Monday, August 22, 2016

We discussed topics like this extensively in our Driving Organic Growth and Innovation class. Rita McGrath is one of the leaders in this area of driving growth in uncertain business environments.

Innovation is on a roll these days as a hot topic of conversation. Unfortunately, despite all the talk about it (search on “Innovation” and it returns approximately 500,000,000 results) the doing, to many, is still a black box. Indeed, a recent McKinsey survey reported that 86% of the executives that responded thought that innovation would be highly important to their future growth strategies, while 80% reported that they were concerned about their business models being challenged. Only 6% reported being pleased with their company’s innovation performance, and the most telling response to me is that the 94% who were not pleased with how their innovation process was going had no idea what the problem was.... 
....My CEO won’t invest in innovation unless I can give him an ROI projection
 This is an all-time classic problem – see Clayton Christensen and colleague’s excellent article “Innovation Killers” for why. The first thing senior executives need to understand is that as uncertainty in your operations increases (as it does when you are doing something new to you), the value that is being created can in no way be captured in a present value calculation. Instead, you need to think of it in terms of option value. Consider the graphic above – as uncertainty increases, the present value component of value decreases, to the point at which when you are waaay out there the value you are creating is almost entirely option value.
....So what I would tell my ROI-hungry CEO is that… “unless you are investing in those hard-to-value but opportunity creating options (high uncertainty), you are implicitly voting that today’s business more or less as it is, is going to drive your growth needs in the future.”