The importance of balancing the innovation portfolio
When we talk about innovations, we generally refer to 4 types of innovations that innovative companies manage according to different methods, budgets and time scales. These innovations are: (i) Incremental innovation, (ii) adjacent innovation, (iii) disruptive innovation and (iv) l’innovation radicale (Breakthrough). Unless you have already done so, I invite you to read my latest article entitled the 4 innovations to propel your business. In this article, I share with you my thoughts on some of the methods used to build a well balanced innovation portfolio.
For several decades, companies have used the Ansoff matrix, a very simple and relatively powerful tool, to define their strategic growth choices. Thus, thanks to this tool, companies allocate the appropriate human resources and budgets to achieve their objectives. This matrix is divided into 4 main categories: market penetration, market development, product development and diversification.
The interpretation of the four categories is as follows:
- (i) Market penetration is promotion to sell more existing products to existing customers,
- (ii) market development allows existing products to be sold to new targets, for example opening up new territories,
- (iii) product development offers the possibility of retaining existing customers by offering them more current products to replace old ones. All consumer products follow this tactic: automotive, gaming industry, electronics, ….etc
- (iv) Diversification allows for the boldness to launch a new product in a new market and this may be related or unrelated. A related market is familiar to us, e.g. from the sale of components to the sale of modules or systems. Unrelated diversification is in a market where you have no experience and no industry. For example, a soup manufacturer investing in car manufacturing!
Depending on the strategic direction chosen, the company deploys the appropriate tactics knowing that it has a favorable economic situation and the capacity to innovate. Even though this tool is still widely used, it has the disadvantage of a binary market-product representation (current vs. new) and does not allow for a global vision to properly identify the entire portfolio of current innovations.
Bansi Nagji and Geoff Tuff published in 2012 in Harvard Business Review “Managing Your Innovation Portfolio” a very interesting article in which I use what the authors call “The Innovation Ambition Matrix” to draw a parallel with the Ansoff matrix. This new representation corrects Ansoff’s binary notion of “current vs. new” and proposes a global and precise schema of the whole portfolio of innovations in progress in an innovative company. We distinguish 3 zones: the first one represents the essential activities of optimization of the products to serve well the existing customers of a company, the second zone is dedicated to the incremental and adjacent innovations to ensure the expansion of the company and the third zone is dedicated to the radical innovations with the objective to create new markets. Based on this tool, the authors conducted a large survey of companies in three different sectors: industrial, technological and consumer products, in order to determine the allocation of human-financial resources to different innovation activities.
Their results show that the most successful companies, across all sectors, manage their innovation portfolio in the following proportions: 70% to optimization of existing products; 20% to incremental innovations and 10% to radical innovations. The important thing to remember is that this tool allows you to balance your current innovation projects according to your ambitions and your industry. The main interest of global innovation management is to measure the economic impact of your investments. Indeed, the benefits of each innovation can be accurately quantified in terms of productivity and manufacturing efficiency gains, the introduction of adapted products in adjacent markets and/or the introduction of new products in new markets. In their survey, Bansi Nagji and Geoff Tuff reported a very interesting result. They found that the economic impact (ROI) of the same portfolio of innovations is inversely distributed, i.e. 70% for radical innovations, 20% for incremental innovations and only 10% of the positive impact is attributed to product optimization type innovations!
Bansi Nagji and Geoff Tuff do not explicitly mention the importance of disruptive innovation. In an effort to clarify, I propose the representation shown below to better visualize the 4 innovations that can really propel a company. This representation is inspired by the article by Mark Dodgson et al in The Oxford Handbook of Innovation Management published in 2014. The arrows suggest possible strategic directions knowing that the challenge of carrying them out simultaneously within a single corporate culture is very high!
I hope that this article has shed some light on:
- The importance of balancing the portfolio of innovations and daring to allocate more resources to innovations that not only bring an excellent return on investment but also ensure the sustainability of the company in the medium and long term,
- the importance of integrating innovation in a systematic way in company strategies
In the next article, we will discuss the traditional management style from business schools and we will try to show its limits in an environment of hyper-competitiveness as described by Ian MacMillan. A sensitive subject but of great importance when it comes to innovation.
See you soon and don’t forget to share this article on your social networks!