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Managing You Innovation Portfolio

Harvard Business Review Article

Danette Winkler

on 7 May 2013

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Transcript of Managing You Innovation Portfolio

Overall Background Traits of Successful Innovation Landfall Consulting Managing Your Innovation Portfolio Funding Pipeline Management Overview Talent Trait #2: Strike & Maintain the Right Balance Performance Market expectations, global competitive pressures, and structural change force company to be innovative to survive

Many executives fail to manage innovation strategically 1) Articulate a clear innovation ambition

2) Achieve the right balance of core, adjacent, and transformational initiatives

3) Have tools and capabilities to manage such initiatives Trait # 1 – Clear Ambition Invented by mathematician Igor Ansoff
Used to allocate funds among growth initiatives
Tactics should differ depending on what the firm wants to do The Innovation Ambition Matrix The Innovation Ambition Matrix Allow a company to draw on existing capabilities but necessitate putting those capabilities into new uses
Example: Procter & Gamble extended the Swiffer into a long-handled mop Innovation: a novel creation that produces value Example: new nail polish color, World Wide Web Benefits: First, it gives managers a framework for surveying all initiatives the business has under way.
Second, it gives managers a way to discuss the right overall ambition for the company’s innovation portfolio Tool: Innovation Ambition Matrix Core Innovation Initiatives: Efforts to make incremental changes to existing products and new markets
Example: Nabisco’s 100-calorie packets of Oreos for on-the-go snackers Transformational Initiatives Create new offers to serve new markets and customer needs
Example: iTunes, the Starbucks in-store experience Adjacent Initiatives: Innovation For The 21st Century Research Shows: Firms that outperform their peers tend to allocate their investments in a certain ratio: 70% to safe bets in the core

20% to less sure things in adjacent spaces

10% to high-risk transformational initiatives Is There A Golden Ratio? People throughout your organization are energetically pursuing the new. But does all that activity add up to a strategy? CORE ADJACENT TRANSFORMATIONAL Resource Allocation Ratio: 10% 20% 70% We Find the Following Distribution of Total Returns Inversely... Transformational Efforts Contribute: Core Innovation Efforts Contribute: Adjacent Initiatives Contribute: Correlates To A Higher Share Price Performance 70% 10% of the long-term, cumulative return on innovation investment 20% Companies: Typically realized a P/E premium of 10-20% Capital Markets: Find this allocation attractive because:

It implies a balance between short-term, predictable growth and longer-term bets Magic Formula? 70-20-10 breakdown is an average allocation based on a cross-industry and cross-geography analysis Additionally, these findings underscore the importance of managing total innovation deliberately and closely Most companies are heavily orientated toward core innovation

Transformational Initiatives are the engines of blockbuster growth Important Factors Industry Competitive Position Stage of Development Technology: spend less time on core products, because their market is eager for the next hot release Example: struggling Apple in 1990s & iTunes platform Early-stage (VC backed): Don't have much of a core business to build on Organize & Manage The Total Innovation System A healthy balance of core, adjacent and transformational innovation is a vital step

5 Key areas of management that serve the three levels of innovation Use a discovery and concept development process to uncover and analyze:
a) The social needs driving business changes
b) The underlying market trends
c) The ongoing technological developments Analytical Skills: Needed for both core and adjacent innovations

Market and customer data translated into specific offering enhancements Transformational Innovation Efforts: Integration The right skills are critical but they are not sufficient:
They must be organized and managed in the right way under the right conditions that will help them succeed

Important decision:
How closely to connect the skills and associated activities with the day-to-day business Integration Majority of people engaged in innovation are working on enhancements to core offerings:
Are most likely succeed if they remain integrated with the existing business

Transformational innovation tends to benefit when people involved are separated from the core business:
a) Financially
b) Organizationally
c) Physically Core & Adjacent innovation funded by relevant business unit’s P&L

Transformational efforts come from an entity such as the executive suite and the CEO

Avoid “innovation tax”

Create completely different funding structure

Example: Merck’s Global Health Innovation Sufficient with core product extension

Use is dangerous with entire new solutions Innovation processes include mechanisms to track ongoing initiatives Stage-Gate Processes: Nonlinear process Core & Adjacent: Small set of winners, vast number of ideas Transformational: Metrics Non-economic & internal metrics

Enhances teams ability to learn and explore

Use hard economics with a pilot or launch Core & Adjacent: Traditional financial metrics

Use variables requiring customer input

State-Gate: economic & external metrics Transformational: Moving Forward Steps: 1) Develop sense for role of innovation

2) Survey company’s current landscape

3) Ideal ratio between core, adjacent, and transformational Enabling: Leaders communicate goals and processes

Project leaders feel sense of ownership/pride

Open commitments and clear messaging

Manage portfolio goals Questions
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