Friday, December 16, 2016

Why innovation portfolios matter

At this point in business evolution, every CEO understands the need for more innovation.  After a decade of reading about it, getting pounded over the head with the Jobs/Apple story and watching new innovations disrupt entire industries, businesses are starting to react.  More and more of them are doing innovation, with drastically different outcomes.  Some are successful.  Many are making significant investments and have had little success.  Some are frankly abject failures.  What I constantly fail to understand is why innovation is treated so cavalierly, with so little regard for planning and integration to strategy.  In many cases it's as if executives throw up their hands and succumb to the idea that innovation is black magic.

Innovation does require creativity and expansive thinking.  It requires divergent thinking and exploration, the willingness to explore customer needs and market trends.  It can require creating new products or services or business models that don't align and may even cannibalize existing products and services.  It requires a new way of thinking, new expectations and often, new skills and tools.  But none of this is even remotely new, or poorly documented, or beyond the reach of many of the people you already employ.  Nothing about innovation is black magic, although many executives and decision makers continue to act as if it is - mostly from a lack of understanding or limited time to fully grasp the approach.

Language, as an example

Take for example the idea of creating a simple, consistent language for innovation.  Defining the terms you'll use to ask for and measure innovation activities.  For example, are the ideas you want "incremental" signalling small change to existing products and services, "breakthrough" or "disruptive" to signal increasing difficulty and impact.  These terms are reasonably well known and defined in the innovation canon, and using them consistently sends signals that help innovations do new and interesting things.

The definitions I've just provided also align to what many of us know as the "three horizons" model - the idea that innovations can have different impacts.  Incremental innovation is sustaining, extending the life and value of existing products and driving revenues, while disruptive innovation is transformative, seeking to create entirely new markets or segments or fill valuable but unmet needs.  The former is less risky and much easier to do with existing, conventional tools, while disruptive innovation takes far more research, takes longer to prove, is more likely to fail but when successful has outsized implications.

All of that should be relatively obvious so far.  If so, why don't more companies define an innovation portfolio and set intentional goals for the amount of innovation investment in a specific year, and how to divide that investment across the three horizons?  Certainly companies are good at product portfolio and roadmaps, making decisions on how much to invest in older technologies, how much to invest in newer products and the roadmaps and versions that should be developed.  Good product management requires that we consider the maintenance and investment to sustain older products and contrast that with the effort to develop and launch new products.  Product portfolios help rationalize opportunities and investments.  Product roadmaps help us think through how a product will morph and add value over time, to remain valuable for customers by adding new capabilities or features.  Most product management teams assign resources and plan projects based on the product portfolio, company objectives and roadmaps.  The question is:  why don't innovation teams do the same thing?  Where are the strategies, portfolios, investment plans for innovation?

Linking innovation to strategy

This last question raises several issues or objections.  The first has to do with linking innovation to strategy.  Often innovation becomes viable when companies decide that they need a compelling new product or service, to respond to customer needs or competitive threats.  Too often this is not in response to strategic planning but a reaction to something from the external market.    These reactions mean that innovation often isn't planned or budgeted, but reactions to market forces.

A number of reactions to market forces doesn't create a cohesive strategy, and usually isn't even good tactics.  Lacking a comprehensive plan or portfolio, and with few upfront financial resources, innovation is done haphazardly on a shoe string.  Without a holistic, comprehensive plan, innovation is done in fits and starts across the organization with wildly different outcomes.

Further, since there is often little definition or clear expectations of outcomes, most innovation outcomes are incremental, since that type of innovation relies most heavily on how things are done today.  This is why so much innovation work seems to fail to achieve expectations and ends up as modest changes to existing products.

Innovation Portfolio

Now, compare and contrast the haphazard approach with a company that defines an innovation portfolio plan.  In this it may determine that some portion of its innovation efforts will be incremental, some breakthrough and some disruptive.  These allocations are made based on expect competitive maneuvers, customer demands, the age and viability of existing products and so on.  Many companies use a "rule of thumb" to divide the portfolio into 70% incremental, 20% breakthrough and10% disruptive.  This ensures the majority of the innovation activity is focused on near term products that have a high probability of success but lower potential, but also ensures that the company is taking some significant risks and focusing on longer term and potentially more valuable opportunities.

With an portfolio in hand executives can ask about the importance and value of each innovation activity, and make determinations to increase the risk and uncertainty by pushing for more disruption when necessary, or identifying needs or gaps in the portfolio.  It's also helpful to use the portfolio as a way to manage product groups and teams.  First to understand if the team has done some successful innovation and if not, walk them through the steps from incremental to disruptive.  Second to measure the innovation goals they had at the beginning of the year and compare to actual outcomes at the end of the year.  Did the team achieve its expected allocation of incremental, breakthrough and disruptive innovation?  If not, why not?

Formalizing Innovation

If you are thinking that an innovation portfolio, budgeting process and roadmap seems like we are formalizing innovation, you are correct.  Innovation needs to become a recurring competency that we plan for.  We have tools like a portfolio to help frame the goals and discussion.  There's no reason to leave a valuable opportunity like innovation up to chance.  There's an important balance between locking innovation down with too much bureaucracy and overhead, and leaving it with little or no guidance at all.  The happy medium that provides guidance but leaves room for exploration is the portfolio.
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posted by Jeffrey Phillips at 6:21 AM


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