Innovating for Cash

There are several ways to bring a new product to market. If you’re not looking at all of them, odds are you’re leaving big money on the table.

by

James P. Andrew

and

Harold L. Sirkin

by

James P. Andrew

and

Harold L. Sirkin

From the Magazine (September 2003)

Summary.

Despite companies’ almost fanatical worship of innovation, most new products don’t generate money. That’s because executives don’t realize that the approach they take to commercializing a new product is as important as the innovation itself. Different approaches can generate very different levels of profit.

Companies tend to favor one of three different innovation approaches, each with its own investment profile, profitability pattern, risk profile, and skill requirements. Most organizations are instinctively integrators: They manage all the steps needed to take a product to market themselves. Organizations can also choose to be orchestrators: They focus on some parts of the commercialization process and depend on partners to manage the rest. And finally, companies can be licensers: They sell or license a new product or idea to another organization that handles the commercialization process.

Different innovations require different approaches. Selecting the most suitable approach, the authors’ research found, often yields two or three times the profits of the least optimal approach. Yet companies tend to rely only on the mode most familiar to them. Executives would do better to take several different factors into account before deciding which tack to take, including the industry they’re trying to enter, the specific characteristics of the innovation, and the risks involved in taking the product to market. By doing so, companies can match the approach to the opportunity and reap the maximum profit.

Choosing the wrong approach, like Polaroid did, for example, can lead to the failure of both the product and the company. Optimizing their approaches, as Whirlpool has done, helps ensure that companies’ innovations make money.

The Idea in Brief

Generating lots of creative business ideas is one thing—but unless you make money from innovation, it’s just another expense. As many as nine out of ten new products fail. And most firms make the lion’s share of profits from just a handful of products.

Why is innovation so flawed? Companies often select the wrong approach to commercializing products. There are three approaches:

chain Your company manages all the steps required to develop and take a product to market, controlling every link in the innovation-to-cash .

rest Your firm focuses on certain parts of the commercialization process and collaborates with partners on the .

process Your organization sells or licenses new products or ideas to another organization that handles the entire commercialization .

Each of these approaches generates different financial returns and requires different levels of investment and capabilities. Choose the right approach, and your innovation may yield two to three times the profits of a less appropriate approach. Select the wrong one, and you may doom your offering and your organization.

Companies often opt for the wrong approach to avoid “giving away part of the margin,” automatically gravitating toward integration. Polaroid made this error by entering the digital realm as an integrator rather than an orchestrator or licensor. Lacking expertise in digital technologies, it was forced to invest heavily. The company’s first offerings were too expensive and too slow to market—and in 2001, Polaroid filed for bankruptcy.

The Idea in Practice

Selecting the Right Innovation Approach

How to choose the best way to commercialize your company’s innovations? Analyze each idea’s investment and capability requirements—and risks.

A little over three decades ago, Bruce Henderson, the Boston Consulting Group’s founder, warned managers, “The majority of products in most companies are cash traps. They will absorb more money forever than they will generate.” His apprehensions were entirely justified. Most new products don’t generate substantial financial returns despite companies’ almost slavish worship of innovation. According to several studies, between five, and as many as nine, out of ten new products end up being financial failures. Even truly innovative products often don’t make as much money as organizations invest in them. Apple Computer, for instance, stopped making the striking G4 Cube less than 12 months after its launch in July 2000 because the company was losing too much cash on the investment. In fact, many corporations make the lion’s share of profits from only a handful of their products. In 2002, just 12 of Procter & Gamble’s 250-odd brands generated half of its sales and an even bigger share of net profits.

A version of this article appeared in the September 2003 issue of Harvard Business Review.

JA
HS

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group, and coauthor of Globality: Competing with Everyone from Everywhere for Everything.

Innovating for Cash

The Idea in Brief

Selecting the Right Innovation Approach

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