PM weekly: Pretotype Maths — Increase Innovation Leverage
How Can a Company Expand its Innovation Pipeline 10× ?
10× is the mindset of improving thing in big leaps rather than incrementally. It is the mindset of disruptive innovation. It is the mindset Google asks of all of its employees.
So why is the process of innovation static? A “this is how we do things round here” process? Why not change the process for innovation itself and make it 10× ?
Pretotype 10× is about the number of innovations you experiment with. The more innovations you try in the market, the more hits you will find.
Hold on, where’s the innovation in just increasing your budget? 10× the innovations tried will bring 10× the successes, but also at 10× the cost…
Not quite so!
Pretotyping is about testing an innovation objectively (in the market rather than in focus groups or through surveys) AND with the minimum investment of time and money.
The cost of pretotypes is so low that you can explore 10× innovations at the cost of developing one, and even more!
Let’s make some back of the envelope calculations to see if Pretotyping can really bring such a big advantage.
What’s the Cost of an Innovation?
Say we have 10 products in our innovation portfolio. Each one is developed from start to end because Thoughtland told us that it would be a Hit. As always happens, Reality will have its say and just 2 out of 10 will be a Hit, the remaining 8 will become a Flop, possibly after a Slow Failure.
So, what’s the real cost of innovation? Say the average development cost of each is 100. Each Hit will have costed 500, that is 5 times the full development cost of a single innovation (10 * 100 / 2 Hits).
OUCH! We should do better. And we can.
Enters Pretotyping.
What’s the cost of Pretotyping? Well it depends, the simplest experiments can cost close to nothing and can help spot pretty soon a False Positive to discard, thus confirming a Negative.
If it’s not a confirmed Negative you’ll keep pretotyping with more articulate experiments and refine the innovation idea and market, till the point where you are confident you spotted a real Positive or a real Negative.
What’s the cost of this? It can be anywhere between 1% and 10% of a FULL innovation development, so between 1 and 10.
Say we Pretotype all 10 Innovations.
The False Positives are likely to be discovered soon, at a cost of 8 × 1, let’s round it to 10. That’s 10% of a single innovation full development.
The remaining 2 innovations (those which will become Hits but we don’t know yet) might require more testing to prove they are real Positives. Say we spend 10 each.
- Total cost of Pretotyping = 10 + 2 × 10 = 30, that is 3 units each.
- 2 innovation fully developed at a total cost 0f 200
- Number of successful innovations = 2
- Cost per successful innovation 230 / 2 = 115 instead of 500 !!!
Hey, the budget for 10 innovations was 1,000! What will you do with that extra money? It’s 770 units, equivalent to the development cost of 7.7 innovations. Shouldn’t we invest it into more innovations? At 115 individual cost, we can create almost 7 Hits MORE!
Where Do These Other Innovations Come From ?
Pretotyping helped us get rid of False Positives early on, but what about False Negatives? Those ideas that Thoughtland dropped, which in Reality might become hits and will never see the light?
If you don’t try you’ll never know. They will remain just Missed Opportunities. How many Thoughtland Negatives did you drop in the process that were actually False Negatives?
Now you have all that spare budget, why not invest it to uncover Missed Opportunities? You’ll have to test them and prove they are real Negatives as Thoughtland pretends, or rather real Positives. What’s the cost to test a Thoughtland Negative? Same as before, around 1 unit cost if it is a Real Negative and 10 if a Real Positive. The average Pretotype cost will depend on the ratio between Positives and Negatives.
There shouldn’t be more than 20% Positives. If there were, Thoughtland would be actively promoting failures!
With 20% Positives, the average cost of pretotyping is the same as above, less than 3 units per Pretotype, leading to the same figure of 115 cost per successful innovation.
Should there be less than 20% Positives, i.e. Thoughtland is better than random at discerning Positives from Negatives the unit cost per successful innovation increases. A little sensitivity analysis tells us that the cost increases to 500 — as without pretotyping — only if Thoughtland were almost perfect at spotting Negatives.
Actually even with just 1% Missed Opportunities it’s worth pretotyping, and the unit cost per successful innovation will raise at 2, a lot better than the original 5.
Here’s a graph of unit cost vs. Thoughtland ability to spot Negatives.
The average cost per HIT innovation drops very fast as soon as Thoughtland is not Perfectly Accurate at spotting Negatives.
Would you really believe it is Perfectly Accurate with Negatives when it does such a bad work at spotting Positives? If Thoughtland were 50% or even 80% accurate at spotting Negatives, Pretotyping would bring the total cost per HIT sensibly down and make it worth doing anyway.
Make sure you take these back of the envelope calculations with a pinch of salt! We made several assumptions that will change in each specific case, but the overall line of thought remains intact.
As long as a test can give us a better level of confidence in the results at a fraction of the cost, it’s worth doing it!
Conclusion
With pretotyping we can think 10×.
Will we churn out 10 more innovations at the same cost? Likely not but we will get closer.
Will we validate 10× ideas in real life? Surely yes and many more.
Will we be more efficient at innovation? Indeed, if we are just concerned with efficiency.
Will we leverage our efforts and become a 10× company? Surely yes!
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