Managing Your Innovation Portfolio

Puneet Agarwal (EPGP Roll No: 1914002)

Individual Assignment
 Companies are aware that in order to achieve higher return they should aim their product strategy
towards transformational innovation rather than incremental innovation.
 In order to achieve that they should first learn how to manage their product innovation portfolio and
strike a balance in it. One tool for managing innovation portfolio discussed in reading is Innovation
Ambition Matrix, which has three components:
o Core Innovation Initiatives – Incremental changes to existing products & services such as
packaging, reformulation, added service convenience etc. It utilizes existing assets.
o Transformational Initiatives – Designed to create new offers to serve new markets and customer
needs such as iTunes, Tata Nano, Starbucks in-store experience. These require company to
build capabilities and develop markets that aren’t yet mature.
o Adjacent Innovation Initiatives – It involves leveraging something the company does well into
a new space. It allows company to draw on existing capabilities but necessitate putting those
capabilities to new uses.
 Right balance is one which maximizes ROI and market capitalization. Management should
determine how far away its ratio is from ideal and try to close the gap. The right balance in
innovation portfolio varies from company to company depending on several factors as follows:
o Industry – As per research findings companies that allocated their resources in core, adjacent
and transformational innovations in ratio of 70-20-10 outperformed their peers by realizing P/E
10%-20% higher. Industrial manufacturing companies, which have this allocation closest to 70-
20-10, have higher P/E ratio than technology companies (45-40-15) and consumer goods
companies (80-18-2).
o Competitive Position – Company’s competitive position in its industry also affects the balance.
E.g. Apple in 1990s had placed more bet on transformational innovation (iTunes) as it was
lagging at that time and wanted to make a truly disruptive product.
o Company’s Stage of Development – Early stage startups (especially backed by VCs), wanting
to make a big splash to attract investors, customers and media, make a disproportionate
investment in transformational innovation. As they mature and develop stable customer base,
they move to focus more on core innovation.
 Companies which get the right balance think carefully about five key areas of management:
o Talent – While for core/adjacent analytical skills are vital, transformational innovation needs
skills found among designers, anthropologists, planners etc.
o Integration – Although right skills are critical, they are not enough. People working on
core/adjacent innovations are most likely to succeed if they remain integrated with the existing
business. However, transformational innovation tends to benefit when they are separated from
company’s norms and expectations.
o Funding – Core/Adjacent innovation does not need big funding. For them it is enough to provide
funding from relevant business’s P&L. However, for transformational funding should come
from an entity that can rise above the fray of annual budget allocation.
o Pipeline Management – In case of core product, companies have enough market insight to be
able to assess the project by stage-gate process. However, in transformational, where customers
may not know what they need, stage-gate process should not be used.
o Metrics – Core/adjacent can be evaluated using economic and external metrics. But non-
economic and internal metrics should be used to assess transformational efforts in its early
stages.