1. Innovation killers
The managers in well-run companies kill innovation because of using wrong applications of
three financial-analysis tools as an assistant in the plan against successful innovation.
1. By evaluating the investment opportunities, managers underestimate the real returns
and benefits of investments in innovation because use of misapplied tools of financial
analysis method of discounting cash flow to calculate the net present of the plan.
Discounting a future stream of cash flows into a present value assumes that a rational
investor would be indifferent to having a dollar today or to receiving some years from
now a dollar plus the interest or return that could be earned by investing that dollar for
those years. So the first error is to assume to not investing in innovation that the
present health of the company will continue same into the future if the investment is
not made.
2. Misapply fixed and sunk cost principle and rely on assets and capabilities that were
copied in the past to succeed in the future. In doing so, mangers fail to make the same
investments that entrant and attackers find to be profitable. The argument that
investment decisions should based on marginal costs is always right. But when creating
new capabilities is the issue, the relevant marginal cost is actually the full cost of
creating the new.
3. The managers’ emphasis on earnings per share price as the primary driver of share price
and therefore creating shareholder value creation, to the leaving out almost everything
else, turn away the resources away from investments whose payoff lies beyond the
instant horizon. Managers are under so much pressure, from various directions, to focus
on short-term stock performance that they pay less attention to the company’s long-
term health than they might, so they reluctant to invest in innovations that don’t pay off
immediately.
These tools and concepts in evaluating investments create a systematic bias against
innovation. So managers should use the alternative methods which help managers in
evaluating much more smartly the future vale.