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Influenced by an article in Harvard Business Review, May 2012 I’m trying to shed some light on how to get the right balance in your innovation portfolio through a trilogy of posts. You’re reading the second one now; the third post will come on Thursday, June 14 and the first was on Wednesday, June 6.

I concluded the previous post by maintaining that there are 5 areas of management that serve three levels of ambition;

  • Enhancements to core offerings—optimizing existing products and services for existing customers.
  • Pursuit of adjacent opportunities—leveraging well-known products and services into new markets
  • Ventures into transformational territory—developing breakthrough products and services for markets that don’t yet exist.

Targeting a healthy balance of core, adjacent, and transformational innovation is a vital step toward managing a complete innovation portfolio. The challenge is that a company must be able to execute at all three levels of ambition. However, few companies are good at all three, and not entirely surprising, companies struggle the most with transformational innovation.

Brutal statistics in a study by Corporate Strategy Board say that mature companies trying to enter new businesses fails as often as 99% of the time! To do different things, you need different people who can do things differently.

GE and IBM, notable examples that have managed to do things right, have thoroughly outlined five key areas of management that serve the three levels of innovation ambition.

  • Talent
  • Integration
  • Funding
  • Pipeline management
  • Metrics

Talent

For core and adjacent innovations, market and customer data needs to be interpreted and translated into specific offering enhancements; that’s why people with analytical skills are vital. Transformational innovations need a different skill set as these people need to investigate what is desirable from a customer perspective and understand underlying market trends. Samsung, who has been awarded numerous design awards, understood this, and moved its design center to Seoul to be closer to a valuable pool of young design professionals. They hired outside firms and created an in-house school to hone designers who exhibited potential. Samsung is today one of the most valuable brands in the world.

Integration

People working on enhancements to core and adjacent offerings are most likely to succeed if they remain integrated with the day-to-day business. Transformational innovation tends to benefit when the people involved are separated from the core business—sometimes both financially and physically. They need a distance so they can stay away from norms and expectations to concentrate on things that are outside the core.

Funding

Again, transformational efforts need to be handled differently to core innovations. Bold investments or not, transformational innovation funding must be lengthy and not come from the line of business as a kind of an “innovation tax”. The innovation team should be seen as a strategic product portfolio investment, funded by corporate and that can rise above the fray of annual budget allocation.

Pipeline Management

Whether a core or adjacent innovation should get a green light or not, the project is revaluated periodically and the projected ROI is continuously recalculated as conditions change. Pipeline management for core innovation involves gradually finding a small set of winners from among a vast number of ideas.

For transformational innovations it’s the opposite, as you need to take a small number of possibly game-changing ideas and ensure that they can emerge. Normally they cannot generally be managed with a funnel approach; they need to remain undefined for a longer period of time to avoid the rejection of promising options before they are properly explored.

Metrics

I made a statement in a previous post that “you should not kill an idea with a business case” [link]. Using metrics too early in transformational efforts can kill potentially great ideas. And how can you make assumptions about adoption rates and price points that require customer input if you are developing things that the customers still don’t know they will need?

As always it’s interesting to see how the famous innovative companies handle this, so let’s learn from Google. They maintain that the hurdle an initiative must clear to receive continued investment is that the company is likely to learn (not earn) from it. Yes, sooner or later, a company must focus on the hard economics of a transformation project, but that can wait until there’s something ready to pilot and launch.

Reading through these five areas of management, I notice that we in IFS fulfill most of these quite well. With IFS Labs, R&D can make bold innovative initiatives—but not necessary financially bold—that are traditionally outside what customers require of ERP; and we don’t want to be a traditional ERP vendor. With our agile development methodology, working close to customers’ day-to-day business, we do core and adjacent development to optimize existing products and services for existing customers and prospects.

The next post in this trilogy about how to balance your innovation portfolio is on June 14 and is about how innovations pay the bills.

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