“Probabilistic Value”: Measuring if you’re winning at innovation.
“Probabilistic Value”: Measuring if you’re winning at innovation.
Darrell Velegol, PhD
@DarrellVelegol
2023 October 19
In MLB baseball, if you reach 1st base you have a ~30% probability of scoring. If you reach 2nd, 50%. And 3rd base is 70%. Getting on base gives you “probabilistic runs”, which by the law of averages leads to actual runs over time. Same thing in the NFL. You stand a better probability of scoring a touchdown from the red zone, than from the 50 yard line.
How do YOU measure your “probabilistic value” in innovation? You can’t afford to wait until the launch comes to fruition -- that’s very costly. It’s so important to estimate the probabilistic value early on and to track it, so that you know if you’re winning or losing.
Some companies estimate -- although not always well -- the probability of success and the present value payback of each project in their portfolio. I also recommend that they estimate the present value cost and the time to launch.
The question then is how to use these probabilities to estimate probabilistic value and how to budget your innovation projects? NPV calculations are not an effective way to allocate your innovation budget among projects in your portfolio. I recommend a modified Kelly Criterion strategy, which gives the highest median returns for a given risk level.
The difference between measuring and analyzing accurately versus not can be worth $millions, and is almost always worth doing accurately! Probabilistic value gives a way to quantify if you’re winning at innovation!
