In my last blog post, I discussed why some projects with the potential to lead to the creation of a new category or subcategory are killed or defunded prematurely. There is the other side of the coin. Some projects that are based on incremental innovations that at best will affect brand preference at the margin are evaluated too optimistically.

An incorrect conclusion that an offering enhancement will create a new category or subcategory and should be managed accordingly not only wastes resources, but can set back the business strategy by years. Why are such misjudgments so prevalent? Why is there such a rosy picture bias in the evaluation process?

Reason 1: Psychological

The innovation champion may have focused for months and maybe years on the attributes and potential upside of the innovation and is excited about the prospects. There has been a well-honed logical argument that the advances are transformational, that it will create a new category or subcategory. It can be difficult to put aside this almost obsessive optimism and take the perspective of the customer, who is flooded with conflicting messages and faced with tough decisions about spending his/her money.

Reason 2: Professional

The innovation may be closely associated with the career or of a person or group inside the organization. A success would accelerate careers, and a failure, even a premature exit, might hold them back. A project can become part of the champion’s professional identity.

Reason 3: Organizational Momentum

If a project has been funded and part of the strategic vision and emerging product portfolio of a firm, it is part of the family. The process around its development gets institutionalized. It is easy to let it continue and hard to stop it or even raise the option of stopping it.

Because of the rosy picture bias, there needs to be a regular process that is objective, data driven, and involves neutral parties. The process should have periodic checkpoints where the project will be subjected to a go-stop-modify decision. The modify option means that there may need to be a change to make the project viable—a different application, target market, or technology. The process should carefully consider key questions. Is there a market or is it based on untested assumptions?

Remember one-stop financial shopping—that customers did not want? Can the firm deliver the offering? The new Tata Nano, the $2,000 car, had production issues that cast a cloud over its success. Can barriers be created so that any success will not be short-lived?

Apple was able to continually innovate to protect the iPod from others’ mounting challenges. Throughout, the firm should be beware of biases in processing information especially about the size of the market, the likely acceptance of the innovation, and the ability of the firm to hold off competitors. Information that fails to support the product may get filtered out or get distorted or minimized—confirmation bias in action.

There are compelling reasons why a firm should engage in substantial or transformational innovation to create new categories or subcategories. But concepts selected to accomplish this goal must be valued by the market, be doable, and have legs. Sometimes the best strategy is to say no.

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