21st century jousting

Joseph Schumpeter famously characterized capitalism as creative destruction. "Innovation Tournaments" by Professors Christian Terwiesch and Karl Ulrich (Wharton School, University of Pennsylvania) shows how tournaments can help to excel in the creative dimension.

	Title:	Innovation Tournaments
	Author:	Christian Terwiesch and Karl Ulrich
	Pages:	242pages
	Publisher:	Harvard Business Press
	Price:	$35

As befits professors of Operations and Information Management, the authors of Innovation Tournaments begin by providing their working definition of an innovation: a new match between a need and a solution. The process of innovation can therefore follow three paths: identification of a new need, discovery of a new solution, or a novel manner of marrying an existing need and an existing solution.

But before innovations are developed and hit the market, there are what the authors call opportunities, that is to say seeds that might grow into an innovation. Not all seeds become innovations – the trick is to find opportunities that result in valuable innovations. Increasing the supply of exceptional opportunities is the name of the game and innovation tournaments are the game.

Innovation tournaments are a competition among opportunities. They start with a large number of contestants, apply filters over a number of rounds and result in the selection of a small number of outstanding opportunities. In Darwinian terms, think of them as organized generation followed by structured selection of the more exceptional.

Among the examples provided by the authors of innovation tournaments used by companies, here are three. Deloitte organizes an annual tournament open to its 43,000 employees who generate initial opportunities. Subject-matter experts then select those opportunities that proceed to the collaboration phase. In this phase, idea owners build a team and enhance the opportunities. In the final phase, winners are selected, with employee input as one of the selection factors. Since the creation of the tournament more than one thousand ideas have been submitted and ninety winners named.

Dow Chemical runs an annual tournament in which factory staff under the supervisor level submit opportunities that must cost less than $200,000 to implement and pay back within a year. An audit of the winning innovations has revealed average returns of 204% and annual savings of $110 million.

Innocentive is a company that organizes innovation tournaments, often for technology companies seeking to overcome specific challenges. Innocentive publicizes the problem, interested people respond, the customer and Innocentive select the winners who are paid a cash award.

Generating opportunities
The authors suggest a number of techniques for generating opportunities. You’ll recall that an innovation amounts to a match between a need and a solution. So one way of fashioning opportunities is to take existing innovations and see if the technological solution can be applied to another need or whether the need can be satisfied by another technology. The authors use as an example of a need, the craving for caffeine, and as example of a technology, dissolvable film strips (such strips were pioneered by Pfizer in their Listerine PocketPaks). New opportunities that can be fashioned from the caffeine need or the film strip technology? Caffeine jelly beans. Vitamin film strips. And so on.

A second method is either to decommoditize a commodity or to drive a high-end innovation down market.  For an example of the former, look at what Altoids did for breath mints. As an example of the latter, the authors cite the inventors of the Spin Pop, a lollipop spun by a little motor, who applied their expertise and took expensive electric toothbrushes down market by creating the Spinbrush costing less than $10.

Deconstructing a product or service into its attributes, or a business model into its functions can also serve as an opportunity starting point. Vary the performance levels (upward or downward) of one or several attributes; imagine different ways of performing one or several of the business functions - those variation exercises will generate new opportunities. For example, the London Stock Exchange Alternative Investment Market innovated by offering lower capitalization and revenue requirements for listing than did the NASDAQ with the advantage of offering better IPO affordability.

Screening opportunities
Once opportunities have been generated, they need to be screened. The screening process needs to steer a course between efficiency (don’t spend too many resources) and accuracy (don’t eliminate good opportunities of select only mediocre ones). One of the filters to be applied is financial attractiveness. The authors suggest the construction of a return curve which visualizes the opportunities in terms of their profitability and investment requirement (see box).

Web-based screening processes tend to excel at efficiency. The authors have developed presentation and selection software, which they have appropriately baptized Darwinator (available through www.innovationtournaments.com). The software asks for a one page electronic summary of each opportunity; all opportunities are then voted on electronically by a number of evaluators (usually ten to twenty).

Workshops may be less efficient than Web-based tools but they can provide more accuracy since group discussion will allow for multiple input and revision of opinion. To maximize presentation efficiency, the authors propose a 2-1-0 rule: two minutes of presentation, one slide or poster, zero questions. To prevent the herd mentality from taking over in selection, electronic voting can be used, even in a workshop setting. Another advantage of electronic voting is that it generates a data set suitable for detailed pattern analysis (see box for more on organization of workshops).

Sourcing opportunity generation and selection
Opportunities can be generated by company employees themselves or by outsiders. Similarly, selection can be sourced internally or externally. The authors classify organizations into four types based on the sourcing of generation and selection.

Integrated innovators generate and select opportunities internally. Typically these are firms where a high degree of technological expertise is required so that outsiders do not possess the required competence. Experimentalists generate their opportunities from within, as do integrated innovators. But unlike integrated innovators, experimentalists bring in customers to do screening. MTV is an example of a company that runs its opportunities by consumers to try to avoid market failure. Publishers are firms where opportunities can be generated by customers while selection will be performed by in-house experts. Staples sources some of its innovations from outside, for example the BandIt (a rubber band with a label),. Red Bull was born when Dieter Mateschitz modified a Thai drink, Krating Daeng, to satisfy European tastes. Innovation Hosts depend the most on outsiders since non-employees both generate and select the opportunities. YouTube is an example of an innovation host.

Shaping the innovation funnel
The shape of the innovation funnel is determined by the number of opportunities generated and by the number of selection rounds. A higher number of opportunities means a wider funnel mouth; a higher number of selection rounds means a longer funnel.

In some industries such as pharmaceuticals, the expected profit from a good opportunity can be much greater than the profit from a quite good opportunity. As a result the funnel mouth needs to be very wide. Pharmaceutical companies will often consider 10,000 opportunities in the initial phase. In other industries, think of film animation and Pixar, the return differential between good and quite good is not so drastic so the funnel need not be so wide – a movie studio will consider 500 or so pitches in the initial round.

In the authors’ view, most companies do not generate enough opportunities initially; they need to widen their funnel mouth. Wider funnel mouths mean higher average opportunity quality. They also can mean greater variance of quality opportunity (more opportunities rated very highly, more opportunities very poorly) which is the mark of a good tournament.

The widening need not be very expensive. The authors run opportunity generation workshops and have found the cost to generate and screen opportunities to come out between $50 and $500 per opportunity (20 professionals at a cost of $2,000 per day, generating and screening 200 opportunities comes out to $200 per opportunity).

Another factor to keep in mind is the length of the funnel. The winner at the end of the tournament is not always the opportunity that was ranked first at the end of the initial round. A good innovation tournament is one that does not eliminate an eventual winner – one way of achieving that goal is by ensuring a sufficient number of selection rounds which will keep several highly rated opportunities in the tournament.

Opportunity portfolios
Balancing opportunities through the use of an opportunity portfolio is a way of maximizing the probability of a continuous stream of innovations, both in the short term and in the longer term. To encourage innovation sustainability, the authors introduce the concept of three different opportunity horizons. It is the prior existence of a market or technology as well as the company’s familiarity with the market or technology that differentiate the horizons.

Horizon 1 opportunities involve familiar technologies and familiar markets. Horizon 2 opportunities connect existing but unfamiliar markets or technology. Finally, Horizon 3 opportunities involve new technology and new markets. Horizon 1 opportunities entail relatively easy exploitation while Horizon 3 opportunities are about risky exploration. A company should cover all horizons: without the close-in innovations the company won’t make it to the future and without the far-out opportunities, it won’t survive in the future.

Smoothing revenues and resource use should also be a benefit derived from a portfolio. The development of opportunities will require resources over time. The resources required each year by opportunities in the pipeline can be visualized in a resource stack diagram. In the near future, the stacks should hover around the capacity line (no gross undercapacity or overcapacity) and decrease out into the longer term future. Being responsive to the environment will generate new opportunities which will fill out those further out resource stacks.

Casium hopes that this presentation of innovation tournaments has been edifying. But we caution that it is not exhaustive – there is more in Innovation Tournaments than we can cover here. Given that the book is also a well-edited and well-charted work, anyone strongly involved in innovation management will derive some benefit from a more detailed look at it.

Published November 2009