Innovation Portfolio Management Insights

Highlights

  • The combination of innovation types and methods define your innovation strategy.
  • A strategy supported by a balanced portfolio minimizes risk, steers resources to the most promising concepts, delivers a continuous cadence of releases and maximizes financial return.
  • Strategy and innovation portfolio management are symbiotic. The strategy ensures the company is targeting and resourcing the right projects (doing the right things). Innovation portfolio management ensures the continuous and collective effort is producing the right results (doing things right).
Johnny Grow Revenue Growth Consulting

Innovation research shows that the most successful innovators use innovation portfolio management to diversify their risk and maximize financial results.

The research also shows that less experienced innovators manage a less balanced portfolio. They over-invest in a single concept. They fail to systemically diversify their portfolio pursuant to an innovation methodology. They are slow to objectively measure, rank and reallocate investment from poor prospects to high performers.

Innovation portfolio management is the remedy to these problems. It's also the solution to prioritize limited investments toward the biggest payoffs. But the challenge is to create a portfolio aligned with the company's business and revenue goals. Here are two complimentary methods to solve this challenge.

Innovation Strategy

In prior posts I've shared there are three types of innovation, which are product, process (aka operational) and business model. There are also three methods, which include incremental, transformative and disruptive. The combination of these types and methods defines your strategy.

If your business goal is revenue acceleration, the most powerful strategies focus on creating new products or growing new markets, or both. As shown in the diagram below, the intersections of product or market expansion combined with methods of innovation define your business growth strategy and the options for your innovation management portfolio.

Revenue Growth Strategies

As Gartner states in their report titled, Transformative Innovation, Reinvigorating Teams and Processes to Spur Breakthrough Ideas, "the research shows that investment in transformative projects is growing slowly, and incremental concepts still account for more than 80 percent of funded initiatives."

This is understandable as incremental efforts are a safe bet. However, they also deliver the lowest payback. Veteran innovators regard incremental advancements as table stakes. It's needed to stay competitive but isn't going to boost revenues.

In a separate research study by the Corporate Executive Group (part of Gartner) and titled, Transformational Innovation, the report reveals that average performance companies underinvest in transformational innovation. They allocate two-thirds less R&D dollars to transformation compared to the companies growing most profitably across industries.

Research shows that average performance companies allocate two-thirds less R&D dollars to transformational innovation than the companies growing most profitably across industries.

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The survey results share that "The average company is sacrificing five percent growth annually due to its failure to act on transformational ideas." The chart below shows how leaders allocate their budget differently than average performers.

Innovation Budget Allocation

Finally, some additional research titled Managing Your Innovation Portfolio and published in the Harvard Business Review found that companies which allocate an average 70% of their R&D funds to incremental concepts, 20% to transformative concepts, and 10% to disruptive or breakthrough initiatives significantly outperform their peers, typically realizing a Price-Earnings advantage of 10% to 20%. That's a significant P/E premium that should not go unnoticed.

A strategy built on the types and methods of innovation forms the basis to balance your portfolio, lower risk, allocate resources pursuant to business objectives, and ensure the entire company is pursuing a shared strategy.

The Growth-Share Matrix

A complimentary tool to assess and orchestrate diversification is the growth-share matrix, or sometimes called the BCG Product Portfolio Matrix.

Innovation Portfolio Management Growth Share Matrix

Each quadrant in the matrix identifies growth and market share potential.

It also shows how concepts progress. For example, all new product releases are question marks, with the potential to become stars and the certainty to evolve into cash cows or dogs.

The growth-share matrix assists in creating a balanced portfolio. A portion of cash cows fund question marks. A portion of question marks are resourced to become stars. And a portion of the stars grow the company.

The matrix also considers new product releases across time horizons. Companies implement shorter projects to deliver immediate value and maintain momentum. They invest in long-term projects to exploit more significant growth opportunities.

You can use the growth-share matrix to assess market size and potential, along with the competitive landscape. The data can then be applied to align the company's business growth strategy with a balanced portfolio.

Takeaway

Without a clear innovation strategy supported with a balanced portfolio, budgeting and releases revert to a model based on capacity and not prioritized objectives.

The two models presented can work together. The growth strategy matrix ensures the company is targeting and resourcing the right projects (doing the right things) while the growth-share matrix ensures the continuous and collective effort is producing the right results (doing things right).

Innovation portfolio management translates the company's business strategy and top growth objectives into a portfolio of innovative projects. It orchestrates the right mix of projects pursuant to a strategy, allocates resources based on prioritized goals, objectively measures risk and payback for each project, applies stage gates to affirm progress and viability, shifts resources based on updated scoring, and calculates how each project contributes to the collective risk and financial payback for the company.