Every choice you make comes with trade-offs.
This is especially true when it comes to strategic decisions around innovation.
If you choose to spend your time, focus, effort and money developing one idea or innovation, it means you cannot spend those same resources on other ideas.
Therefore, you must give up the opportunity to do something else in order to work on your innovation.
As an everyday example, if you only have $1 to spend on lunch, you could either buy a $1 donut, or a $1 apple, but not both. Whichever one you choose, you give up the opportunity to have the other (at that moment in time).
This is opportunity cost.
And while it is a fundamental principle in economics and investing, it is just as important in innovation management as well.
Most companies do not struggle with innovation because they have too few ideas.
They struggle because they have too many ideas but cannot execute on them effectively.
By having too many ideas and not enough resources, these companies often suffer from loss aversion, where they are afraid to invest too much into any one idea in case the other ideas might have been better.
By not being able to prioritise ideas based on what value they could bring, many companies might:
- Try to find the “correct” idea to invest in by producing extensive business cases, which are impossible for innovation projects
- Invest in ideas which are too similar to the existing business, and not enough in exploring more disruptive and transformational ideas
However, what if the company is thinking about the opportunity cost wrong?
Yes, you cannot invest in two full-scale innovation projects which require the same people, money and resources.
But what if the costs were not the same?
By running small scale experiments early on to validate desirability, feasibility and viability, it is possible to figure out which ideas are worth investing in further.
This requires a much lower budget and can be done quickly, allowing far more ideas to be validated, instead of hypothetical business cases being invented.
And the best way to achieve this is to put in place an innovation management and governance framework which allows fast, low risk validation of ideas. Frameworks like this often include an innovation budget pool and an innovation pipeline management processes.
This way, the opportunity cost of every idea is significantly reduced, and the success rate of new innovation projects is significantly higher.
I have developed a management framework designed to achieve all these goals, called the Lean Innovation Validation and Execution (L.I.V.E.) framework, which I will be releasing in the coming weeks.
If you would like to find out how L.I.V.E. can help you, get in touch and we can discuss.
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