Professor Karl Ulrich on Innovation Tournaments

I know of two ways to identify exceptional opportunities for innovation right the first is your organization can be led by a prophet who speaks to God now this is the prophet job or jobs I guess who can come down from the mountain and laid down the tablet and said we're gonna do this now the problem with that approach to innovation is I don't have anything else to say about it all right they're not making any more of him maybe I could say live righteously hope the best but but this is not necessarily a model that we can teach our emulate fortunately there's a second approach from a company that is almost as successful as Apple I suspect that the market share for this product in this room is close to 100% at least you've seen it what we see here is very interesting it's it's a very stark contrast to what we see with Apple where the Prophet tells you what to do and he's more or less right at least historically it was more or less right what we have here is a process that's actually much more transparent in which a large number of opportunities are identified by Google employees engineers developers and so forth those are fielded on a Google Labs page some of those make it onto the even more page some of those make it onto the more page and if they're really lucky they end up in the nav bar and maybe someday Google toshka will end up as what you see on the homepage when you type right now that structure is the structure that I'm going to call what I want to call an innovation tournament and that's really the central idea that I want to talk about today and it has this basic format a large number of raw opportunities enter a process and there's one or more development steps or filters until all only the exceptional few remain that's the basic structure that we saw at Google and in fact there are lots of other industries in which we see that same basic structure the pharma industry is is quite bizarre and unusual in its innovation processes so let's look at a successful innovation from Merck this is the statin drugs Okur which created about 50 billion in economic value from Merck over its lifecycle and the interesting thing about Pharma is that the rate of success in identifying exceptional opportunities is extremely low and so in pharma a pharma company will look at on average across the industry 10,000 newly discovered or synthesized molecules for every one that proves to be safe and effective in treating some kind of unmet medical need and so in fact that little gold circle right there that's zocor and and that is 10,000 circles control V control V control the incredibly tedious to create that slide and and the challenge in pharma if you think about it that's the base rate right that's the inherent if you will the inherent richness of the raw material they start with is 1 in 10,000 and the challenge in pharma is since it costs a billion dollars to take one of those molecules all the way through to commercialization the challenge is how do you explore 10,000 opportunities without going out of business because 10,000 times a billion is a really big number right now that's you could argue an extreme filter ratio 10,000 to one but we see the same basic structure in other industries so for example in the in the in the movie business you see the base rate in the movie industry is about two hundred to one so a movie movie studio will look at 200 one sentence descriptions of movies for every one that will eventually hit the theaters Pixar actually runs a little higher ratio so they run 500 to hopefully I've convinced you that that tournament structures are prevalent they're used widely and identifying exceptional opportunities they that's not new I certainly didn't invent that the question that I want to pose is how can we improve the performance of tournaments and in particular how can we improve the performance of innovation tournaments intrinsic to a tournament is the idea that you're gonna add value to something that you aren't going to ship right I mean that's what a tournament does it it carries forward opportunities that you're not going to eventually commercialize and as an operations management guy this is my turn this is the tournament I want to run right I want to identify the opportunities then I want to pick the winner I want to only add value to the winner and ship the winner right that's the tournament I want and if if Toyota if the Toyota Production system were applied to tournaments that's what it would look like all right now why why don't we do that no one's that good right you don't know you don't know you you probably picked wrong in fact you you almost certainly picked wrong if you picked just why I'm that's the whole point of a tournament is you're gonna make a small investment in order to be able to get a better estimate of which are the really the better opportunities ideally if you think about porosity or about these filter ratios you want the first round to be very generous and the reason for that is that the cost of the next stage is low all right you've very little spending on the next stage and your uncertainty is very very high and so those two things combine to say I want to be very humble about my ability to pick the winners on on this face I want this to be very generous at this point I have quite a bit of information and actually the next step is really expensive I get spent you know maybe have to build some prototypes I have to run a test market or I have to do something very expensive so if this in the later stage I want to be much more aggressive and I actually think this is counter to what we tend to see in managerial life which is we tend to get all caught up in criteria and screening and deciding on the first round and then we never kill anything once we get it in to the process and actually it should probably be the opposite right which is a general rule be more generous on the first round and then be quite ruthless on on the final round this discipline of saying what is the slightly more general articulation of the problem what is a slightly more specific articulation the problem is in my opinion this the the single most important first step in tact imposing imposing an innovation tournament to make sure that you've got the challenge articulated at the right level and as a general rule slightly more general than you're comfortable with I think is the way to go here right it's easy to eliminate ideas later it's hard to go back and say you know we really should have thought more broadly about this the second lever that I want to identify is you know the single the single most important thing you can do in a tournament is to ensure that a very large number of highly diverse candidates show up what we've discovered in our research is that in idea generation and innovation there is tremendous variation across individuals in terms of capabilities this doesn't surprise you when we talk about sales force it doesn't surprise you if we were to talk about running 100 meters somehow we find it a little more awkward when we talk about innovation but it's equally true and if you can identify who those people are you stacked the deck on really getting the best ideas well on the one hand from a cultural and organizational standpoint you want inclusion you you increase the performance of these tournaments by making sure that you've got the highest performers contributed and inclusion it by itself won't get you there at least it won't it won't get you as far as inclusion plus some focused idea generation by the very best if it is really the case that you can acquire better raw material at lower cost externally then you ought to go external right and and this is a quality dimension but you could also imagine a cost dimension you could look at sure you want to if you can generate ideas at lower cost outside do it it doesn't mean you don't put it into a tournament structure right it just says and in fact in in a survey organizations we found that about half of successful innovations were externally sourced and about half were internally source tournaments are everywhere the question isn't whether you use tournaments the question is whether is whether you can improve their performance four main ways to improve performance first make sure your challenge is not too broad and not too narrow you can use the five why's you can dial that in just right secondly ensure you get many and diverse ideas by independent parallel exploration solicit participation from the prover proven high performers stack the deck with that black distribution by identifying who it is in your organization is really effective at this making sure they have the resources they need to actually provide input and then lastly design your filters so that their generous early where the costs are low and the uncertainty is high and they're aggressive late where the costs are high and the uncertainty is much lower all right if you do those four things I think you'll be able to improve the performance of the tournaments in your own organization

One Comment

  1. Lycan AreOne said:

    Nice video — I think some software can help guide this process in already existing agile workflows. Gives me quite a few ideas, thanks!

    June 29, 2019

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