Running the numbers on innovation success and failure
By Tatsuya Nakagawa
As the recession deepens, more and more I’m reading articles about how we’ll emerge from these tough times. Though every downturn is different, it’s often helpful to look at the past, and it only takes a glance to find out that entrepreneurship and innovation tend to lead the way out.
But despite the hype and the very real opportunity, succeeding at innovation isn’t all that easy.
In corporate circles a 70 to 80 percent new product failure rate is considered common. Yes, that seems high, but sources as varied as the Boston Consulting Group and Booz Allen Hamilton have published studies that confirm these numbers and recommend a goal of continuous innovation to beat the odds.
Major corporations and those known as leaders in new product development use a portfolio approach toward sales, counting on products at various stages of the product life cycle to contribute to overall sales. New products are an integral part of the equation.
A typical goal for established B2B and consumer products companies is to have new products contribute 25 percent of total sales each year. Companies in more fashion forward industries of course may have as much as 100 percent of sales each year from new products. With a 70 to 80 percent failure rate that’s a lot of resources thrown at innovation.
But it pays off. Companies that are leaders in innovation become the pacesetters for the rest of the industry. The other players are forced to keep up or get knocked out of the never-ending race.
While large companies with their superior resources tend to have a program in place to ensure that they remain competitive through innovation, start-ups, which often rely completely on a new idea, have an abysmal failure rates. Less than a third to one-half of all start-ups are still in business three to five years later. Those with a great new idea fail at an even greater rate, which is why venture capitalists and finance people generally have a hard time dealing with start-up companies based on a new product idea.
Let’s take a quick look at the math.
If we consider that 70 to 80 percent of all new products fail, the inverse is that approximately 25 percent succeed. Now let’s review those start-up success rates of one-third to one-half. Combining the two rates, we come up with a success rate for start-up companies based on an innovative new product of, generously, one out of every eight companies.
Suffice to say that the odds of success for start-ups and lone inventors, even those whose ideas are covered by patents, is low. That isn’t to say it’s impossible. The odds change dramatically when you add in experience, contacts, and resources, something that most successful entrepreneurs have—usually after starting their third or fourth company.
The odds improve even more though when you consider the major impediment to successful innovation, what we call “inventoritis”—that is, losing perspective; becoming emotionally attached to a product or idea; and misreading or not reading the market at all. Overcome these hurdles and the daunting statistics on new product failure look more like an opportunity and less like an impediment.
Tatsuya Nakagawa is the president and CEO of Atomica Creative Group, and the coauthor of Overcoming Inventoritis: The Silent Killer of Innovation (Happy About, 2008).