Article revisited, because the article is still interesting and for further use… my next inspiration

Source: Geoff Tuff and Bansi Nagji, May 2012, Managing Your Innovation Portfolio, Harvard Business Review.

The global competitive pressures and the amount of innovation inside companies are still happening with low return on innovation (ROI). A company needs to have well-balanced portfolio aligned with their innovation ambition.

  • Balance of core, adjacent, and transformational initiatives across the company.
  • Put in place the tools and capabilities to manage those various innovation as parts of an integrated whole.

Tools to manage an innovation portfolio, could be the Innovation Ambition Matrix (see the matrix), proposed by Geoff Tuff and Bansi Nagji. The matrix, on the x axis, the novelty of a company’s offerings and on the y axis, the novelty of its customer markets are a matter of degree. Three levels of distance from the company’s current, bottom-left reality;

  • Left of the matrix, core innovations, efforts to make incremental changes to existing products and incremental inroads into new markets. Such innovations draw on assets the company already has in place.
  • At the right corner of the matrix, transformational, designed to create new offers, new businesses, to serve new markets and customer needs. These sorts of innovations, also called breakthrough, disruptive, or game changing, generally require that the company call on unfamiliar assets. Building capabilities to gain a deeper understanding of customers, to communicate about products that have no direct antecedents, and to develop markets that aren’t yet mature.
  • In the middle, adjacent innovations, which can share characteristics with core and transformational innovations. An adjacent innovation involves leveraging something the company does well into a new space. Adjacent innovations allow a company to draw on existing capabilities but necessitate putting those capabilities to new uses. They require, proprietary insight into customer needs, demand trends, market structure, competitive dynamics, technology trends, and other market variables.

The Innovation Ambition Matrix offers;

  1. Gives managers a framework for surveying all the initiatives the business has under way: How many are being pursued in each realm, and how much investment is going to each type of innovation?
  2. Gives managers a way to discuss the right ambition for the company’s innovation portfolio.

The right balance;

  • The balance for an innovation portfolio, managers should consider the allocation of resources across core, adjacent, and transformational initiatives correlated with significantly better company performance, e.g. share price.
  • The right balance will vary from company to company, according to a number of factors.
    • One important factor is industry. The industrial manufacturers vs technology companies.
    • Consumer packaged goods manufacturers have little activity at the transformational level, because their main focus is incremental innovation.
    • A company’s competitive position within its industry also influences the balance.
    • A company that wants to retain its leadership position or believes the market for its more ambitious innovations has cooled may decide to do the reverse, removing some risk from its portfolio by shifting its emphasis from transformational to core initiatives.
    • A company’s stage of development. Early-stage start-up vs mature companies.

The point is that a management team should arrive at a ratio that it believes will deliver better ROI in the form of revenue growth and market capitalization, should discover how far its current allocation is from that ideal, and should come up with a plan to close the gap.

Targeting a healthy balance of core, adjacent, and transformational innovation is a vital step toward managing a total innovation portfolio.

This reflects the hard truth that to achieve transformation, to do different things an organization usually has to do things differently. It needs different people, different motivational factors, and different support systems.

The skills needed for core and adjacent innovations are quite different from those needed for transformational innovations. Although the right skills are critical, they are not sufficient. They must be organized and managed in the right way. One of the most important decisions will be how closely to connect the skills and associated activities with the day-to-day business.

Most efforts related to core and adjacent innovation are fairly small-scale projects that don’t need major funding. Transformational efforts typically require significant investment. Companies might create a completely different funding structure for transformational innovation.

Any well-managed innovation process includes mechanisms to track ongoing innovations and ensure that they are progressing according to plan, e.g. stage gate. Whereas pipeline management for core or near-adjacent innovation involves gradually finding a small set of winners from among a vast number of ideas, the process is different for transformational innovation. Here the challenge is to take a small number of possibly game-changing ideas and ensure that they emerge from the pipeline stronger. A company must spend sufficient time up front exploring what’s possible, constantly expanding the options available in pursuit of the right big idea. The transformational efforts are not generally managed with a funnel approach; they require a nonlinear process in which potential alternatives remain undefined for a long period of time. This is another reason why a stage-gate process is so lethal to transformational innovation!

What measurements should inform management; for core or adjacent initiatives, traditional financial metrics are entirely appropriate. But using such metrics too early in transformational efforts can kill potentially great ideas.

Managers should discuss thoughtfully where economic and noneconomic metrics, along with external and internal metrics, are most appropriate.

  • Stage-gate systems operate at the intersection of economic and external metrics, they estimate how much money the company will make when its innovation is launched in the outside world. Appropriate for evaluating core or near-adjacent innovations on the basis of information that is obtainable and largely accurate.
  • Companies should use the polar opposite, a combination of noneconomic and internal metrics to assess transformational efforts in their early stages; this can enhance the team’s ability to learn and explore.

Managing total innovation will require a significant shift for most companies, which are used to a less orderly approach, the pathway;

  • The first step is to develop a shared sense of the role innovation plays in driving the organization’s growth and competitiveness. Managers should agree on an appropriate ambition level for innovation and find common language to describe it.
  • Second step, it makes sense to survey the company’s current innovation landscape. A comprehensive audit will reveal how much time, effort, and money are allocated to core, adjacent, and transformational initiatives and how that allocation differs from the ideal ratio for the company in question. With the difference exposed, managers can identify ways to achieve the desired balance, usually by paring core initiatives down to those focused on the highest-value customers, encouraging more initiatives in the adjacent space, and creating conditions more conducive to breakthroughs in the transformational realm.

Leaders must communicate clearly and relentlessly about innovation goals and processes. There’s no getting around the fact that to improve the overall return on innovation investments, managers must take a hard look at projects. The imperative is to identify and accelerate the most promising ideas and kill off the rest (some of which may be perfectly viable but don’t represent the best use of resources). Open commitments and clear messaging (entire organization), what is being decided by whom and why, and how those decisions will benefit the business over the short and long terms.

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