A Short Guide to Managing Innovation Portfolios (Part 2 - Recommendations)

How should established companies allocate innovation investments? In the first part of this series, I outlined strategic aspects of the innovation horizons and took a deeper look into the 70/20/10 formula for portfolios. Now, let's take a look at strategic implications for practice.

Managerial implications

The 70/20/10 formula is a starting point, but should not substitute a sound strategic discussion. Keep in mind that innovation horizons are both blurry and dynamic. In practice, it is usually a subjective judgement call that determines whether a project is defined as horizon one or horizon two for instance. And more often than not, the horizons change over time - for instance projects tend to lose some of their disruptiveness along the way as hypotheses are tested against reality.

Three steps for better portfolio decisions

So how should established companies allocate their innovation budgets? Instead of jumping to a miracle formula, I recommend going through a sound strategic decision-making process. There are three crucial aspects to consider.

1) Understand your company's innovation needs.

Deeply understanding your company's (or division's) topical innovation needs, is a core top management job and it that takes time. A full picture should combine an outside-in perspective of the market environment with an inside-out view of your company's situation. In order to arrive at sharp, actionable results, I recommend to conclude the strategic discussion by drafting 2-3 brief innovation hypotheses. These act as a north star for your innovation activities.

Inside-out perspective

Which innovation goals can be derived from corporate strategy? Which corporate assets can be further leveraged with innovation? (Think: Expertise, brand, sales channels, IP, production facilities, locations, ...). Which business risks can be mitigated through innovation?

A good starting point to answer such questions is to assess the most important business fields along the value chain - which steps from R&D, procurement, production, marketing & sales to product usage and recycling have the highest potential for innovations? At Infront Consulting, we use interactive, haptical tools for this analysis. We derived our approach from war gaming and have refined it over the years to make the strategic discussion both very tangible and to-the-point.

Outside-in Perspective

The aim of this exercise is to arrive at an assessment of the external trends and how these impose chances and risks to the business. These questions help with the assessment:

• How high is the risk of major market shifts and from which directions can they come from? (disruption risk)
• Which examples of similar industries that went through major changes can be applied?
• How could startups or new entrants attack your business?

2) Deploy the right corporate innovation vehicles

Once a clear direction for the innovation activities has been defined, the right vehicles should be selected to progress in that direction. To come back to the plant metaphor, think of these vehicles as the growth environment (or greenhouse) that those seeds and plants need. After analyzing more than 200 corporate innovation settings over the course of six years, we derived a simple framework - the keyboard of innovation vehicles (illustration, more resources can be found here).

3) Deploy the innovation vehicles the right way

Innovation is all about execution and even the best laid plans will only be as effective as the people that turn them into reality. Just like new products need to be user-centered, new organizational settings need to be people-centered as well. This means that they should be built around the idea of bringing the brightest minds together with a shared, meaningful and enticing vision, and design every step and process in a way that empowers the people to unfold their innovation potential. The human factor is most commonly underestimated in innovation settings, because it is often viewed as a soft factor that is merely a nice-to-have. To grasp the importance of people, think of three teams.

Who will make the race?

• a poor team with the right initial direction and the right tools
• a winning team with the wrong tools and right initial direction
• a winning team with right tools and wrong initial direction

I would always place the bet on the best possible team with the right tools - if they take a wrong initial direction, an empowered team will quickly notice this and change the direction. However, a poor team will get nowhere even with the best plans and instruments. Decision makers should therefore, just like early-stage startup investors, always emphasize people and build the innovation settings around that paradigm. This is easier said than done, and in this article, I can only provide a starting point of describing how the ideal, human-centered innovation setting looks like. But here are few tips, based on my experience of observing successful (and not so successful) corporate innovation activities:

• In contrast to the widespread notion that innovators need to be young, I would always advise to focus on people with experience, especially when it comes to scaling. But this experience should be entrepreneurial rather than simply seniority measured in work years
• Use KPI systems that you co-develop with the innovation teams. Ideally, accountability is created by combining outcome metrics on project, team and portfolio level
• Avoid zombie projects (more in this short article)
• Here are some pitfalls that any innovation setting should steer away from