Monday, December 05, 2022

Innovation Portfolio Gymnastics

 There's been a significant number of posts on LinkedIn and other social media about innovation lately, especially focused on the type of innovation that companies perform.  The traditional way of thinking about this, which is really just a loose rule of thumb, is to suggest that companies SHOULD plan for 70% of their innovation efforts (and hopefully, results) to be focused on incremental innovation, and 20% on transformative innovation and 10% on disruptive innovation.  The 70/20/10 allocation was originally created by one of the big strategic consulting firms and seems reasonable on its face, but was never intended to be a fixed proportion, but a signal that every company should be innovating across all three horizons. 

The idea of diversification across the three horizons was the key point, not the amount of innovation in each horizon.  There may be companies or industries where the appropriate division is 70/20/10.  More than likely, there are a few companies where this is the correct investment across the portfolio.  However, there are several issues with this allocation.  First, it isn't gospel.  Clayton Christensen didn't carve it on stone and hand it down to the rest of us.  It is a rule of thumb that should be understood as such, and then modified by every company based on competition, the pace of change in the marketplace, the amount of impact or disruption the company wants to create and so on.  It is lazy thinking to believe that your innovation investment should be the same as every other company.

Second, the original 70/20/10 split really only addresses one dimension - that is what new products should we create.  I think more than ever, it's reasonable to ask what the portfolio of new services, new customer experiences and business models we should be creating, and across all three horizons.  We need to free ourselves from a limited way of thinking about innovation outcomes.

Third, we need to recognize that few firms will ever fully embrace or realize the third horizon.  While some firms may espouse the goal of innovating to disrupt their market or other markets, the near-term incentives to protect what exists, and the risks associated with disrupting a home market are too significant for the vast majority of companies.  There's a reason most if not all disruptive innovation happens from outside an industry.  The upstarts and external actors don't have an investment in the status quo.  So, it's generally been my rule, let's call it the Phillips rule, that all disruptive innovation will be realized by companies innovating in an industry they hope to enter or to create.  This does not mean you should not plan for third horizon innovation, but if you do, you must ask how the innovation will be realized.

Building a real innovation portfolio

If you want to truly understand the power and depth of an innovation portfolio across these horizons, then we need to examine what criteria are important.  

First, it is clearly important to sustain and extend existing products and services.  Thus, the incremental segment of the three horizons is important.  What is critical here is knowing which products and services are worth extending or adding on to, and which should be culled from the portfolio.  Most companies are loath to cull products and services, so they spread too few innovation dollars across the entire portfolio, making meager changes that do not thrill customers.  The best action in the existing portfolio is first to go on a zombie hunt, to remove the weakest products and services to free up more innovation dollars for the best remaining products.  All incremental innovation should first begin with subtraction, to free up room and funds for future growth.

Second, you need to consider what new products and services and business models you'd like to create to add to your existing portfolio.  This will represent the second horizon of innovation, the transformative horizon.  It's in this segment that you create new products, introduce new technologies or target new customers.  In all of these cases, learning is involved.  You must invest in exploration, in learning and in engaging customers and prospects.  You should also do a good amount of work in trend spotting and scenario planning.  This segment is where you make the most important bets on your mid-term future, so the more you can learn, the better off you'll be.

Third, you will want to understand what disruptive innovation looks like, while recognizing that disruptive innovation can and will happen in your industry (likely by an upstart or outsider) AND that you can be a disrupter to other companies or industries.  It helps to understand how your industry might be disrupted, so you can anticipate the entrants and significant changes that could occur.  It's also valuable to see how your capabilities, products and services could disrupt another industry, opening up new markets and new customers.  It is important that you do both - understand how your market or company could be disrupted, so you can defend against it or prepare to move if necessary and examine where your capabilities could allow you to enter or disrupt other markets.  As Eisenhower said, plans are nothing, but planning is everything.

Who should do this work

The challenge with all I've identified above is that there is no one person or even one function that can do all of this work.  Few companies have competent planning departments that can spot future trends and build scenarios or spot important competitive movements.  Most innovation happens in R&D or in isolated product groups, so forming a true innovation portfolio means cobbling together different innovation pipelines from vastly different organizations, and most of those will be product innovations since customer service or business model innovation is rarely considered.

What this points out is that while innovation seems important, it is not well-organized, often not strategic and not carefully planned or executed, and does not have a single point of responsibility or accountability.  I've been in the innovation space for over 20 years, and I've seen a lot of improvement in corporate innovation but compared to the way many other business processes operate, there's another 20 years' worth of work before innovation gets the kind of attention it deserves.

What to do now

Where to start?  Define a corporate-wide innovation portfolio, to get a sense of all the innovation work underway.  Classify it as incremental, transformative or disruptive.  Determine the ratio of the three.  Gasp when you realize that the vast amount of innovation underway is incremental and unlike to move the needle.  Examine your markets, your competitors and your customers to determine just how much innovation you should be doing.  Cull your innovation portfolio and enforce the right ratios across the three horizons.  Invest in learning, discovery, customer engagement to gain more insight for transformative innovation (horizon two). Research disruptive innovations that you can create to attack other industries.  Research the disruption that is going to happen in your industry.  Learn, adapt and then change your innovation portfolio.  Make sure to track not just product innovation, but services, customer experience and business model innovation as well.

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posted by Jeffrey Phillips at 11:45 AM


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