Innovation & getting past loss aversion

Extract from book: “Risky Strategy” to be published by Bloomsbury in August

 

At Procter & Gamble this was referred to as ‘minimising the cost of failure’. The idea is that we reduce cost, and therefore the risk of failed innovation, by having regular check points or gates at early stages in the process, which provide opportunities to check out of the innovation process before too much is invested.   Our old friend ‘loss aversion’, and its close cousins ‘cognitive inertia’ and ‘confirmation bias’, are increasingly at work, seeking to trip this process up. At what point is too much invested in the process to feel comfortable to walk away with a guaranteed loss, while there is always the chance that it could still be a successful gain? To what extent do we continue to look for reasons why the innovation may not be right, compared to our reasons for persevering?

The Silicon Valley phraseology for this kind of approach is ‘failing fast’. The implication is that your expectation is managed because you expect to fail – the thing that’s important is that it happens quickly, you learn quickly and move on. Speed is of the essence. It would appear that, not just because in a world where technology is supposedly changing fast and markets are changing swiftly, being ahead of your competition is a distinct advantage. But also, ‘failing fast’ means you have not got too fond of your pet project; it’s not your baby to try and protect. As a result, cognitive inertia doesn’t have a chance to set in. And ‘failing fast’ means you have not built up too much cost before it becomes sunk cost.

 

It takes a certain type of character (or deep pockets) to be able to walk away from a lot of sunk cost on an innovation project that is going nowhere. I was at Mars Confectionery as a management trainee, in my early career years, when I witnessed Forest Mars turn up to our offices in Slough, and tell local management to start ripping up the Banjo line. Banjo was a chocolate wafer bar that was innovative because its main ingredient was a chocolate substitute, which was significantly lower cost than real chocolate. It had tested positively in research and test markets, and gone to full production. The Banjo line was the biggest and most efficient in the factory, using latest technology, for packaging as well as product. However, it was not tracking to plan, and while it was achieving profit, it was not achieving the required level of return on assets that the Mars family set for all its businesses. As far as Mars was concerned, it was therefore taking up valuable space and management time which could be better employed on better ventures. So it was stopped, and the investment written off. This type of risk mitigation is itself high risk for most business leaders.