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.

In this week’s class we talked about Jane McGonigal’s TED talk on using games to save the world. It’s one of my favourite recent talks, and it’s worth a watch:

Her key idea is that we can harness the efforts put into online games can to solve real-world problems. Her latest game is called Evoke, which just started and is running until May (so you can start playing right now!).

The description of the game is here, and it’s pretty interesting. The game is organised a number of tasks such as this week’s: “Today, 1 out of every 6 people on Earth lacks access to clean water. Your mission this week: help at least one of those people.” The tasks require cooperative work within networks of players, so community building is inherent in the structure of the game. Here’s what happens if you do well with these tasks:

Players who successfully complete 10 game challenges will be able to claim their honors: Certified EVOKE Social Innovator – Class of 2010.

Top players will also earn online mentorships with experienced social innovators and business leaders from around the world, seed funding for new ventures, and travel scholarships to share their vision for the future at the EVOKE Summit in Washington DC.

We had a spirited discussion of the talk afterwards. A lot of people were stuck on the idea that she’s telling everyone to play an online game, but we worked hard to get past that to some of the broader themes within the talk. I think that there are some pretty interesting innovation and strategy ideas in here:

• The first is that it illustrates the value of having a big goal to pursue. In an outstanding column this week, John Kay discusses the benefits of pursuing something other than profit:
  

  Obliquity is the idea that complex goals are often best pursued indirectly. In general, oblique approaches recognise that complex objectives tend to be imprecisely defined. These objectives contain many elements that aren’t necessarily or obviously compatible with each other. Furthermore, we learn about the nature of the objectives and the means of achieving them during a process of experiment and discovery.

  McGonigal’s games are great examples of building your strategy around the pursuit of ambitious goals. And really, if you’re building a company around executing a great idea, shouldn’t it be something that will make the world a better place?

• This relates closely to an idea put forward by Umair Haque last week – that competitive advantage must be built on creating resources more than on consuming them:
  

  The future of advantage is radically different from the past for a simple reason: because it’s economically better. 20th century advantage focuses firms on simply extracting resources from people, communities and society — and then protecting what they extract. 21st century advantage focuses firms on creating new resources, and allocating them better. The former is useful only to shareholders and managers — but the latter is useful to people, communities, and society. The old Microsoft was useful to shareholders, but a lot less useful to society — and that’s exactly how Google and Apple attacked it, and won.

  Evoke is a great example of lateral thinking in developing strategy. It takes a fact of social life that on the surface seems negative – the huge number of hours put into playing online games – and figures out a way to repurpose that effort more positively. That’s creating value. And if the actions carry through into real life, as they have with some of her earlier games, this will also have a positive impact in reducing the consumption of real-world resources as well. That seems like a pretty good kind of strategy to have.

• It taps into the idea that play can have positive benefits within the workplace. This is something that Mark has put a fair bit of effort into researching (see his page on research projects). Michael Schrage talks about this as well. This is why things like Google’s 20% rule work – you’re given 20% of your time to work on projects of your own design. This is essentially a playful approach – you’re given time and resources, and you get to make up your own project. It is one good way to increase the innovation within your organisation.
• One theme that really came through in the class discussion is how people want to have some of the features of games replicated at work. They want clear paths to the next level. They want positive feedback when they’re doing well. They want to work within optimistic teams of fired-up, engaged people. McGonigal describes gamers as “Super-Empowered Hopeful Individuals” – and I think there’s a pretty good case for trying to build organisations filled with the same type of people.

Is this an optimistic view of the world? Yes. Of course it is. But in the end, it’s the kind of vision that I think we need. When you are trying to do something great, your energy level goes up, your engagement increases, and you build skills in pursuit of your goals. People do this all the time when they’re playing games. Wouldn’t it be great if we were simply doing it all the time?

We had some rain here over the weekend. Here is what was reported in yesterday’s Australian Financial Review (emphasis added):

Heavy rains fell across NSW and south-east Queensland over the weekend, which flooded homes and roads, brought down trees and caused motor accidents. But in good news for Sydney, 115 millimetres of rain fell across the Warragamba catchment which could result in dam levels rising over the coming days. The rainfall is ill-timed for the NSW government as it coincides with the switching-on of a $2 billion desalination plant, which will run regardless of dam levels for the next two years as it undergoes engineering testing. Nevertheless, dam levels remain at 50 per cent of capacity and this is the first significant rainfall over the Sydney catchment since mid-2007…

I am still astonished by the logic in the part that I highlighted. It is basically saying this: Australia has been in a country-wide drought for 7 of the past 8 years; Sydney hasn’t had any significant rain in 2.5 years; the dams have fallen below 50%; but the $2 billion investment in a desalination plant might look bad because it rained over the weekend. This is lunacy.

The desal plant may or may not be a good idea. Whether it is or not will depend on a number of factors – projected rainfall over the coming years, projected population trends for the Sydney region, and trends in water use/conservation. Many of the assumptions that underpin a model of the impact of a plant will be debatable. Nevertheless, there is simply no way to judge the wisdom of a $2 billion investment based on whether it rained this week or not. This is the worst kind of short-term thinking.

We see the same thing happen in business here. Every time there is a down-turn in the price of iron, multiple mining projects are put on hold. To me, this doesn’t make much more sense than judging the merits of a desal plant based on last week’s rainfall. According to some talks I’ve had with folks in mining, the thing that is happening here is that their due diligence systems require them to calculate the net present value of projects based on current prices. So when prices are high, they build like crazy, and when prices drop, everything stops. It seems to me we’d be better off looking at expected long term prices of whatever they’re digging. But then, the miners are all making a ton more money than me, so maybe I’m missing something…

This is also an innovation problem. When the global financial crisis hit at the end of 2008, investment in innovation fell through the floor through pretty much all of 2009. This is, again, crazy – for a couple of reasons. Tom Fishburne illustrates the first reason perfectly (his cartoons are great, and you should check out his site):

He’s drawn it exactly the way that I talk about it in classes – you can’t just turn innovation on and off like a faucet. Innovation takes time, and it needs a process. Short-term thinking combined with NPV hurdles for new ideas is one of the best possible way to ensure that you will never come up with an innovative idea again.

The second reason that it is crazy is that we know that the best way to manage innovation is through the use of some kind of portfolio process. This mixes small bets with big ones, and it is the best way to make sure that we have a constant flow of good new executed ideas. One tool that is very useful for this is the Three Horizons model.

We have talked about this a few times – the very short description is that the first horizon involves implementing innovations that improve your current operations, horizon two innovations are those that extend your current competencies into new, related markets, and horizon three innovations are the ones that will change the nature of your industry.

When we shut off innovation in a downturn, it is usually the longer-term innovation projects that get killed. These are the ones that will ensure that we are still in business in five years, or in ten. It is absolutely critical that we consistently innovate across all three time horizons. Unless our very survival is under threat right now, we can’t afford to stop investment in innovation. Even if it did rain over the weekend.

(Storm photo by flickr/Richard.Fisher under a Creative Commons license)