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.