Managing an Innovation Portfolio

Yesterday I talked about how inertia is the biggest obstacle to innovation. One way to get around this problem is to explicitly incorporate innovation into your strategy. One key aspect to doing this is to manage innovation as a portfolio.

To do this, you need to invest in innovation across multiple time horizons. We tend to use the Three Horizons model to frame this type of thinking. Horizon 1 concentrates on innovations that improve your performance in current markets, Horizon 2 innovation looks for ways to extend current skills and products into related fields, and Horizon 3 innovations are those which will make your industry obsolete. A recent post from Insead explains how Google manages investment across these three time periods:

Girouard concedes that not every idea may bear fruit, but says there is internally a “formula” to assess new ideas. “We have a 70/20/10 model which Sergey Brin came up with several years ago, which is 70 per cent of our efforts are to be focused on our core business, 20 per cent should be focused on related but new areas that we’re developing off of that, and 10 per cent we should reserve for ‘crazy’ ideas, some of which may turn into great advancements and many of which may not pan out at all,” he adds.

I ran across another example of managing an innovation portfolio today on the blog for the Palo Alto Research Center (PARC). In case you’ve not run across PARC before, that is the research lab that Xerox formed in the 1970s, and they invented, well, everything. The mouse, the graphical user interface, ethernet connections and networking, portable document format and many other things. Many of those innovations were not successfully commercialised by Xerox, but PARC persisted. They were set up as an independent subsidiary of the firm about 10 years ago, and now they do research that is sometimes commercialised by Xerox, and sometimes they seek other partners to bring new technology to market.

Here is the diagram that shows how they think about their innovation portfolio:

And here’s how they describe the process in another post:

PARC manages its research investments from a portfolio perspective. We have deep scientific understanding that supports all our fields of research. And we make little research bets to test if big bets are warranted. We try to test assumptions quickly to learn fast and optimize our market timing. But it’s not a question of balancing basic vs. applied research here — we ascribe to Pasteur’s Quadrant of “use-inspired” basic/exploratory research. Value is created from what you can do with what you know.

That idea of making small bets is a perfect example of taking an options approach to innovation. You invest small amounts to find out if it is worthwhile to invest more.

Managing innovation is hard. Stimulating change and overcoming inertia are major challenges, in any kind of organisation. One way to get better at doing this is to make sure that your innovation objectives and your strategy are integrated. To do this, you need to think about innovation across different time scales, like they do at Google and PARC. Managing innovation as a portfolio is one of the best ideas you can implement. I try to avoid making one-size-fits-all type recommendations, but this is an idea that will work for nearly everyone. The one possible exception is if you are in an incredibly turbulent market.

With that caveat in mind, my recommendation today is to start thinking about your innovation program across multiple time scales. Use a portfolio approach to integrate innovation with your strategy.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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6 thoughts on “Managing an Innovation Portfolio

  1. Tim,
    Enjoyed your post and loved the framework – folks should definitely be thinking about innovation in a multi-faceted and multi-dimensional way.

    One of the key words I use with folks I interact with is that they should strive to improve their ‘peripheral vision’ – the ability to learn from the past, sustain and expand the present and envision the future.

    And lastly, talking about baby steps – one can also innovate by looking at the ‘Existing Markets’ and using ‘Existing Technologies’ but by rearranging the combinations. Just mentioning this as sometimes folks have a knee-jerk reaction of going out and spending money on new technologies without efficienty using existing technologies.

    Great stuff.


  2. That last point is a critical one Ned – that gets at some important aspects of Business Model Innovation, among other things, which I think is something nearly everyone should be thinking about. As you say, taking these different perspectives is one good way to get around some of the more common forms of resistance to innovation.

  3. Tim,

    This was a fascinating read, since you bring together other viewpoints that flesh out and also reinforce some of the practices we’ve engaged in for a while, but have only recently begun to articulate.

    Your comment about small bets as representing an options approach is especially spot on. Here’s what resonated most from your other post:

    “But taking a real options approach to innovation can tell us more than just valuation. It also tells us how to maximise the value of the project by constructing it as a real option where we can maximise its value by looking at the variables that make the option more attractive. For example, can we take an initial stake in the project as an option that will allow us to hold the option for a long time? Can we decrease the costs of exercising the option by finding potential partners to help us take the innovation to a bigger market?”

  4. Thanks for stopping by Mark – I’m very glad that this seems right to you, since you’re obviously right in the middle of it all! I’ve been very heartened to learn more about what’s going on at PARC these days, I think that your overall approach there is excellent.

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