|Book Review: Innovation Tournaments|
Innovation Tournaments: Creating and Selecting Exceptional Opportunities
Written by: Christian Terwiesch and Karl Ulrich. Boston, MA: Harvard Business Press, 2009. 304 pages.
The fuzzy front end of product development projects is widely recognized as a crucial stage in the development process. In these initial phases many ideas are generated; however, only very few survive the selection process and become a final product. For instance, in the biotech sector scientists may start with more than 10,000 ideas for molecules that may have potential and winnow them down to one or two successful products. The effective and productive idea generation has long been recognized to be difficult. But the scale of initial idea generation, with numerous alternatives up front, many of which may come from open source, creates innovation competitions and makes both the decisions on starts and termination critical to pipeline success. Moreover, it is in these initial stages that important tests are done to detect problems a project is likely to have. By reducing uncertainty early in the process with such tests, companies avoid spending too much effort and money later on “bad” projects. Many books have recently been written (e.g., Anthony, 2009; Cooper, Edgett, and Kleinschmidt, 1998; Levine, 2005; Verganti, 2009) on product portfolio/pipeline management; however, few books have focused on what goes on in these initial phases. Christian Terwiesch and Karl Ulrich's “Innovation Tournaments” approaches the topic from a holistic perspective, giving the reader a clear idea of the structural elements of an innovation tournament and an overview of the most effective and widely accepted tools to enable successful idea generation, selection, and development.
The first chapter of this book develops the concept of innovation tournament and illustrates the key variants of the tournament structure used in the book. It also identifies three key performance levers: (1) increasing the average quality of the opportunities; (2) the quantity of opportunities; or (3) the variance in quality of the opportunities. It shows how all tournaments start with many opportunities and filter them to identify the exceptional ones. This structured way to manage the front end imposes a number of organizational decisions. Will the tournament be open (with outside sources) or closed? Will it be a pure cascade, or will it be an iterative process, allowing initial opportunities to spawn others and eliminate ones to be improved and reentered in the competition? Will there be one round of elimination or multiple rounds?
Building on the structures and organizational decisions explained in the first chapter, the book focuses the next three chapters on each of the most important decisions. Chapter 2 deals with in-house sources of ideas; chapter 3 deals with outside sources; and chapter 4 deals with the screening of opportunities. These chapters present a series of techniques to help improve idea generation and screening.
In chapters 3 and 4, many possible sources or techniques to generate innovative ideas are explained, such as following personal passions, annoyance-driven innovation, and trend-driven innovation, but the authors emphasize that these ideas should be organized into a tournament by means of an innovation workshop or Web-based submission. According to them, recent research has shown that individuals are three to seven times more productive in generating ideas than are the same people in a group. On the other hand, groups can produce more varied ideas, some very good or very bad, that increase the chance to discover exceptional opportunities. The authors show how external innovation becomes more important when the company operates in an industry in which the minimum required scale for innovation is low, so the company must pay attention to opportunities discovered and exploited by innovators outside the company. They explain the most important sources of external innovation and show how these ideas can complement those generated in-house.
Chapter 4 is about the screening of ideas. The two requirements of this process are efficiency and accuracy; companies must be productive and terminate the right projects. The authors argue that the tension to achieve both objectives is minimized by evaluating opportunities in multiple rounds. After an initial screening, the best ideas move forward for an in-depth analysis. The authors outline three rounds of filtering. In the first stage they emphasize efficiency, explaining how to collect and vote on opportunities using a Web-based system with an automated rating process. In the second stage, they balance efficiency and accuracy, showing how to run an innovative workshop. And in the third stage, they shift the emphasis to accuracy. The logic behind this is that at later stages there are fewer opportunities to be explored, so each will be evaluated comprehensively.
Chapters 5 to 8 deal with strategy and profitability. In chapter 5, two basic approaches are proposed to identify opportunities aligned with corporate strategy: (1) filtering many opportunities using strategic considerations as the main criteria; or (2) directing the opportunity creation process to identify opportunities aligned with the strategy. The chapter suggests many analytical tools to help in this process, such as the value map (identifying product attributes and comparing them with competitors), analysis of attribute positions, user anthropology, traffic light, analysis of competences, and mapping of technology life cycles. The former three tools consider opportunities from the perspective of the customers, and the latter three tools emphasize the role of solutions.
Chapter 6 focuses on assigning financial value to opportunities and identifying the types and sources of risk. The authors propose three categories of opportunities based on the level of risk. Horizon 1 opportunities entail moderate parameter uncertainty. The company knows that revenue will be made but doesn't know how much. Forecasts are generated that can be too conservative or too optimistic. Companies can avoid these problems by consulting prior forecasts or using expert forecasters to do an analysis. Horizon 2 opportunities risk failure; in this case the ideal scenario may not play out. When valuing these opportunities, companies should spend just a little, learn with the experience, and then decide whether to make it bigger. Horizon 3 opportunities are so uncertain that it is impossible to even articulate a set of outcome scenarios. The focus here is on reducing uncertainty to allow for better decision making.
Chapter 7 deals with interdependencies between opportunities. The authors identify five kinds of interdependence: (1) market cannibalization, where one opportunity shares the existing market with another; (2) exploitation versus exploration, where exploratory opportunities open up future possibilities instead of creating a new market immediately; (3) smoothing revenues; (4) smoothing demands on resources; and (5) hedging against external risks (a diversified group of opportunities covers risks).
Chapter 8 is about managing far-horizon opportunities, which are unavoidably risky. A key decision managers must face is the extent to which the portfolio will explore new categories of products and services. The authors suggest an analysis of the structure of tasks required to pursue the opportunity as a tool to reduce as much uncertainty as possible with as little investment as possible.
In the final chapters the authors focus on the structure of the process (shaping the innovation funnel) and on the administration/organization of innovation. It is pointed out that most companies do not generate enough opportunities and could improve the quality of their products and services by generating more. At the same time, an increase in commercialization without an associated increase in opportunity generation will degrade the quality of the new offerings. The authors show that some tournaments are like cascades, where opportunities flow in one direction, or like whirlpools, in which opportunities can flow back upstream to be transformed and improved. Regarding the administration of the innovation process, the authors analyze multiple ways of organizing it. The creation of opportunities could be outsourced, and the company could focus on selection. Alternatively, the company could generate ideas but leave the selection to the market. Or the company could simply act as a host and let creative people from outside contribute. Besides choosing the organizational structure, it is also necessary to decide how centralized the process will be. There is a trade-off in this decision, because centralization brings efficiency but suffers from worse creativity. Decentralization enables quick experimentation and more creativity but breeds inefficiency. The authors suggest that a hybrid approach might often be the best choice. In doing so, companies are categorized in five groups according to their innovation maturity level, and a few steps are outlined for those just starting and those mature in their development.
Overall, the book combines sharp analysis with real-world case studies and examples of simple but effective tools that can be beneficial to any company trying to turn ideas into a successful portfolio of new products and services. The book also opens up a series of questions around the structural and behavioral aspects of innovation tournaments, which ought to promote follow on investigations by product innovation scholars.