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So You Want Bolder Innovation? Define the Types of Innovation First

Determining the portfolio of innovation projects is part of innovation strategy. The prerequisite to responsibly developing organizational or departmental innovation is the understanding what kinds of innovation you want teams to develop. Otherwise, you are personally holding portfolio management yourself as the leader and every decision will have to cross your desk limiting agility and value.

Innovation Portfolio Strategy

A common question that kicks off this issue is when I sit down with an executive and a question such as how can we create bolder innovation? is asked. The first step is to realize that “bold” or “bolder” innovation really is quite vague and my best directional understanding of the meaning of such as question is that there is a desire to have teams take on more risk and get more return. Furthermore, with possibly the same resources, and, if so, the organization would also be doing fewer, bigger risk/return projects? Socratic type questioning is how I typically tease out the implicit innovation strategy or improvements. The questioning style would quickly lead us to realize that what we need to define are the types or buckets of innovation from which we want to direct teams to innovate.

Defining types of innovation can be done functionally and by risk. Classifying your innovation efforts through the associated types of projects are useful so you can shape an innovation portfolio to ultimately the right balance of risk/return.

Functional Typing

When I ask leaders about what types of innovation their organizations are developing, usually the conversation starts with what category, industry, or a product/service solution. Sometimes, it might include process innovation or other lesser-utilized activities. We consider this grouping as Functional Innovation. Functional innovation is defined by the type of function or activity which would include product, marketing, market/category/product, channel operational or process.

This grouping is a natural way to begin to define innovation strategy; however, that is usually where the strategy conversation ends. These definitions can help set direction for essentially what many innovators call a growth platform or opportunity area which are important but merely set the boundaries of a category or benefit space. To ensure as leaders we drive value to the organization, we need to define foundational elements like risk to understand impact to financial return and shareholder value.

Risk Typing

When I ask leaders about what types of innovation their organizations are developing, usually the conversation starts with what category, industry, or a product/service solution. Sometimes, it might include process innovation or other lesser-utilized activities. We consider this grouping as Functional Innovation. Functional innovation is defined by the type of function or activity which would include product, marketing, market/category/product, channel operational or process.

This grouping is a natural way to begin to define innovation strategy; however, that is usually where the strategy conversation ends. These definitions can help set direction for essentially what many innovators call a growth platform or opportunity area which are important but merely set the boundaries of a category or benefit space. To ensure as leaders we drive value to the organization, we need to define foundational elements like risk to understand impact to financial return and shareholder value.

We define Innovation into 3 risk buckets:

  1. Core Business Innovation– Close-in to the existing business, line extension to continue to grow from core, low risk because most variables are known and time to market is short-term; commercial/marketing innovation is classified here as well.
  2. Innovation Adjacencies – Meaning adjacent to the core business such as new categories, channels or markets, medium risk because typically means building, acquiring or partnering on new competencies mixed with capabilities you currently do, and
  3. Transformational Innovation – Significantly new innovative solution sometimes referred to as breakthrough, disruptive, new business, new ventures, new-to-the-world or new business models; it changes, e.g. “transforms,” the makeup of the portfolio and is the highest risk/return innovation

Defining projects by risk allow you, the organization’s leader, to have perspective of risk/return across the whole organization or your scope of leadership such as business unit, category, or function. By a simple example if every department is investing in high-risk innovation because the charge was to “be bold,” the organization might not have visibility to manage or direct taking on that level of risk. By grouping projects in like buckets of risk, leaders can manage the overall risk and allow possibly younger, smaller business units or categories that have high growth potential to take more risk for the high-growth return, but larger mature businesses focus on core and close in adjacencies to keep balance.

Last, the level of risk in each bucket will need to be defined specific to the organizational leaders needs to homogenize the risk and benchmarks for expected return to balance resources utilized across the portfolio. Furthermore, it allows for freedom to innovate with an easy way of managing the overall innovation portfolio. While there is software to implement portfolio management, it is typically best to start simple and manually to determine drivers and then implement a system. It’s this type of thinking that helps ensure growth and ultimately value is created in a fiscally responsible way.

What About New Economy Theory?

In closing, I call ideas like I’m about to share new economy theory because some ideas remind me of the dot-com era type economics and others actually are really valuable. In any case, these are about changes in thinking from the past! For example, during the dot-com era when we were really learning about the Internet the investment community originally valued eyeballs (e.g., the number of cars driving past a highway billboard) and forgot about revenue of that advertising company or product; however, the direction was right. For a while even ad-based companies were devalued until they could produce revenue, and now, we have TikTok celebrities making millions on followers that can be monetized in many ways.

Last, the level of risk in each bucket will need to be defined specific to the organizational leaders needs to homogenize the risk and benchmarks for expected return to balance resources utilized across the portfolio. Furthermore, it allows for freedom to innovate with an easy way of managing the overall innovation portfolio. While there is software to implement portfolio management, it is typically best to start simple and manually to determine drivers and then implement a system. It’s this type of thinking that helps ensure growth and ultimately value is created in a fiscally responsible way.

For portfolio management, here are 3 New Economy Theories to keep in mind:

  1. Cash Flow and Timing.
    Fundamentally all projects must eventually produce cash flow it is merely the timing and level of investment, there is the Mendoza line that is good example of thinking about revenue growth and investment/profit risk that can also help.
  2. Idea of Partnerships Change Economics.
    So in portfolio management and typing risk, we used to equate higher risk projects to taking longer than close-in. However, you do not automatically assume that all high-risk projects take longer. Partnerships are the best way to get to market faster and many times lower risk. Think about the COVID-19 vaccine discovery, production, and distribution timeline. This execution shows the speed that was unheard of because of cooperation, what we call partnerships.
  3. Risk is always there.
    When using partnerships, risks like investment risk, many times, can be shifted to the partner because they work on many similar projects, think about outsourced manufacturing but the unit economics will be higher so that risk is being put into the margin and higher price. Thus, while timing and cash investment can be mitigated in partnerships, risk is always there just sometimes one party can take more of it than the other and that is where opportunity might lie for you to increase innovation return while mitigating early-stage risk.

By understanding risk-types, you can balance your portfolio not only by function, but also by risk. If business units or functions heads share risk in addition to function, it becomes easy to analyze the return on investment including timing and financial and other business risks of the overall organizational portfolio.

Let us know if you would like to learn more about how you can leverage innovation portfolio strategy to better manage execute value for your organization.

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GUS VALEN MANAGING PARTNER

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