It is virtually impossible for leaders to pick the winning ideas on day one. This is particularly the case when it comes to novel ideas that the company has never worked on before. The business world is filled with examples of business ideas that leaders passed on that later become huge successes. There are also examples of the opposite – ideas that leaders strongly believed in and poured money into, that later became huge failures.
What makes investing in breakthrough innovation tough is that it is characterized by high levels of technical and market uncertainty. Despite the difficulty of making good decisions, leaders cannot be removed from the process. Instead, leaders can learn lessons about how to make better decisions. One way to learn these lessons is by developing an understanding of where decision making panels can go wrong when making investment decisions on innovation projects.
A recent study published in MIT Sloan Management Review examined R&D panels and identified the ways in which decision making can go wrong. The authors, Thorsten Grohsjean, Linus Dahlander, Ammon Salter and Paola Criscuolo, conducted a multiyear research project inside a global professional services firm. During the research project, they examined how eight selection panels composed of senior leaders made decisions. They also conducted qualitative interviews with several executives. In their analyses, the authors identified five ways in which R&D panels can go wrong when deciding to invest in innovation projects.
1. Bias Against Novelty
The researchers’ first finding was that R&D panels tend to show a strong bias against highly novel ideas. This discomfort was due to the high levels of risk that are inherent in pursuing highly novel ideas. Instead, the panels were more comfortable with intermediate levels of risk. This is an interesting challenge that is common in most organizations. Leaders want to be able to pick the winning ideas and the best way to do this is to select ideas that are low in risk. A possible solution is to embrace the idea of leaving things to chance. Make multiple small bets on highly novel ideas then increase investment only in those ideas that are showing traction. Allow the rest to fail and embrace that failure as part of the process.
2. Lack Of Diversity
The researchers found that most expert panels suffer from a lack of diversity. The panels within this research were often staffed with senior males. This lack of diversity can result in decision makers favoring projects from people who “look and sound like themselves”. A lack of diversity also impacts the potential novelty of the ideas that are presented to and approved by the panel. A possible solution is to ensure diversity on the decision making bodies and to also seek diverse voices within the company in terms of idea submissions.
3. Too Much Focus On Technology
One consequence of the lack of diversity in R&D panels is that they tend to be composed of scientists and engineers. The researchers found that these experts tended to focus on the technical aspects of an idea, while ignoring its business potential. Having a breakthrough technology is not the same as having a breakthrough value proposition or business model. Thorsten Grohsjean, who is one of the researchers and Assistant Professor at Bocconi University in Milan, proposes that, “Including people with both technical and nontechnical backgrounds on R&D expert panels makes selection teams more diverse and ensures that projects are evaluated not solely on technical aspects, but also on market potential, business planning, and strategic fit and financing.
4. Decision Making Process
The way decisions are made can also lead to problems. The researchers found that most ideas were introduced by one of the panel who acted as an informal sponsor. The challenge was that the sponsors framed the discussion by raising the issues they thought the panel should discuss. The way the sponsors present their ideas can bias and influence decision making. The best solution for this is to have standardized submissions that cover the key questions that the panel needs to be answered for them to make good decisions. These submissions must cover technical, value proposition and business model aspects of the idea.
5. Timing Of Decisions
Finally, the researchers found that the timing of the process can also impact decision making. They found that the decision to fund one project made it unlikely that the next project will be funded. This is a scary finding because decisions to fund are not being determined by the quality of the ideas. This is where the notion of making multiple small bets and allowing teams to test their ideas really matters. This is because, if the initial funding is easy to get, at later stages decisions can be made based on evidence rather than gut feeling.
A Breakthrough Technology Is Not A Breakthrough Business
Leaders need to embrace that they cannot pick the winning ideas on day one. What they can do is create the context in which the best ideas emerge. In order to do this, they have to move beyond technology and also think about value propositions that resonate with customers and business models that are profitable. Leaders also need to think about their decision making panels in terms of the processes they use to make decisions and the diversity of the teams making those decisions.