Use Strategic Buckets: How to Succeed at Innovation

Decisions, decisions. How does a big company make good decisions to launch new products that might fatten up the bottom line and keep it innovative and growing? Senior management has a clear-eyed view of the big picture — the overall strategy — but project managers know the rich details necessary for the greatest chance at successfully initiating new products. How best can they talk to each other? How can they get around the typical information imbalance existing in all large companies to make the most informed decisions on where to plunk their money and manpower?

Company Culture

Paramount to the answers to such questions is dissecting the complex tangle of factors that make up a company’s culture. Is a company run from the top only or does it allow the lower levels more power — a bottom-up management? Or is it somewhere in between? Does the company have a high tolerance for failure or a low tolerance that means you better not fail or you’ll pay a big price — maybe even get fired? How does either management style affect the propensity of a company to churn out new product ideas?

Darden Professor Jeremy Hutchison-Krupat, whose research focuses on the effective execution of a firm’s innovation strategy, takes a deep look at those questions in his paper “Strategic Resource Allocation: Top-Down, Bottom-Up, and the Value of Strategic Buckets,” co-authored with Stylianos Kavadias of the University of Cambridge Judge Business School.

The paper investigates the choice between top-down and bottom-up management styles by examining:

• The disparity between stakeholders’ information in an organization
• The implicit or explicit penalty managers are subjected to for failed projects
• How challenging it is to transform an idea into a new product for the firm

“It’s the link between the resource allocation process and the culture within the organization that determines what initiatives ultimately get pursued,” he says.

Microsoft, for Example

Take Microsoft, a company that just five or 10 years ago had evolved into a culture many would characterize as having a low tolerance for failure. The company used a forced ranking system under which the bottom 10 percent of performers were fired. They wanted to keep only the best. It also sported massive top-down control. Yet such organizational policies may limit the new products that are eventually launched, resulting in a conservative portfolio of products. The result: Middle managers do not push the boundaries of innovation.

“Satya Nadella, the CEO since 2014, changed that. He established a culture to go after things. He got rid of forced ranking, and now they’re moving more to the front in new product innovations,” says Hutchison-Krupat.

Strategic Buckets: A Hybrid Approach

The interplay between company culture and information imbalance is key. “A lot of new product development deals with information asymmetry. Anything you can do to reduce this asymmetry is a good thing,” says Hutchison-Krupat. And the best way to reduce information imbalance is through an effective decision-making process known as strategic buckets.

“When it comes to top-down or bottom-up management, we find that no single decision process is the best,” he says. “Bottom-up methods work better for more challenging initiatives, but increased penalties — loss of pay or status within a company, for example — may deter the approval of potentially profitable ventures. The strategic buckets approach holds the potential to produce the best results, as it combines the best aspects of a top-down method with a bottom-up approach.”

The top of an organization understands the strategic objectives really well and can maintain control over decisions about resources, as in a classic top-down process. Therefore, with strategic buckets, resource levels are defined by senior managers for specific categories of initiatives. Categories represent distinct objectives of the organization.

For example, an organization that seeks to enter into a new market should establish a bucket that outlines the key objectives associated with the long-term rationale for entering the new market, likely associated with higher risk and a longer time horizon. The result of such objectives may prompt the selection of projects for which the potential to learn is high and the impact of failure is low, which may ultimately be smaller opportunities. And these opportunities would never make the cut if they were assessed on the same criteria used to select projects aimed at existing business. For this reason, the objective of each strategic bucket must come from the source that understand the goals of the organization best: top-management.

In contrast, mid-level managers are likely to understand what it takes to execute the details of any one specific initiative really well, and this knowledge is crucial to effectively sort initiatives into appropriate categories, capturing the benefits of a bottom-up process. Ultimately, we want both: resources defined according to the firm’s strategy (by senior managers) and an accurate categorization of the projects that execute on the strategy (by project managers).

A Strategic Buckets Example

Consider a chemical company that we will refer to as Alpha. Alpha suffered from high sales volatility in one of its businesses. To address this, the company sought to develop a new product with superior performance along several critical dimensions desired by key customers. Alpha had a two-year window between when they could produce a small fraction of their targeted production and when they would be able to produce it at full capacity. As Alpha prepared for its initial commercial launch of the material, the question remained, given its limited production capacity: Which customers should Alpha target?

Customers that seemed ideal, health care professionals, were associated with significant regulatory oversight, which meant there would be little opportunity in the two years to convert product performance to actual sales — and senior management would most certainly want to see some revenue within this time. In contrast, the customers that represented markets with shorter sales cycles might not appreciate and reflect the material’s superior performance; this meant there was little potential to learn about the key properties Alpha’s key customers valued.

Traditionally, Alpha would have solved this dilemma through a multi-criteria objective (different emphasis placed on the goals of short-term revenue, long-term sales potential, ability to open new markets, etc.), rank all of the options and choose the top few. The problem: a high likelihood that either the long-term objective would not be met in order to achieve short-term objectives, or the long-term objective would be misrepresented in order to be pursued.

Enter strategic buckets. Through the strategic buckets process, conflicting objectives are clearly articulated. Alpha’s senior management explicitly defined one bucket as short-term revenue and another as long-term sales potential. Then mid-management was able to allocate each option to the proper bucket. Finally, the options were ranked within their respective buckets, thus ensuring both objectives were met.

Big Impact

Strategic buckets are not all about protecting resources for long-term objectives. “Though the most commonly known benefit of strategic buckets is to protect resources, our research points to the benefits strategic buckets pose when it comes to acquiring information,” Hutchison-Krupat says.

And that’s where the big impact is: how strategic buckets chip away at information asymmetry.

“That’s actually what strategic buckets start to do. Senior managers first use the firm’s strategy to define the buckets. Then they can solicit input from people lower in the organization to categorize initiatives appropriately,” he says. “By recognizing that strategic buckets do more than just protect resources — they alleviate information asymmetry — we shift the conversation to highlight the criticality of the need to crisply define the objectives of each bucket.”

But there must be some type of penalty for failure so that resources are allocated in the best way and projects are categorized appropriately. “There must be some consequences,” he says. “When projects consume significant resources and fail, managers run the risk of their budgets being cut for not being productive. Obviously, the degree to which this happens varies and depends on the resources of the company. Still, the ability to stay the course in the face of failure and not scapegoat anyone requires a special type of leader.

“All this is to say: Humans do not do well with loss. Failure is a loss. Losses hurt more than gains. And as a result, organizations generally have some implicit penalty for failure, be it through status, association, promotion, pay or something else. When penalties are high, though, the opportunities for innovation are reduced. Therefore, the more an organization can do to increase its tolerance for failure, the better. This, it seems, is what Satya Nadella has been working to do at Microsoft.”

So what’s best way for a company to go? “There is no single optimal policy for any organization,” he says. “It depends on the culture within the organization and what its objectives are. But I think every large organization pursuing innovation should employ some variant of strategic buckets. And there is a best organization — it’s one that has a high tolerance for failure and uses strategic buckets.”

Jeremy Hutchison-Krupat co-authored “Strategic Resource Allocation: Top-Down, Bottom-Up and the Value of Strategic Buckets,” which appeared in Management Science, with Stylianos Kavadias of the University of Cambridge Judge Business School.