Beating the odds in the innovation arena The role of market and technology signals classification and noise

Innovation is a risky business. Notwithstanding the attention in research on the determinants of innovation success, the estimates of the extremely high failure rates (ranging from 40% to 90%) have not come down. As a result, new approaches have to be found to address the issues that prevent organizations from reaching innovation success over a longer period of time. In this study, Signal Detection Theory (SDT) is introduced to show that it may be less important to improve innovation practices in companies, than it is to change the nature of the projects that enter the corporate innovation funnel. In our empirical study of 44 innovation projects in the pharmaceutical and electronics industry, we show that pursuing more noisy signals (uncertain technological and market opportunities) is currently beneficial for innovation success. In general, companies allocate too few resources to noisy innovation opportunities. Interestingly, we find a positive, and not an inverted U-shaped, relationship between noise/signal ratios and innovation success. This indicates that there are almost no companies that take too much risk in the current competitive environment and that many can gain from increasing their noise tolerance. The implications from this study are quite counter-intuitive in a sense that ‘risk’ is not the cause of the innovation problems, but may be a solution.

Keywords: Innovation; Success; Signal Detection Theory (SDT); Noise; Blockbusters