Management knows it and so does Wall Street: The year-to-year viability of a company depends on its ability to innovate. Given today’s market expectations, global competitive pressures, and the extent and pace of structural change, this is truer than ever. But chief executives struggle to make the case to the Street that their managerial actions can be relied on to yield a stream of successful new offerings. Many admit to being unsure and frustrated. Typically they are aware of a tremendous amount of innovation going on inside their enterprises but don’t feel they have a grasp on all the dispersed initiatives. The pursuit of the new feels haphazard and episodic, and they suspect that the returns on the company’s total innovation investment are too low.
Managing Your Innovation Portfolio
Reprint: R1205C
For many companies, innovation is a sprawling collection of initiatives, energetic but uncoordinated, and managed with vacillating strategies. For steady, above-average returns, firms need a balanced innovation portfolio and the ability to approach it as an integrated whole.
Having studied companies in the industrial, technology, and consumer goods sectors, the authors found a striking pattern: Outperforming firms typically allocate about 70% of their innovation resources to core offerings, 20% to adjacent efforts, and 10% to transformational initiatives. As it happens, returns from innovation investments tend to follow an inverse ratio, with 70% coming from the transformational realm.
The ideal balance will differ from industry to industry and company to company, but one thing is constant: Companies must execute at all three levels of ambition and manage total innovation deliberately and closely. In particular, they must develop the unique capacities needed for transformational innovation. This means finding the talent required for breakthrough efforts and ensuring enough separation from the core business; creating an appropriate (and often very different) funding structure; departing from a pipeline management approach; and using noneconomic and internal metrics to assess early efforts.
Companies that learn how to manage for total innovation can fully harness innovation’s energy and make it a reliable driver of growth.
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