Innovation Portfolio Management
At a Glance
- The combination of innovation types and methods define your innovation strategy.
- An innovation strategy supported by a balanced portfolio minimizes overall risk, allocates resources pursuant to prioritized objectives, ensures the entire company is pursuing a shared strategy and maximizes financial return.
- Innovation strategy and innovation portfolio management are synergistic. Innovation strategy ensures the company is targeting and resourcing the right innovation projects ("doing the right things") while the innovation portfolio ensures the continuous and collective effort is producing the right results ("doing things right").
Innovation is a risk/reward equation. Innovation portfolios diversify and manage risk while positioning the portfolio to maximize financial impact. Most companies manage an innovation portfolio but over-invest in a single innovation concept, fail to systemically diversify their portfolio pursuant to an innovation strategy and fail to objectively measure, rank and reallocate investment from poor prospects to high performers.
Innovation portfolio optimization is the remedy to these problems and the method to prioritize limited investment toward the biggest payoffs. But the challenge is creating the innovation portfolio aligned with the company's business and revenue goals. Here’s two complimentary methods to solve this challenge.
In prior blog posts I've shared there are three types of innovation (product/service, business model and operational) and three innovation methods (incremental, transformative and disruptive). The combination of these define your innovation strategy.
If your business goal is revenue acceleration, the most powerful innovation strategies focus on improving, expanding or creating products or services. As shown below, the intersections of product or service innovation and methods of innovation define your business growth strategy and the options for your innovation portfolio.
As Gartner advises in their Transformative Innovation, Reinvigorating Teams and Processes to Spur Breakthrough Ideas report, "research shows that investment in transformative innovation projects is growing slowly, and incremental innovation still accounts for more than 80% of funded innovation initiatives." This is understandable as incremental innovation is the safe bet. However, it’s also the lowest payback. Most experienced innovators regard incremental advancements as table stakes. It's needed to stay competitive but probably isn’t going to boost revenues.
In a separate research study, the CEB (Gartner) Transformational Innovation Survey, reveals average performance companies underinvest in transformational innovation. They allocate two-thirds less R&D dollars to transformational innovation than the companies growing most profitably across industries. The survey results share that "The average company is sacrificing five percent growth annually due to its failure to act on transformational ideas." The graph below shows how leaders allocate their innovation budget differently than average performers.
Additional research titled Managing Your Innovation Portfolio and published in the Harvard Business Review found that companies which allocate an average 70% of their innovation funds to incremental innovation, 20% to adjacent or transformative innovation, and 10% to radical or breakthrough initiatives outperform their peers, typically realizing a P/E premium of 10% to 20%.
An innovation strategy built on the types and methods of innovation forms the basis to balance your innovation portfolio, lower innovation risk, allocate resources (budgets, people, etc.) pursuant to business objectives and ensure the entire company is pursuing a shared strategy.
Innovation Growth-Share Matrix
A complimentary tool to assess and orchestrate innovation mix and potential is the growth-share matrix, or sometimes called the BCG Product Portfolio Matrix.
Each quadrant in the matrix identifies growth and market share potential. All innovation releases are question marks, with the potential to become stars and the certainty to evolve into cash cows or dogs.
The growth-share matrix assists in creating a balanced portfolio, where a portion of cash cows fund question marks, a portion of question marks are resourced to become stars and a portion of stars grow the company.
The matrix also considers innovation across different time horizons. Companies implement shorter projects to deliver immediate value and maintain momentum while also investing in long-term projects to exploit more significant growth opportunities.
Using the innovation growth-share matrix to assess market size and potential, along with the competitive landscape, provides data to align the company's business growth strategy with a balanced innovation portfolio.
The Point is This
Without a clear innovation strategy supported by a balanced innovation portfolio, innovation budgeting and releases revert to a model based on capacity and not prioritized objectives.
The two models work together. The innovation strategy matrix ensures the company is targeting and resourcing the right innovation projects ("doing the right things") while the growth-share matrix ensures the continuous and collective effort is producing the right results ("doing things right").
Portfolio management translates the company’s growth strategy and top objectives into a portfolio of innovation projects. Portfolio optimization orchestrates the right mix of innovation projects pursuant to an innovation strategy, allocates resources based on prioritized goals, objectively measures risk and payback for each project, applies stage gates to affirm progress, shifts resources based on updated scoring and calculates how each project contributes to the collective risk and financial payback for the company.