Executive decision-making often makes or breaks innovation success. Most organizations are capable of generating ideas, but struggle with the process of choosing when, where, and how to commit dedicated resources to explore or develop promising ideas.
In most cases, this struggle can be traced to an internal tension between innovation efforts and operational priorities. Most innovation practitioners adhere to the “fail fast, fail often” mantra, with a bias toward quick experimentation and action. In contrast, most senior managers must follow a more rigid, risk-averse decision-making rubric. How an organization reconciles these two viewpoints determines whether innovations thrive or evaporate.
Just as in medicine, science, and statistics, innovation decisions are prone to two fundamental errors. In the classic example of a false negative is a doctor decides a patient is healthy when in fact life-saving treatment is needed. In this case, it’s better to take action, just in case. The classic false positive is quite different – a judge condemns an innocent person to death by execution. In this case, it’s better to refrain from taking immediate action, just in case.
Real-world business decisions can easily produce either error type. For corporate innovation, it’s critical to understand which type of error is preferable in real-world situations – launching an innovation that ends up failing (false positive), or not funding one that could be successful (false negative)?
At first blush, it’s not a straightforward calculation. The answer depends on an honest assessment of the risk/reward tradeoffs for each error type – rather than blindly following the default big-company bias toward risk aversion. Finding the right balance is crucial. Let’s explore examples of each error type in action.
False positives drive unnecessary risks. Corporations exert tremendous effort to make data-driven decisions, in an attempt to avoid myriad cognitive biases (see HBR’s 2012 feature on Big Data). This typical bias toward objective, rational decision-making tends to penalize false positives (failed innovations) far more than false negatives (missing out on opportunities). Examples are easy to find: punishment was swift and unforgiving for the executives who attempted to improve the Coke formula, who required iOS users to use Apple Maps, who set up a new pricing structure for JC Penny, or who separated streaming from DVD distribution at Netflix.
False negatives create missed opportunities. On the other hand, periods of industry change or upheaval often create a strong need to encourage false positives. Much has been written about the advent of online retailing as the cause of Borders’ eventual demise. However, not all booksellers succumbed to these disruptions: Barnes & Noble (B&N) survived the transition, in party by developing their own Nook E-reader as a viable competitor to Amazon’s Kindle. Although there may have been no consequences for Borders executives when B&N launched their E-reader, eventually Borders was severely punished for its failure to embrace new business models.
Thankfully, not all companies behave like Borders. Recently, Sir Richard Branson claimed Virgin has created businesses in eight different sectors, each valued at more than $1 billion dollars. Yet a company poised to capture opportunities necessarily ends up with flops, too. Despite the success of Virgin America, Virgin Galactic, Virgin Media, and Virgin Mobile, there was also Virgin Cola, Virgin Brides, Virgin Cars, and Virgin Digital. These false positives, rather than failures, are in fact healthy markers of an innovative company culture.
What’s the right way for businesses to navigate the balance between missed opportunities and unacceptable risks? In the next section, I offer several tips drawn from real-world experience.