August 10, 2020

How an innovation portfolio links innovation strategy and execution

Roald

Staying competitive in an ever changing market is tough. It requires a constant balancing act between running the day-to-day business and searching for tomorrow's Next Big Thing. In this article we discuss how companies can link today's reality with tomorrow's ambition in a focused and organised manner by managing their innovation portfolio.

Traditionally, companies too often invest the bulk of their resources on sustaining their existing business and, as we know, history has proven again and again that this approach is not sustainable over the long run. How then can companies avoid to focus too heavily on the present and not being clear about what's next? The key to solving this challenge is by linking your innovation activities to the overall strategic business priorities. Having a balanced innovation portfolio helps companies to do just that. However, that may sounds easier as it turns out in real life.

 

When companies decide to invest in innovation, having a coherent strategy and a balanced portfolio is an essential part of success. In the absence you risk losing the chance to reap the fruits of your innovation efforts. So the question remains, how? As a company, you can think about your products and services as part of an innovation portfolio. Framing it this way allows you to understand where investments are being made, but also to spot opportunities for new investments and identify where resources should be allocated. 


Your innovation thesis sets a vision for your innovation efforts, and tangible criteria to choose among different ideas and business models. Creating the innovation portfolio will clarify your investment priorities over the short, medium and long term.


The first step to build your innovation portfolio is to map out your company’s innovations according to two dimensions: products (existing products vs incremental products vs new products) and markets (existing markets vs incremental markets vs new markets). The framework is called Innovation Ambition Matrix and the intersection of the two dimensions produces a map where you will see your Core, Adjacent and Transformational innovations.


Core innovation

Refers to small adjustments to existing products in existing markets which usually require assets that the company already possesses. Examples include process optimization, product redesign,...


Adjacent innovation

In this case, you either take a current product/service and extend it to a new market or you introduce a new product into an existing market. For these innovations, you can still use current capabilities.


Transformational innovation

It covers all innovation efforts that intend to place new products in new markets. As you are standing outside your core business, it typically requires the development of new capabilities.



At this point you might be looking at the matrix and thinking? “How should I distribute my resources amongst the 3 innovation categories?” You can use the 70-20-10 rule as a rule of thumb. This means that 70% of your resources would be allocated to core innovations, 20% to adjacent innovations and 10% to transformational innovations.


Another tool worth mentioning is the The 3 Horizons Model. By plotting time against value for the business, you end up with three horizons for growth investment where H1 focuses on optimizing the core business; H2 refers to emerging businesses which are likely to produce sustainable cash flows in the near future; H3 which covers the breakthrough innovations which the ability to generate cash flows is still uncertain.   


A great example of the model is Facebook’s 10-year roadmap. 



With these two frameworks at hand, you are ready to map your Innovation Portfolio. Just follow these steps:


Steps

  1. Get a block of post-it notes and sharpies
  2. Write down all the products your company currently has and include products under development (1 post-it per product)
  3. Cluster the products/services horizontally according to their maturity level, from H1 to H3
  4. Move them vertically according to the innovation ambition matrix categories (Transformational, Adjacent, Core)
  5. Analyse the gaps (blank spaces) and see if your portfolio fits the 70-20-10 rule

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