Companies that rely on innovation for growth — that view the development of new products and services as their métier — must learn more than most to live with failure. For all the effort put into developing and marketing fresh ideas, many projects, particularly the bold ones, are unlikely to achieve commercial success or emerge as major growth drivers. Indeed, studies have shown that it takes as many as 3,000 raw ideas to result in one commercial success.
But lack of commercial success does not have to be a terrible result. If you keep your disappointments cheap, you can afford a lot of them. First you have to be able to separate the winners from the losers. To do that, Ian C. MacMillan, the Dhirubhai Ambani Professor of Innovation and Entrepreneurship at the Wharton School, and I have created a “barebones” net present value (NPV) calculator (available in our book) that assesses such factors as launch time, ramp-up time, competitive response, total investment, and projected annual costs and sales. This analysis, which can be revisited repeatedly during a project’s development, provides a simple way to compare innovation initiatives in a company. If a project consistently produces a negative NPV, continued funding cannot be justified and a graceful ending is warranted.
We call this process “pruning.” Just as a fruit tree yields more if its old, low-yield branches are trimmed back, so a business intent on growth needs to cut projects that are not promising. The goal is to shift resources from unproductive activities to higher-priority, more attractive opportunities. Because so much effort is required to get a project started, however, companies are often tempted to keep going, even after the project’s early promise has deteriorated. This temptation escalates as the investment of time, energy, and resources increases. The tragedy is that the energy of good people and the effectiveness of the organization can be compromised when innovators become trapped in what venture capitalists call “living dead” projects.
Project escalation often derives from the best of intentions. Researchers have identified three major sources of entrapment in a failed initiative: psychological entrapment, in which team members feel personally committed to staying the course; rationalized entrapment, in which team members feel that success is just around the corner; and social entrapment, in which team members are reluctant to withdraw from a project because of commitments they have made to one another and to outside parties. A simple way to determine if the team is trapped is to ask each person in the group to anonymously agree or disagree with a series of statements. These statements can explain why smart, successful people might consciously or unconsciously have continued committing their talent and resources to projects that reasonably should have been shut down. They could include:
- I feel we will lose the respect of others if this project is shut down.
- Stopping this project would have a negative effect on my career or that of other team members.
- We made a public commitment to this project, and it would look bad to break it.
- We’ve made commitments to outside parties (investors, suppliers, distributors, customers) and inside parties (directors, management, other divisions, employees), and we cannot or should not break them.
- We have had some good results and are at a turning point; it would be premature to stop now.
- At this point, it would cost us more to stop than it would to finish.
- People who want us to fail (rivals, competitors) will gloat.
If most of the group’s members agree with about a third or more of the statements, the team is at risk of escalated commitment. In that case, we suggest you have a frank discussion with team members about the various pressures that have little to do with the commercial promise of their project, and that may be clouding their judgment. You’ll have to tell them that some tough calls will be made about the project, but they will be made as thoughtfully and gracefully as possible.