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Five Reasons Why Innovation Decisions Succeed 2.5X More Often At Top Companies

Erik Larson Oct 27, 2023 7:45:00 AM
Top companies are 2.5 times more likely to make successful innovation decisions.

Innovation is critical for business success. One McKinsey survey found that 84% of executives agree that innovation is the key to growth, and their 2021 global survey found that the top ten percent of companies earned almost twice as much revenue from products and services that didn’t exist a year before. This importance drives enormous investments – US businesses spent $538 billion on innovation in 2020.

Innovation is also notoriously tricky. It’s difficult to identify customer needs, design and launch products and predict how competitors will react. It’s even difficult to find data about how often innovations succeed. While the late Harvard Business School innovation guru Clayton Christensen is widely quoted as saying that 95 percent of new products fail, it turns out that he never said such a thing and typical failure rates are in the 40 percent range. That still adds up to $215 billion in lost innovation expenses in the US annually, even without including forgone revenue from failed offerings.

The stakes are high, and companies need innovation benchmarks to compare their performance against and diagnose how to improve. Recent research I completed based on survey responses from attendees at the 2023 Consumer Goods and Marketing Summit provides a practical new perspective on the problem.

2.5X More Likely To Fail, 2.5X More Likely To Succeed

The survey of 21 companies used the Decision IQ framework to measure the effectiveness of innovation-related decisions and compare the results to broader business decision-making benchmarks.

The comparison is stark. According to the survey analysis, innovation decisions are 2.5 times more likely to fail than typical business decisions, with outcomes missing expectations 50 percent of the time. That failure rate aligns with the previously mentioned research findings about innovation success rates, which is unsurprising since decision-making effectiveness is 95 percent correlated with business performance.

More importantly, the survey results show that successes and failures are not evenly distributed. Innovation decisions at the top half of companies succeed 76 percent of the time, compared to a 31 percent success rate for the bottom half and a miserable 15 percent success rate for the worst decile. In other words, the top companies are 2.5 times more likely to make successful innovation decisions.

Five Traits Of Successful Innovation Decision-Making

The Decision IQ framework also diagnoses the decision-making behaviors most correlated with successful innovation decisions. These traits can serve as a roadmap for companies struggling to achieve greater innovation success and a benchmark for top companies to maintain their excellence. In order of importance based on the relative strength of each trait amongst top companies:

  1. People are empowered to make decisions, willing to take on the responsibility and motivated to follow a high-quality decision process. Innovation decisions demand more empowerment, motivation and discipline, given the relatively high likelihood of failure innovators face. Highly successful companies disproportionately foster these traits.
  2. Organizational values, goals and priorities are well aligned. The combination of higher decision failure rates and longer timelines involved in innovation cycles places more pressure on organizational alignment. It’s hard for a toothpaste company focused on dental health to sell innovative beef lasagna, no matter how delicious.
  3. Innovation decisions are executed as intended. Execution is essential for successful innovations since they often require go-to-market, manufacturing or business model strategies that differ from a company’s standard practices. Top-tier companies carefully consider these execution challenges when making innovation decisions and include associated investments in their calculus.
  4. Innovation results are tracked and reviewed to fix deficiencies in the innovation process and incorporate lessons learned into future decisions. While innovation decisions are 2.5 times more likely to fail than typical business decisions, and failure is often the best teacher, learning can only happen if lessons are captured and fed back into the innovation process. Companies that consistently make post-mortem feedback a step in their innovation process reap the rewards by taking action to improve future innovations and adjusting in-flight innovations.
  5. Analysis and input from key stakeholders is given appropriate weight in the decision-making process. Individual intuition is much less reliable when making innovation decisions because such decisions involve combinations of ingredients, customers, distribution channels and other attributes beyond the decision-makers' experiences. To manage this, successfully innovative companies emphasize careful analysis and take a holistic view of innovation-related decisions, incorporating perspectives from all the stakeholders involved in bringing a new offering to market.

Performing well in these areas does not guarantee success for every innovation decision, but falling short in any area significantly increases the risk of failure. Innovation is complex, no one can predict the future and it is hard to overcome lousy luck. In the face of this uncertainty, top-performing companies must work hard to stack the deck in their favor.