Payback: Reaping the Rewards of Innovation - PCC - ebook

If you're like most people, you bet your career and company on innovation--because you must. Payback: Reaping the Rewards of Innovation offers you a new way to think about and manage innovation that will dramatically improve the odds of success. Authors James Andrew and Harold Sirkin, senior partners in The Boston Consulting Group, describe an approach to managing innovation based on the concept of a cash curve--which tracks investment against time. They ask the questions you need to ask: How much should you invest in a new product or service? How fast should you push it to market? How quickly can you get to optimal value? How much additional investment should you pour into sustaining and building the product or service? Payback offers you practical and economically sound advice on when to pursue cash flow indirectly by first pursuing other benefits, such as brand and knowledge. It also shows you how to reshape the cash curve by using different business models--integrator, orchestrator, and licenser--each of which balances risk and reward differently. The authors then present a short list of decisions and activities that you must make--not delegate--to achieve a high return on innovation. You won't find facile answers in Payback--but you will find valuable insights and practical guidance for mastering one of the most challenging and critical business activities: innovation.

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Table of Contents

Part 1: The four factors which affect payback

Part 2: Choosing the optimal business model for each innovation project

Part 3: Aligning and leading for payback


Table of Contents


Part 1

The four factors which affect payback

When it comes to successful innovation, cash is king. In order to manage the innovation process adroitly, it’s necessary to have a structured way to make good decisions. The most effective way to do this is to develop a “cash curve” which tracks overall cumulative cash flow over the length of the innovation project.

There are four factors which will ultimately influence just how much cash is generated by your innovations and which should be tracked:

1. Start-up costs – your prelaunch investment

2. Speed – your time to market

3. Scale – time needed to achieve volume production

4. Support costs – your postlaunch investments

This cash curve is a good way to track the four factors which will affect the cash payback on any innovation:

1 Start-up costs – the amount of money which must be invested up-front before a marketable offering can be made available. This capital is used in developing the assets and capabilities which will be required by the innovation. The larger the start-up investment, the greater the risk and the more marketplace success is needed.

2 Speed – or time to market. This is the time and investment needed to go from a working prototype to a product which can be mass produced and sold. Increasing speed will increase the cash payback of the innovation and decrease risk because it enables the company to capture a larger market share at a higher average price. Increases in speed, however, often increase start-up costs and impact on quality.

3 Scale – or time to volume. This is the time required from launch to where the new product or service achieves its planned volume. The faster an innovation reaches full production volume matched to market demand, the quicker it can begin generating cash profits.

4 Support costs – the cost of marketing and promotion, special pricing offers, product enhancements and even the cannibalization of other products. The lower the ongoing support costs, the greater the cash profits that can be harvested by the company.

The cash curve is a management tool which brings together all of the assumptions which have been made about how the innovation will perform in the marketplace. It also centralizes in one place the different perspectives which individual managers may have about what the company’s plan of attack should be. It provides a common point of reference so everyone can get on the same page. The cash curve is a reality test which is helpful because for new ideas, optimism tends to run rampant.

The cash curve also helps companies assess risk more accurately. For an innovation project, three types of risks are generally present:

■ Executional risks – whether the company can actually develop, make and sell the new product as scheduled.

■ Technical risks – whether or not the product or service will do what it’s supposed to do.

■ Market acceptance risks – whether custo- mers will actually buy in the numbers required.

The cash curve makes any of the trade-offs which are happening become obvious as well. There’s often an option to do things faster if you’re prepared to spend more money. The cash curve allows the company’s executives to discuss these choices and make them deliberately. Use of the cash curve will also identify innovation projects which end up being cash traps – development projects that end up absorbing more cash than they ever generate over their lifetimes. Sometimes most of the cash a new product develops has to be reinvested just to maintain a competitive position. Cash traps can destabilize companies so they need to be identified early on.

In addition to cash, there are also four intangible benefits which can be derived from innovation. These intangibles may not generate an immediate payback but at some point down the road they may lead to more cash for the innovation developer.