Innovation story

Formulating Great Innovation
David Matheson, President and CEO
SmartOrg, Inc.
www.smartorg.com

David Matheson
Dr. David Matheson has helped senior management of firms in the
United States and Europe improve their results from portfolio
management, product development, innovation, R&D, capital
investment and strategy, and is an expert on measuring value and
managing uncertainty.
His practical experience covers a wide variety of industries, including
printing, software
development, biotechnology, telecommunications, chemicals, pharma
ceuticals, medical devices, manufacturing, electric power and
entertainment.
He is co-author of the best selling book, The Smart Organization:
Creating Value through Strategic R&D (Harvard Business School Press)
and has authored numerous articles on innovation, portfolio
management and decision making.
In addition to SmartOrg, his executive roles include: currently member
of the board at Photozini, Inc. and prior to founding SmartOrg in 2000, a
principal at Strategic Decisions Group.
His Ph.D. is from Stanford University, where he currently teaches on
Strategic Portfolio Management and other topics at the Stanford
Center for Professional Development
© 2000-2013 SmartOrg. | Confidential and Proprietary.2

SmartOrg software and services helps companies find
the most profitable projects
Life science Aerospace Technology Other

When heroes fail

A great technology and a compelling
customer need are necessary but not
sufficient to change the world.
What is missing?

The work of innovation: answering three
questions.
6
Market/ customer
need
Technology/ Product
Solution
Does
anybody
care?
Can we
Do it?
Should
we do
It?
Winning Opportunities
Strategic and
Economic value
© 2000-2013 SmartOrg. | Confidential and Proprietary.

Formulating Great Innovation
Course Purposes
To give you actionable insight on an innovation project
you are working on.
To improve your ability to formulate innovation projects.
To continue to build a community of innovators at HP.

Our image of innovation

The reality

Asking executives what worked and what didn’t:
• What have you tried in the last ten years or so?
• What worked really well and should become (or remain in) the
innovation canon?
• What did not work well, was significantly oversold or under delivered,
and should fade from memory?

The five must-do’s of innovation management:
1. Use iterative, learning-based processes.
2. Make uncertainty and ambiguity your allies.
3. Allow innovation to challenge strategy.
4. Experience your customers.
5. Find and support committed innovators.
Go to www.smartorg.com and
search for “assessing the state of
innovation” to download a
whitepaper and view a webinar.
PDMA Visions

Making Innovation Soar.
12
FormulateIdeate Incubate Accelerate
Reformulate
Committed
Innovators with
actionable insight
Aligned
Learning
Plan
Proven
Opportunity
Scalable
Business

Ideation: finding the committed innovator with
unique insight.

Niccolò Machiavelli on Innovation:
“It ought to be remembered that
there is nothing more difficult to
take in hand, more perilous to
conduct, or more uncertain in its
success, than to take the lead in
the introduction of a new order of
things. Because the innovator has
for enemies all those who have
done well under the old
conditions, and lukewarm
defenders in those who may do
well under the new.”

A common misconception:
“People think ideas are the input
to the process. This is wrong.
Ideas are the byproduct of the
committed innovator.”
Alberto Savoia
Serial Entrepreneur
Currently at Google

In every field, HHMI grants generated the most
important and innovative research.
Funds projects based on
rating proposals on multiple
criteria.
Funds researchers and
encourages them to explore
interesting topics.
Source: Jonah Lehrer, author of How We Decide, from his blog “The
Necessity of Funding Failure.”

Having committed innovators is not enough;
your innovator needs actionable insight.
Market Customer Technology Trend Etc.

Formulation: aligning on a learning plan.

Success FactorsShelter the project from internal
metrics and processes
Banish supplier / procurement thinking
Have the tough conversations up
front
Negotiate based on principles
Never over estimate your
knowledge
of your partner
Every decision needs to improve
risk adjusted value
Communicate your vision (prepare
the market, build your brand)
Market disruptions are often driven
by technology innovation
New businesses fail for commercial
reasons
Internal
Partner
Value
Creation
Market
Disruption
1
2
3
4
5
6
7
8
9
The more outrageous the vision,
the more resilient the program10
Real-time traffic
conditions
Security/Access
Climate monitoring
Water/Gas
Infrastructure health
Home automation
Home security

Aspirations are low

Can we distribute motor oil in a cardboard box?

Frost & Sullivan wrote up a best practice
guidebook for the Formulation Phase.
See a webinar or download at: www.smartorg.com/hpguidebook

How to develop a DVD burner that writes its own
label? (circa 2002)
A feature in our
computers

Multiple strategies – need to learn which is best.
A feature in our
computers
License out
A consortium-
based inside brand

Which uncertainties matter?
Future disc usage? Bill of Materials Cost?
Strong growth supported
by multiple third-party
experts.
Detailed engineering
estimates and contracts
show BOM within 5%.
Team not concerned. Team very worried estimates
might be 10% off.

Lightscribe sensitivity analysis (Tornado Diagram)
Loss Small OK Good Great
NPV given launch success
The team was focusing on the wrong factors.
If mp3 players
take off, then
business is small
If copyright favors disc
distribution, then
business is great
BOM
uncertainty
has limited
impact on
business

Incubation: delivering on the proof points.

Work vs. proof: HP’s idea for the “ATM
of photo printing.”
• What is the biggest source of risk?
• Supply Chain
― Very difficult to set up, very complex
― Large source of schedule and budget
variance.

Work vs. proof: HP’s idea for the “ATM
of photo printing.”
• What is the biggest source of risk?
• Supply Chain = needs work
― Very difficult to set up, very complex
― Large source of schedule and budget
variance.
― HP is world class at this!
• Behavior change = needs proof
― Will someone encountering a station
on the street pull out their camera
card and print?
― To get evidence, saturate an area
with prototypes.

31
Technical
Phase Cost ($M) Uncertainty
Probability
of Success
Product Development 2$ 47%
Performance 95%
Reliability 90%
Channel Partner Trials 55%
Scale -Up 10$ 8%
Ease of Use 25%
Business Model Validated 35%
Channel Partner Commitment 90%
Total Cost 12$ Million 4%
Expected Cost 10.9$ Million
Common plans: morale building, strength
focused
Big questions left unanswered until late in the project—an
expensive way to fail. Note Expected Cost and Total Cost
are close.
A risky project. The overall probability of technical success is the
probability of overcoming all the hurdles in all the phases.

32
Technical
Phase Cost ($M) Uncertainty
Probability
of Success
Product Development 2$ 5%
Ease of Use 25%
Business Model Validated 35%
Channel Partner Trials 55%
Scale -Up 10$ 77%
Peformance 95%
Reliability 90%
Channel Partner Commitment 90%
Total Cost 12$ Million 4%
Expected Cost 2.48$ Million
Venture plans: manic anxiety, uncertainty
focused
Revised Project Plan
Reordering plan to “fail fast”
radically reduces expected cost.

Print Engine
Fast 4x6 Print Engine
Addressing the needs of incumbents
“Dry” Photofinishing lab
Semi-Attended Environs
Low Volume Stores
“Can I get the printer part
of the kiosk”
“Just chop the head off,
add an Ethernet, and
I’ll write you a check!”

Acceleration: growing up.

What is the best first major account for your new
business?
You have launched a business.
• Customers are enthusiastic about the product.
• You are making money (gross margin), but still require investment
to grow.
• The product is in version 1.0.
• Manufacturing is ramping up.
OR

Adolescent businesses need adult challenges in
a safe environment.
Need P&L discipline without
crushing pressure.
Require the flexibility to adjust.
Have lots of awkward issues that
need to be worked through.
Metrics that transition to full P&L
accountability.

Making Innovation Soar.
37
FormulateIdeate Incubate Accelerate
Reformulate
Committed
Innovators with
actionable insight
Aligned
Learning
Plan
Proven
Opportunity
Scalable
Business

SmartOrg® provides software and services to help companies evaluate their opportunities
and make the best decisions about where to invest, especially when the future is clouded
with uncertainty. Customers use SmartOrg® to build their capability in driving innovation
from idea to commercial results and in selecting projects, improving returns in their
portfolio.
SmartOrg® helps companies to attain the highest value from projects and portfolios.
855 Oak Grove, Suite 202
Menlo Park, CA 94025 USA
T: +1.650.470.0120
info@smartorg.com
www.linkedin.com/company/smartorg
@smartorginc

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