I will discuss some processes that support innovation and doesn’t sabotage it like some numerical tool can if used incorrectly.
Processes that Support Innovation (Blog 7)
I found this book helpful because it highlights flaws of pre-existing analytical methods and reflect on ways to evaluate projects in a better way. The authors felt that a method called Discovery-driven planning was more effective than using NPV and EPS.
Discovery-driven planning (DDP) is a practical tool that acknowledges the difference between planning for a new venture and planning for a more conventional line of business. It derives from Stage-gate Innovation (SGI), which is a technique used to divide a project by stages or decision points. SGI puts the spotlight on the analytics while DDP spotlights assumptions that will make the analytics fail. This eliminates managers having to manipulate NPV or EPS values.
Discovery-driven planning acknowledges that future values are unknown. The team first calculates an NPV using minimal revenue and cash flow values. They then create a list of assumptions that must prove true for the original number to materialize. Each step, the team revises the valuation based off of new information and use the assumptions to guide their values. If no set of plausible assumptions will support the case for success, then the project is killed.
Most companies or projects fail in innovating because managers don’t have good tools to help them understand markets, build brands, find customers, select employees, organize teams and develop strategies. This method of analysis is much more productive because it has living and breathing evaluations, meaning they can change. It takes much of the risk off of the company because the numbers change as the project and environment changes. Whereas, using an NPV analysis constructed in 2021 for a project being built next year may not be as accurate. While numbers help tremendously in valuations, they can hurt if not used properly.