Turning Ideas Into Dollars

PAYBACK

Reaping the Rewards of Innovation

By James P. Andrew and Harold L. Sirkin

Harvard Business School Press -- 228pp -- $29.95

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Editor's Review

Star Rating

The Good A step-by-step program for innovation that actually makes money.

The Bad More how-to-instructions would help, along with more hard numbers.

The Bottom Line There's ample payback to be gained from reading Payback.

You're a pretty sharp executive. But maybe your company is suffering from slowing sales growth. Perhaps margins are getting squeezed. Or new competitors are stealing market share and talent. What do you do? Innovate, of course.

In Corporate America, acquisitions and cost-cutting are yesterday's strategies. Today, innovation is in. In a Boston Consulting Group Inc. poll of senior managers in 2006, 81% of chief executives listed innovation as one of the top three priorities at their companies. Further, 76% of CEOs told the BCG survey, done annually in partnership with BusinessWeek, that their corporate cultures foster innovation.

Despite their zeal, though, many companies come up short when it comes to innovation, observe veteran BCG consultants James P. Andrew and Harold L. Sirkin in Payback: Reaping the Rewards of Innovation. Typically, it's not because these companies lack smart ideas. It's that they don't manage to turn that winning concept into a winning product. "Most attempts at innovation fail to...generate enough payback," the pair write. "Payback means one thing--cash."

To better these returns, Andrew and Sirkin offer a step-by-step program for upper-level executives. Organized like a consultant's presentation--the authors are, after all, senior vice-presidents and directors at BCG--their advice is easy to grasp. Their book is also quick to read: You could probably breeze through the 22-page overview while the coach-class passengers file past to take their seats and be wrapping up the afterword before your flight from New York lands in Chicago.

The authors' main point is never to forget that innovation is only a means to make money. There are indirect benefits from innovation, of course, such as boosting morale and enhancing brand image. But unless innovation equals profit, it's not worth it. To see this plainly, Andrew and Sirkin urge executives to plot a cash curve. The chart measures four so-called S factors: startup costs, or prelaunch investments; speed, or development time to get to market; scale, or time to ramp up to peak volume; and support costs, which include marketing and cannibalization of earlier products.

Ideally, the curve follows the lifeline of Apple (AAPL )'s iPod. Certainly, design played a huge role in the product's dazzling success. Overlooked, argue the authors, was Apple's expertise in minimizing outlays and maximizing income. Apple kept its startup costs down, for example, by contracting out engineering work. As a result, Apple never had more than 50 employees on the iPod project team. By again turning to outside help, the company also hurried along the iPod's debut and ramp-up of production, hitting the market with ample supplies just before Christmas, 2001. All told, the authors estimate, Apple spent $10 million to develop the first iPod. Through 2005, they reckon, iPod-related sales came to more than $7 billion.

More often than not, however, the cash curve looks like the chart for Motorola (MOY )'s Iridium phone network. Motorola wisely put together a consortium of partners to share in the $5 billion it cost to start its new service, which included the launch of 66 low-orbit satellites. But there was no speed to market; it took 12 years to get from concept to reality. By then, mobile-phone networks had already won over many of Iridium's hoped-for customers, and at prices well below Iridium's. The venture went bankrupt in 1999.

"More than 30 years ago," say Andrew and Sirkin, "Bruce Henderson, founder of BCG, wrote, 'The majority of products in most companies are cash traps--they will absorb more forever than they will generate.' This is still true today."

Payback needs more how-to instructions. Yes, the cash curve is, as the authors say, "a case where a picture is worth more than a thousand words--it may be worth $100 million or more." But how to draw that curve when there are countless data points and every one is only a best guess? The book could also use more hard numbers. At LG Electronics, for instance, where the authors observed innovation teams, an executive related how many projects were under way (200) and how many were likely to have a big impact (10 to 20). But there are no figures on how much even one of LG's innovations cost or generated in sales or profit.

Based on its own cost curve, however, the book should put readers ahead. The up-front investment is minimal, and there's little time expended from start to finish. There's also ample payback in being reminded that innovation is likely to be no more of a fix-all than management fads of the past.

By Michael Arndt

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