How much of your innovation budget and innovation efforts should focus on improving your existing business, and how much should seek to explore and transform your business for the future?
This is one of the fundamental strategic questions which every business leader needs to consider.
One of the best ways to assess what proportions your company should allocate to different types of innovation projects is by looking at your current and desired innovation portfolio.
With clients, I always use a tool like the Ambition Matrix to look at where their current focus and resources lie, and how this aligns with their future ambitions.
But what does a well-balanced innovation portfolio look like?
One of industry standard answers comes from research by Deloitte Partners Bansi Nagji and Geoff Tuff, in their groundbreaking 2012 article in Harvard Business Review: Managing your innovation portfolio.
According to their research, high-performing innovation companies spent approximately:
- 70% of their innovation resources on incremental innovation, to improve their existing offerings and operations
- 20% of their innovation resources on adjacent innovations, to expand offerings and attract new customers
- 10% of their innovation resources on transformational innovations, to explore completely new offerings and markets
Since then, the 70-20-10 ratio has been used as a standard by many innovation consultancies, to ensure that companies build out a portfolio of innovation projects which improve current performance, but are also looking to grow into the future.
The 70-20-10 ratio was always an average though. Some companies, like technology companies which need to produce new offerings more quickly, might have a ratio that is more like 45-40-15. On the other end of the spectrum might be large consumer goods companies with established core offerings, where the ratio might be 80-18-2.
What I always find interesting when working with clients to map their current portfolio is how their current portfolio does not actually match their ambitions. They might have lots of projects which they consider to be “transformational”, but when you actually look at what those projects are hoping to achieve, they often turn out to be nothing more than maintainance, like upgrading software across the company to the newest version.
However, since 2012, this 70-20-10 ratio has come into question, especially as more and more leaders aim to ensure they are investing enough in transformational and adjacent innovations.
So what is the best new ratio for companies.
The best research I have come across to answer this was done by Innovation Leader‘s Benchmarking Innovation Impact 2018 report.
Innovation Leader, together with management consulting firm KPMG, asked 270 executives at large companies responsible for innovation, R&D and strategy about their innovation projects, challenges, portfolios and strategies.
What they found is that in reality, companies are already investing much more in adjacent innovation and transformational innovation.
In fact, their research showed that instead of a ratio of 70-20-10, on average companies were already investing 49-28-23.
Innovation Leader even did a follow-up survey in 2020 to re-benchmark the results, and in 2020 the ratio was around 48-26-26. But the 2018 also has other very interesting insights which I will go through now.
However, this is an average ratio. It does not apply equally to every type of company.
Fascinatingly, the report goes into much more detail about the different innovation portfolio mixes in different industries, as shown in this table:
As you can see, certain industries with large, established offerings like Mining, Automotive and Hospitality are spending much more than average on improving their current offerings with incremental innovation. There is nothing wrong with this.
On the flip side, other industries with room for completely different offerings and markets in the future, like Aerospace, Education and Pharmaceuticals, spend much more on adjacent and transformational innovations.
So your company’s ideal innovation portfolio mix should align with your strategy, as well as processes on existing business and potential future business.
Finally, one of the most interesting insights around innovation portfolios from the report was about which people or parts of the business are actually involved in the various types of innovation?
After all, we know that often innovation dies at the handover.
What became clear is that the most incremental innovations are likely to be executed by the business units themselves.
Dedicated Innovation teams and R&D teams, as well as outside resources, were much more likely to be involved with innovation projects which were deemed to be more adjacent and transformational.
This shows why it is so vitally important to understand which innovation capabilities are required to innovate across the entire company, not just in the stereotypical innovation teams. A great method to assess these capabilities is a tool called the 3 Dimensions of Innovation.
Finally, the question also asked how innovation projects and portfolios are allocated their budget:
Nearly 70% of companies admitted that innovation budgets were done as part of the standard annual budget process. Only about 30% of innovation budgeting has its own process.
This is terrible news.
Time and time again, we have seen that normal project budgeting processes, especially those that rely on business cases, do not work for delivering high-performing innovation projects.
Innovation projects need to be judged and progress assessed using a different, appropriate methodology.
So what is the ideal innovation portfolio ratio for your company?
Well, that depends.
It will be different for your company compared to your competition, and compared to other industries or companies with other strategies.
Not only on what your current innovation strategy looks like, but also what the wider market might look like in the near-term and long-term.
At the moment, it looks like there might be a recession coming. This could significantly impact whether it makes sense for companies to invest more in incremental or transformational innovation in their near-term portfolio.
If you are interested in having an innovation expert come and help you assess your current innovation strategy, and balance your innovation portfolio of projects accordingly, then have a look at my client services and contact me. I look forward to hearing from you.
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