Thursday, June 28, 2007

Book Review - Payback

For a while now I've followed the writings of Jim Andrew from the Boston Consulting Group. His annual survey about innovation in corporate America provides an interesting window into what's on the minds of corporate leaders about innovation. Jim and a fellow BCGer, Harold Sirkin, have just released a new book about innovation called Payback, Reaping the rewards of innovation.

As you might guess from the title, Payback is about closely and carefully identifying the measurable, tangible benefits of innovation. Too often, innovation appears as a "good thing" but we don't measure the results very carefully. In these cases it can be hard, if not impossible, to indicate the direct benefits and payback of innovation. Andrew and Sirkin want to change our thinking about innovation, and make us much more hard headed about the reasons for innovation and the expectation of return.

The book is divided into three sections. The first section looks at payback from innovation and its importance. The second section is about choosing the "right" strategic model and the third section is about alignment for innovation.

In the first section, the book looks at what should be obvious but often isn't - the investment in a new idea and the "cash curve" an idea represents. That is, almost all new product or service ideas require an up-front investment before there's a return, which drives the cash curve negative. Eventually, sales begin and revenue turns the curve upward and a new product or service crosses the breakeven threshold and starts to earn money. The problem many innovations face is that we are too optimistic about the "ramp up" and investment and discount the costs of investment. The authors break these costs into four phases - Startup costs, Speed or time to market costs, Scale or time to volume costs and support costs after the product is launched. Generally speaking, we underestimate the startup costs, and larger firms fail to take into consideration the bureaucracy and barriers to new product development, so speed to market is a challenge. We overestimate the "hockey stick" or ramp up, so the cash curve for many innovations never reaches the break even threshold.

Again, we know a lot of this stuff - but where innovation is concerned, too often we fall in love with our ideas and don't take a hard headed look at the payback of the ideas.

In the second section, the authors look at three innovation models, which are really strategic decisions about how your firm should innovate. These models are: integrator, orchestrator and licensor. Of course one firm may follow several or all of these models in its various business units.

An integrator controls all aspects of the innovation - from ideation through product launch. The authors note that the integration strategy is important when:

  • control is necessary
  • the company has world-class capabilities
  • risks are manageable
  • knowledge assets have to be protected
  • or simply, there's no better choice.
Orchestrators combine their own talents with the skills and talents of others to bring innovations to market. Orchestration is a good option when:
  • A key capability is missing
  • You are entering an unfamiliar market
  • You don't want to invest in building a capability
  • You have trusted partners
  • You want to share the risk of development
The final model is licensing. The authors note that licensing makes sense when:
  • the company does not have the resources to commercialize an idea and can't acquire the resources
  • there's an opportunity to create critical mass through adopting a standard
  • the competition can be transformed into a royalty source
The last section of the book is about aligning the organization to support and nurture innovation initiatives. The authors point out several significant challenges to innovation that are structural or cultural:

  • Innovation strategy is at odds with business strategy
  • Innovation is all talk and no support
  • Innovation is an island
  • The innovation process is fragmented
  • "Dynasties" monopolize innovation resources
  • Metrics (and compensation) confound the goals of innovation.
Frankly, this was my favorite section of the book. We've found that in most of the firms we've worked with, the management teams have innovation religion, but aren't sure how to change the culture and get people on board, much less how to make innovation sustainable. The list of challenges I've just provided will occur in just about any firm where the culture and the strategic intent for innovation are not firmly in place. A lot of these challenges can be chalked up to what the authors called "alignment". Strategic alignment, team alignment, compensation alignment, role alignment - all of these things and more must be aligned for innovation to succeed, since, as the authors point out "..the effect of any organization on innovation is often a negative one. This is because organizations, no matter how nontraditional they may be, are primarily designed for control, standardization and reduction of risk - and these characteristics can be the enemies of innovation."

Payback is a good book, but I would have ordered it differently. I strongly favor the last section, since it is alignment and cultural change that make sustained innovation possible. Only when you have sustainable innovation should you worry about payback on innovation. Clearly, the investment in innovation is important, and none of us will invest in concepts with very uncertain outcomes. However, getting the process and cultural attitudes are more important initially than payback. I'd then focus on the returns of innovation and how to maximize those returns. The middle section points out some of the models that are possible to pursue as an innovator - many firms will have all three of these models operating simultaneously - creating and launching ideas themselves, partnering with others to bring new ideas to market and licensing great concepts to others. Choosing a strategy for innovation is important, but I think getting the process up and running initially and tying it to strategic intent is the most important concept - what the authors call "alignment".

I found the book to be a real mixed bag - full of good advice but the sections seem to target different audiences and out of the order I'd prefer to see them. Naturally, as someone who is interested in the cultural and process aspects of innovation, I found the third section the most compelling, and the concepts and advice in that section are worth the reading by themselves. These ideas are more operational and topical, while the second section is really written to a very senior management audience who can choose the appropriate innovation models. The second section is really about the innovation strategy you'll choose. Finally, the first section seems "obvious" to anyone who has launched a new product or service, examining the costs and benefits of a new product or service and the cash curve. What the first section reminds us is that we too often fall in love with our ideas and neglect the hard evaluation of each phase of a new product or service development, underestimating costs and overestimating adoption, leading to many ideas that fail to achieve break even.

This is a tough book to evaluate, since it is chock full of great ideas and models to use to evaluate your business and implement change, yet to me it feels a little unfocused in its target and the consistency of its message. James Andrew is a noted leading thinker in the innovation space, and for that reason alone the book is worth a long look. The ideas around alignment and leadership are especially important and worth reading.
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posted by Jeffrey Phillips at 12:55 PM


Blogger Dennis D. McDonald said...


this book is sitting on my coffee table and I think I will start with section 3!

10:35 AM  
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8:01 PM  

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