Why Failure Breeds Winners

5 Apr 2011 Sandeep Mehta

Business Week article Intelligent Growth: Why Failure Breeds Winners has two important lessons for R&D managers consider growth or innovation investments (and R&D planning in general):

(1) Define what failure looks like for growth investments—specify when and why disinvestment should occur. Then stick to the plan.

This is quite intuitive, but I have been consistently surprised at the lack of clearly defined goals/objectives for R&D projects. This lack of discipline always results in goal creep, waste of resources and reduction in R&D team morale.
So, the take home message is to develop a clear plan on how the growth bet (or innovation bet) is going to get delivered in products and tie investments to that plan.  Also decides what signals a clear departure from the plan and have the discipline to cancel projects if they do.  This plan would help combat the valley of death that frequently leads to innovation project failure.  Furthermore, this plan would also help to

(2) Upgrade your growth investment process by shifting analytical resources away from up-front screening toward life-cycle analysis. Create a ‘learning loop’ for management by dedicating staff to mid-cycle and post-completion project evaluations.

There is significant evidence that consistent evaluation of innovation projects can have tremendous benefits to the organization in terms of management learning and market understanding.  However, this is difficult to do:

Cycle discipline is intuitive but difficult to recreate in a large, complex corporation. Less than 10% of the companies we examined exhibited this kind of financial savvy for more than a few consecutive years at a time.

But well worth trying because the results are impressive:

Companies that are able to consistently grow sales and improve margin across multiple business cycles realize a 4.4% compound total shareholder return (TSR) advantage relative to industry returns over pure growth leaders, and a 5.4% compound TSR advantage over pure margin leaders.

Leave a Reply