The importance of keeping a balanced innovation portfolio

Every new ground-breaking product and service, in the end, will become obsolete, commoditized and outcompeted by new and better solutions, products and companies; maybe best epitomized by Kodak. Ones an icon of American technology innovation but slow to react to the digital revolution, the company ended its 100-year history in 2012 declaring bankrupt with $6.8 billion in debt.

So how did one of the world’s most profitable and bellowed companies in less than ten years going from being a stock-market wonder-child to bankruptcy? The main reason, according to Bloomberg, was the fact the organisation relied too heavily on old innovations and revenue streams, failing to build an innovation pipeline with products and processes adapted to the new digital revolution.

What the many “to-large-to-fail” giants which in the last decade have declared bankrupt show (Blockbuster, Toys R Us and Kodak just no name a few), is that to survive in today’s fast-moving markets, companies cannot rely on old inventions, but need to envisage the future and invent things for markets that do not yet exist—and maybe most importantly—also to keep a balanced portfolio of innovations to secure market positions, revenue streams and profits: today, tomorrow, and in the future.

The importance of innovation portfolios.

The last two decades have seen a dramatic reduction of product life-cycles, with 50% of annual company revenues—on average—now being derived from product launches within the past three years, and with many industries now also replacing their product- or service lines every two years ^(3,4).

To secure healthy revenue-streams and long-term survival organisations, therefore, need to have a balanced portfolio of innovations covering horizons of time: short, mid, and long-term.

The primary purposes for organizations to keep a balanced portfolio of innovations are:: 1. To secure the long-term survival of the organisation.; 2. To manage risk inherent in innovation initiatives, while optimizing the results achieved by related investments.

The benefits of holding a balanced innovation portfolio include:: Steady, long-term and above-average returns, which according to Harvard Business Review only can be achieved through a well-balanced innovation portfolio (Fig 1, below).; Companies allocating 70% of their innovation activity to core initiatives; 20% to adjacent; and 10% to transformational, typically, outperform their peers with a P/E premium of ten to twenty percent.; Ground-breaking technology innovations, from inception to commercial viability (Fig 2, below), can take twenty years or more to realize. As such, organisations need to diversify and adapt their innovation portfolios to reflect this time horizon.

The concept of value innovation.

The conventional idea of business tactics that companies “only can compete by cost advantage or differentiation” have lost much of its ground to a new idiom of business strategic thinking called ‘Value Innovation’ in which businesses simultaneously pursuit differentiation and low cost. This tactic also is the cornerstone of the “Blue Ocean strategy,” developed by W. Chan Kim and Renee Mauborgne and introduced in their perennial bestseller with the same name.

Blue Ocean is about breaking-out of the competition by creating new uncontested market spaces instead of competing heads-on with a lower price or incremental product innovations in already crowded market spaces (Fig 3, below):

Some of the main focus-points of the Blue Ocean strategy-model include:: Processes to make competition within an industry irrelevant by reconstructing boundaries, and creating un-contested market spaces.; Systematic tools to assess the current state-of-play in an industry, and to convert non-customers to customers—in addition to also providing defined processes for implementation.; Robust mechanisms to mitigate risks and to increase the odds of success.

The landscape of innovation frameworks

While the Blue Ocean Strategy has become one of the most acclaimed theories and frameworks of the new school of innovation, there has been an incredible amount of research in this area both in the academia and in the business-world, and a number of models for innovation now are well established including: The Lean Start-up¹¹, Claytons Theory of Disruptive innovation¹², The Three Horizons Framework¹³, Ten Types of Innovation1⁴, Porters Five Forces¹⁵ and Design Thinking¹⁶.

Apendix 1 and 2, below presents three of these frameworks in more detail:

There is no such thing as a universal model of business.

Every project and team bring unique challenges, needs, and demands which might not fit within the dynamics of a specific innovation framework. All frameworks also have their own crowd of dogmatic supporters and critics; well visible in the discourse of the Blue Ocean versus Five Forces followers whom often overlook or reject research indicating that a combination of both schools, in fact, often yields the strongest outcomes¹⁷. The wisdom from this is that business leaders do best by learning about a few different innovation frameworks to enable informed decisions before choosing a model for their innovation initiatives.

Get the right talent.

While there is a divergence between innovation frameworks on how to best innovate, all emphasize that the key to success is to build the right talent:

Innovating for tomorrow versus initiatives with a horizon of maybe ten or twenty years in the future demands very different skills¹⁸. To succeed with building a balanced innovation portfolio, it is therefore imperative to establish team structures reflecting each phase of the “nose of innovation”:
Innovation teams should represent all major stakeholders and interests in the organization¹⁹.
Innovation teams should have one or a few influential “champions” with the ability to convince all major stakeholders to get on-board.²⁰
It is vital to bring in highly talented outsiders that will look at innovation projects with fresh eyes and without the lens of the organization.²¹

The importance of metrics.

Innovation initiatives always should have stated OKRs and KPIs to determine and explain if and how investments deliver according to plan which is at the heart of the ‘Management by Objective’ (MBO) principle launched by Peter Drucker in his 1954 seminal ‘The Practice of Management’ ^{22 23}. While KPIs for standard business operations often has an economic focus, the Ten Types-framework¹⁵ proposes that innovation metrics should compose a balanced set of measurements over four dimensions: looking back, looking ahead, external, and internal—with at least one measure for each dimension ²⁴.

Figure 4, below, presents examples of innovation metrics for each of these dimensions:

The importance of sanctioned leadership.

Organizational change always needs to be systematically organized and also require sustained investments (money, people, time)²⁵. In addition, it is also imperative that innovation initiatives are sanctioned by the executive suite to win support; well summarized in organizational expert Jim Hemerling’s model of organizational change 26; Fig 5, below:

Leading literature of corporate innovation also lists critical key-points to succeed with corporate innovation:: Successful implementation of corporate innovation always needs managerial coordination throughout all levels of the organization.; Leadership of corporate innovation is about unlocking the creative potential of the organisation and setting up conditions to generate, embrace, and execute new ideas.; Unless there are genuine rewards for taking risks and putting forward new ideas, people within an organisation rarely embrace innovation initiatives. As such, it is necessary for leaders to recognizing peoples efforts through extrinsic and intrinsic rewards.

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How digital technologies transform innovation

5th May 2020