would you spend time on small projects? But this makes me feel uneasy because of this fundamental puzzle – if Fictional Products can accurately value a business at over $50m; they will be dealing with tangible facts and an opportunity that is pretty close to what they already have.

Early stage opportunities that can either disrupt an existing market or create a new one are mired in uncertainty. By their very nature they are unlikely to use the standard business model for that category. Until users get their hands on it, the full potential of the product is difficult to estimate. The traditional route to market, the ways to communicate and market the product may all be irrelevant.

That’s why really radical innovation should not be quantified in the same way as existing incremental opportunities. Instead other ways to map out the future should be taken. For example, customers should get prototypes or as close-to-finished-product as soon as possible. They should be encouraged to share their experience by word of mouth and through social media, building buzz with other early adopters and laying the foundations for a hopefully successful business in the future.

If you try to quantify too quickly, you may kill too many future successes before they can start to prove their worth. It’s culturally counter intuitive to many businesses, relying as much on belief as data, but paradoxically the step-by-step approach enables you to obtain more data. As long as your investment and return profiles don’t get too far out of kilter, you won’t go too far wrong. And you’ll be more likely to produce radical innovation by starting small and building fast.

image credit: myphototutorial

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Kevin McFarthingKevin McFarthing runs the Innovation Fixer consultancy, helping companies to improve the output and efficiency of their innovation, and to implement Open Innovation. He spent 17 years with Reckitt Benckiser in innovation leadership positions, and also has experience in life sciences.

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4 Responses to Valuing Radical Innovation

  1. John Wolpert says:

    OK, this is sacrilege even for me, certainly as a guy who has spent half of his career doing big company innovation, but here’s a thought: maybe big successful companies aren’t the right tool for creating disruptive businesses. Maybe that’s why we have startups. They are set up correctly to control for risks…for the 95% certainty that the venture will fail.

    Why do we self-flagellate on this topic? What if we accepted that everyone has a part to play, and trying to get successful, large, complex companies to allocate resources consistently on 5% bets (and then double-down even when the bet hasn’t shown clear signs of paying off, as we do in angel/venture) is like casting Robert De Niro as Lady Macbeth. (Actually, that is something I’d like to see.) :)

  2. Hi John – that’s a really insightful comment. Why should large companies beat themselves up over something they can no longer do? And why should we have a go at them?

    It would be great if a large company openly said they weren’t planning to do radical innovation organically, just acquire it when a start up succeeds in creating a new business with critical mass. One example that comes to mind is Coca Cola taking a majority stake in Innocent Smoothies but leaving operational control with the founders. Many other examples come from pharma/biotech acquisitions.

    Next, we should open a thread on who would play Macbeth opposite De Niro……

    • Braden Kelley says:

      Big companies have one asset that small companies can’t replicate, that is the knowledge, relationships, and ability to manufacture and distribute at scale. They should maximize their use of this ability and not care about where the inputs (new products) come from, but instead focus on getting really good at acquiring, integrating and scaling them (along with promising new ideas developed internally). Cisco was doing a very good job at this, and a lot of the pharma companies have been following an acquire, integrate, scale model of innovation for some time, but many other industries have been reticent to do this. There is no shame in acquiring, integrating, and scaling other people’s innovation – shareholders of companies that do it well don’t mind that new profit engines come from outside. And, there will always be people outside your organization that are smarter than you and that see the future of your industry more clearly than you, so you must have an organization with the mindset and the mechanisms to acquire, integrate, and scale their ideas. Cisco was so good at it for a while that they reached beyond their brand umbrella and got soaked, so you can learn from them in a positive way and a negative way. Among non-pharma companies P&G has worked quite hard to transform their culture from a mindset of ‘Not Invented Here’ to proudly found elsewhere. This is one key transformation that all large companies that want to maximize their revenue going forward will have to make. You can find more in my white paper – ‘Harnessing the Global Talent Pool to Accelerate Innovation’ here – http://bradenkelley.com/Harnessing-Global-Talent-Pool-White-Paper.pdf

      Keep innovating!

      @innovate

  3. You’re right, Braden, large companies bring scale to innovation. The question is; can they originate and develop radical innovation as well as they can scale it? I don’t think they can, which is why the acquire/integrate/scale model you suggest should be the dominant approach. Even some of the Open Innovation leaders are still trying to originate new business internally, with the % of sales targets, but as you rightly point out there’s no problem with this. They are more likely to be successful at acquiring new business that companies dominated by NIH.

    Kevin

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