For years we’ve been perplexing about why so many wise, diligent managers in famous companies find it difficult or even impossible to innovate successfully. Our investigations have unveiled a number of reasons. These include paying too much attention to the company’s most profitable customers (thereby leaving less demanding custormers at risk) and creating new products that don’t help customers do the jobs they want to. Now we’d like to list the misguided application or 3 financial-analysis tools as an accomplice in the conspiracy against successful innovation:
- Usage of Discounted Cash Flow (DCF) and Net Percent Value (NPV) to evaluate investment opportunities causes managers to underestime the real returns and bonuses of proceeding with innovation investments.
- The way that sunk and fixed costs are considered when evaluating future investments grants an unfair advantages on challenges and shackles incumbent firms that attempt to respond to an attack.
- The emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation to the exclusion of almost everything else, diverses resourses away from investments whose payoff lies beyond the immediate horizon.
They aren’t bad tools and concepts. But the way they are commonly wielded in evaluating investments creates a systematic bias against innovation.
So, we will recommend alternative methods that can help managers innovate with a much more keen eye for future value like Stage-gate innovation and Discovery-driven planning.
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