Thinking Managers

Robert Heller of looks at why many successful companies fail to innovate successfully.

Following Figures Away From Innovation

Plans, projections, decisions and debates all depend on the provision and calculation of outcomes, whether forecast by scientific models or guessed at through experience and instinct.

But even when the figures are rigorous, honest and well presented, how many managers actually pause to consider whether those numbers are guiding their organisation in the right direction?

Worthy of consideration is this quote from the January 2008 Harvard Business Review:

“For years we’ve been puzzling about why so many smart, hardworking managers in well-run companies find it impossible to innovate successfully. Our investigations have uncovered a number of culprits…”

“These include paying too much attention to the company’s most profitable customers (thereby leaving less-demanding customers at risk) and creating new products that don’t help customers do the jobs they want to do.”

Clayton M. Christensen, Stephen P. Kaufman and Willy C. Shih, the authors, point the finger at three financial analysis tools for crimes against successful innovation:

1)  Discounted cash flow (DCF) and net present value (NPV) used to evaluate investment opportunities, they say, “causes managers to underestimate the real returns and benefits of proceeding with investments in innovation”.

2)  They also believe that considering fixed and sunk costs when evaluating future investments “confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack”.

3)  Finally, they say focusing on EPS “to the exclusion of almost everything else” diverts resources away from the investments “whose payoff lies beyond the immediate horizon”.

I covered this issue of priorities in my Essential Manager’s Manual, recently re-released in a new edition (Dorling Kindersley, £25). In the book I state: “Successful management involves trade-offs and compromises to reach the best decision when several factors are involved. The aim of tradeoffs is to keep short- and long-term risks as low as is possible.”

If you think that you can maximise investment and profits at the same time, you’re making a grave error. Concentrating on the long term means that short-term profit must be sacrificed for success in the future. Conversely, ambitious expansion plans sometimes need to be trimmed if current returns are to be satisfactory. The same philosophy applies to products: a car’s acceleration cannot be maximised whilst minimising its fuel usage at the same time.

Trying to square this circle could result in a business that is biased against successful innovation. And in this tumultuous decade of the unfolding 21st century, innovation should be high on your list of priorities.

About the author
Robert Heller is one of the world’s best selling authors on business management.