Flashpoint

By Jim Euchner, Editor-in-Chief, Research-Technology Management

“I think there is a world market for maybe five computers.”

– Thomas Watson, chairman of IBM, 1943

“There is no reason anyone would want a computer in their home.”

– Ken Olson, president, chairman, and founder of DEC

“So we went to Atari and said, ‘Hey, we’ve got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we’ll give it to you. We just want to do it. Pay our salary, we’ll come work for you.’ And they said, ‘No.’ So then we went to Hewlett-Packard, and they said, ‘Hey, we don’t need you. You haven’t got through college yet.'”

– Steve Jobs, cofounder of Apple Computer

Is recognizing profitable ideas in business more like picking an NCAA March Madness bracket or more like managing a team to victory? One is about picking winners, based on knowledge, intuition, and a measure of wishful thinking; the other is about shaping the outcome.

Picking winners is dicey. The history of business is replete with examples of smart people making the wrong bets—the leaders in the computing industry were very, very wrong about the potential of PCs and a lot of people were wrong about Steve Jobs and Apple at several key junctures. Many companies have been dismayed to find that the innovations they ended up competing against had been under development in their own research labs, but had never been brought to market. No one saw them as winners.

Successful innovation is more often about shaping the outcome than betting on it. Creating a winning franchise requires a different approach than betting on a bracket: winning coaches select players, develop their skills, create a coherent team, develop game plans, motivate the team, and react to circumstances in the moment. This requires clear thinking, adaptation, and, increasingly, analytics. Shaping the result is difficult, but it is more predictably successful than picking winners. The stories of the Apple II computer, the Macintosh, the iPod–iTunes combination, and the iPhone are all examples of shaping an innovation to increase its chances of success.  Being in the right game wasn’t enough; many others were also in those games.  Jobs had to work within the game to create success.

Michael Lewis, in the book Moneyball, provides a detailed case study of these contrasting approaches from the world of baseball. The book analyzed the Oakland Athletics’ move away from traditional scouting practices (focused on picking winners) and toward a focus on systematically shaping a winning team. Success came from understanding how value is created in the game, overcoming preconceptions about talent, developing a winning strategy based on undervalued talent, building a team to execute that strategy, and executing relentlessly against the strategy. Billy Beane, the general manager of the Athletics, made the game his game, and he won. Consistently. The whole field of scouting—a field devoted to picking winners—watched in disbelief (and denial).

The collection of papers in this reprint book provides a set of tools that R&D executives use to shape the risks of new business development. The approaches are more akin to Moneyball than to the tactics of picking NCAA brackets. All of them come down to managing and shaping risk: at the R&D project level, at the business opportunity level, at the organizational level, and at the portfolio level.

In “Valuing Risky Projects with Real Options,” Scott Mathews focuses on project risk and discusses an algorithm for valuing high-risk, high-return projects, using an example from Boeing to illustrate the method. Though the algorithm is itself innovative, a key contribution is Mathews’s discussion of the use of real-options thinking to simplify complex problems. The rules of thumb he discusses should help executives to think in more nuanced ways about uncertainty and to make appropriate decisions about actions to reduce risk in their specific contexts.

Robert Phaal and his co-authors address the challenge of managing risk by focusing at a level above the project: the opportunity. In their paper, “Charting Exploitation Strategies for Emerging Technology,” they propose the use of lightweight, agile tools to support strategic dialogue about R&D programs. The authors discuss in detail a tool they call emergence road mapping (ERM), which starts with a clear focus on the opportunity space and seeks to identify and manage defined milestones to realize it. At each stage, the discussion attempts to identify the key enablers of and barriers to success.

In “Tools for Managing Early-Stage Business Model Innovation,” John  Evans and Ray Johnson discuss what they call Innovation Readiness Levels (IRL). Drawing on, and complementing the Technology Readiness Level framework developed by the military, the IRL approach addresses issues related to an organization’s readiness to implement the business model required to capture value from an innovation. The authors used the approach at Lockheed Martin where, they say, the framework helped the company focus on opportunities with high future value and for which the corporation had a high IRL. As a result, Lockheed was able to target resources at those innovations with “a realistic chance of materially affecting the business.”

Finally, Marc Wouters, Berend Roorda, and Ruud Gal, in “Managing Uncertainty During R&D Projects,” discuss the project portfolio option-value (PPO) method they developed to facilitate decisions about highly uncertain R&D projects. The PPO method helps managers to represent, discuss, and value uncertainty and focus on key challenges and success factors, including interdependencies among projects. The authors use an example from Philips Lighting to illustrate the technique.

A key element of all of the above approaches is the creation of the clarity that enables strategic decision making. There is no magic formula that enables leaders to pick winners at an early stage, but there are tools that can help shape a winning portfolio. This collection should help those who seek to create winners by actively managing their risks.

To purchase your copy of this reprint book, visit the IRI Bookstore.