What is the purpose of a CEO in relation to innovation?
While they are required to help form the innovation strategy and allocate resources, one of the most important responsibilities they have is in setting the attitude towards failure in innovation projects.
After all, we know that the majority of innovation projects fail. This costs time and resources.
But those which do succeed can bring significantly higher revenue and benefits than other forms of investment.
Imagine you are the CEO of a large multinational company. One which has tens of thousands of employees, hundreds of millions or billions in revenue, and therefore a large management structure.
You want to expand the portfolio of more transformational innovations, which might take longer, are more likely to fail but also potentially cost more but bring significantly higher returns if they do succeed.
Based on rough estimates, these projects might have a 90% failure rate, but if they do succeed could bring in 10x to 100x their initial investment over the long term.
So at your next board meeting with your 10 department heads, you set them the ambition of each of their departments taking responsibility to try and develop one such innovation. You inform them of the predicted statistics of success and tell them to get creative with their teams.
Here is where the difference in psychology can cause major issues.
In the mind of the CEO:
With 10 teams trying to develop new innovations, even if there is a 90% failure rate, one of the 10 teams will come up with a successful innovation that will pay for all of the other failures, and potentially even 100x more.
However, in the mind of each department head:
What? I have been set a challenge which is 90% likely to fail??? I cannot accept that. Failure would look terrible for my team, and therefore look terrible for me. We need to come up with reasons why we cannot afford to spend time and effort on this guaranteed failure.
This is the difference between someone like a CEO and a Department Head.
A CEO can think of success and failure at a portfolio level, where it is expected that the majority of things you attempt will fail but a small number of large successes will bring the overall returns. They are able to do this as they have the responsibility for a large number of departments, so as long as one succeeds, it counteracts the failure of others. And as long as there is one outside overall success, that is what the board, investors and the market care about. This is called the equal odds rule: in order to succeed, you need to try a lot of things.
However, for each individual Department Head, they will focus on the likelihood of their own teams’ failure or success. And if the information about potential success is uncertain, or even worse, is likely to be a possible failure, then their innate negativity bias and loss aversion bias will make them focus on the negative impact of the possible failure. And one of the most effective ways to not fail at this innovation challenge is to not try or get started.
This is one of the main reasons why even with well-meaning CEOs and innovation leaders in companies championing an “it is ok to try things and fail” mentality in a company, these efforts are often stopped by the corporate antibodies of managers who only see the downside for themselves individually if these efforts do not work out.
So how can you convince these managers to take on the challenge of trying these risky endeavors?
Well, either you can make each individual innovation project less risky, but then you run the risk of a focus on fewer transformational innovations and more incremental innovations.
Or, you can help each manager use the equal odds rule to their own advantage.
If each department head has a 90% chance of failure with their efforts, then if they only attempt 1 innovation, it is likely that they will fail. But if they attempt 10 innovations, one should succeed. And if they attempt 100, then maybe as many as 10 could work, of which 1 works very well.
By implementing a portfolio mindset in each team, and an innovation pipeline to test ideas quickly and an innovation budget pool to keep the cost of failure low, it is much more likely that each department head can change their perspective for a single point of failure, to a higher likelihood of multiple potential successes.
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