Diversify The Risk And Focus On Time Horizons
Innovation is novelty that creates value for customers and stakeholders. While more than 80% of executives surveyed by McKinsey in 2021 said that innovation was one of their three key priorities, only 10% are content with their team innovation efforts. If innovation is ubiquitous, why is it so difficult to achieve and sustain? This series of "Innovation Blueprint" articles will explore key elements of cultivating an innovation ecosystem, including measuring and scaling innovation for your organization. This article offers insight into the importance of innovation portfolios and how to structure one for your organization.
What Is An Innovation Portfolio And Why Is It Important?
A portfolio is a cadre or collection of similar projects or investments. In the context of innovation, an innovation portfolio includes all the innovation initiatives your team or broader organization chooses to explore as pilots or larger initiatives at the enterprise level. An innovation portfolio is important because it creates a pipeline of innovations for the organization to explore in order to sustain growth in the products and services offered to customers.
If innovation is the lifeline of growth for an organization, then the innovation portfolio is the toolbox to achieve such growth. By deciding which projects to go after as part of this innovation portfolio, you will also be carving a path on the projects and initiatives that will drive growth in your organization. As such, you foster a culture of innovation and continuous growth, which are foundational to positive performance results.
Structuring An Innovation Portfolio
Similar to structuring an investment portfolio, an innovation portfolio can be structured in various ways to diversify risk and optimize return and results. Below are 2 tactics to consider when choosing which projects to go after to transform the products and services offered by your organization. These tactics include diversifying risk and focusing on three innovation horizons.
1. Diversify The Risk
As the old adage goes, don't put all your eggs into one basket. The same goes for innovation portfolios. As Warren Buffet said, "Diversification is protection against ignorance." Some innovation pilots will inherently be riskier than others. The goal of the portfolio is to diversify the risk across less risky and more risky initiatives. Diversifying the risk also ensures that if some of the pilots or innovation initiates fail, you will still have some that will be successful.
To diversify risk across innovation initiatives, you may want to consider one or two pilots in three or four different product or service lines. A basic formula to follow includes the Harvard Business Review Ambition Matrix model, which helps organizations decide where to play and how to win. The model plots innovation initiatives across two axes: the x-axis is the solution, and the y-axis is the challenge. Both axes scale from existing to new. Therefore, existing solutions and existing challenges define the core innovations, followed by adjacent innovations pairing existing solutions and new challenges, followed by transformational innovations where both the solution and the challenge are new. These are high-risk, high-impact innovations.
Depending on the organizational innovation appetite and ambition, you can use the model to plot the various initiatives in the portfolio. A basic allocation is to follow the 70-20-10 rule, whereby you invest 70% in core projects, 20% in adjacent projects, and 10% in transformational projects. The returns are typically inverse, so the highest returns come typically from transformational projects.
2. Focus On Three Innovation Horizons
Based on research by Steve Coley, Mehrdad Bahai, and David White, the three innovation horizons form the timeline of innovation in your organization. McKinsey also offers a similar model, the three horizons of growth. The first horizon pertains to the core business, the second horizon pertains to emerging businesses growing through fast scaling or acquisition, and the third horizon includes two or three moonshots.
In the first horizon, the business is mature and foundational. The performance results from this horizon have been proven consistently, and innovation is incremental. When innovation takes place in this horizon, it focuses on improving efficiencies and optimizing profitability without much risk-taking. The focus on this horizon is stability. A good example of a horizon-one product is the Starbucks Spice Latte. Building on all its core capabilities, this new product optimized profitability with little risk.
The next horizon is all about fast growth through acquisition and scaling processes. This could mean acquiring new companies or divisions, as well as expanding in new geographies locally or internationally. A good example of the second horizon is Microsoft's Flight Simulator.
The third horizon is where you introduce entirely new products or services that are not present in your line of offerings today. This is where moonshots would fall, or pilots that require investment upfront and whose results are unknown for quite some time. Moonshots are important because they inspire and empower the team to strive higher, despite the unknown. A great example of a third-horizon project is Microsoft's Xbox, which was a completely new undertaking for the company. It leveraged core capabilities but was completely out of the company product realm at the time. Today, Xbox is a billion-dollar product and business line.
Conclusion
Diversifying risk across many innovation initiatives, pilots, geographies, lines of business, and different horizons are also critical in building successful innovation portfolios. In addition to structuring a portfolio, measuring innovation is critical, as data provide insights into your strategy and approach and allow you to tweak or change tack as needed.
Forming your innovation portfolio and assessing its performance on a biannual or annual basis can help you evaluate your efforts and make changes in resource and talent allocation so that you can continue driving the generation of new ideas, value, and ultimately, growth.
