Constructing Your Innovation Portfolio

By G. Michael Maddockand Raphael Louis VitónMay 26, 2010

Factor the four classes of innovation into how your company contemplates investing in product development.With the rather negative exceptions of Enron, Bernie Madoff and WorldCom, finance is not the first place we think of when we hear the word “innovation.”

Still, asset allocation — a staple of financial planning — can be applied to your “innovation portfolio” with terrific results. We’ll explain.

When it comes to how you divvy up your personal investments, you have always been told that they should be spread among asset classes (stocks, bonds and cash) and then diversified further within the classes themselves. For example, you might hold stocks in both foreign companies and domestic ones, enterprises with large and small market capitalization, retailers and high-tech companies.

The idea is to capture all the potential gains out there — the more bets you place, the greater the chances you have of being right — while minimizing risk. For example, if you’re investing in the small cap growth stocks sector and it tanks, your bond holdings might mitigate the loss.

You can use exactly the same approach when it comes to innovation. In determining whether or not to invest in research and development, product tweaks, line extensions or new offerings, it is helpful to think of your budget dollars and people time as assets, then diversify them as well.

Why? Clearly, these activities present different levels of risk and reward trade-offs. Like stocks, bonds and cash, they are not necessarily correlated to one another; the success of one is not contingent on another. As with financial planning, the idea of hedging your bets — while making sure you are represented in whatever sectors are hot — just seems to make sense.

The Four Classes of InnovationIf you want to go down this road (and we think you should), how would you divvy up your innovation portfolio? Before you can answer that question, you need to determine the classes into which your innovation efforts fall. There are four:

1. EvolutionaryInnovation. (Technically easy and a clear customer benefit.)

This is the effort you extend to keep current cash cows fresh and to grow brands in the market. This is a hedge against becoming stale in the current markets and categories. It is generally the largest portion of any company’s development budget, and it’s sometimes over-weighted in companies that tend to “follow.” Examples would include combining DVR functions into a cable box and launching a new flavor variety in an existing product.

2. Differentiation. (Technically difficult and a clear customer benefit.)

This portion of your innovation budget is used for making a distinction between your products and those of your competitors. Multitouch interfaces were studied for years; Apple took on the technical challenge to put it into a phone.

Mike Maddock, CEOmike@maddockdouglas.com630.563.6415

One last point: To take the financial planning metaphor one step further, automatic “rebalancing” is important, too. Once an idea develops in the revolutionary or fast-fail boxes, it may move to the maintenance box after it grows and matures. The budget should be shifted accordingly.

The nice thing about approaching innovation this way is it reduces the subjective “whichever way the wind blows” process of deciding where to invest to the actionable and strategic no-brainer. You have your innovation asset allocation model and you divide the money up accord-ingly. It reduces the stress at budget time by getting everyone thinking concurrently about how to set priori-ties. It allows your teams to stay focused on generating the right ideas and then implementing them versus the hamster-wheel scenario of repeatedly guessing at the “how much should we spend?” question.

It’s a very handy idea.

G. Michael Maddock is chief executive, and Raphael Louis Vitón is president of Maddock Douglas, an innovation consultancy that helps clients invent, brand and launch new products, services and business models. Maddock is author of the upcoming book Brand New: Solving the Innovation Paradox — How Great Brands Invent and Launch New Products, Services and Business Models (Wiley, April 2011).

3. RevolutionaryInnovation. (Technically difficult and there’s no way of knowing ahead of time if the customer will accept it.)

This is the place where you search to find ground-breaking ideas for products, services and business models. PayPal, iRobot’s Roomba and Fuji’s environ-mentally safe batteries would be examples. This is a bet that the market will move toward your idea and your company will have a first-mover advantage.

4. Fast-FailInnovation. (Technically easy, but no way of knowing if the customer will accept it.)

This is the activity where you go to market and do your testing and learning there. It is the opportunis-tic segment of your development activity (i.e., it’s well within your wheelhouse of capabilities and core competencies, but far more experimental than usual). Here you expect to fail quickly before succeeding with an offering that may literally be refined by your cus-tomers’ feedback in market. It is fairly low risk — you don’t spend much before you send the product out into the marketplace — and has an extremely high potential reward as customers express exactly how they want you to alter it. Google runs multiple tests on ads and then goes worldwide with the ones that work best; companies are using Twitter as a potential customer-relations and resolution channel. Is it pos-sible that Apple is planning to learn more about the growing tablet market by introducing the iPad?

In more aggressive industries — that is, industries such as consumer electronics that live and die on new products — your innovation portfolio development model might see a higher balance of effort in the upper right side of the diagram and less on the left. In more conservative industries, it’s vice-versa.

MAINTAIN RELEVANCE WITH CORE

TEST THE WATERS AND LEARN IN MARKET

TAKE ADVANTAGE OF FUTURE MARKETS

ESTABLISHED MARKET

A CURRENT BUSINESS CAPABILITY

MUST BUILD BUSINESS CAPABILITY

NEW MARKET

INVEST IN DIFFERENTIATION

EVOLUTIONARYINNOVATION

REVOLUTIONARYINNOVATION

FAST FAIL INNOVATION

BEAT YOUR COMPETITION TO

THE PUNCH