Some companies only innovate when they are in crisis and need a silver bullet. Others hedge their bets by approaching innovation investments with a portfolio strategy...

1. Constructing Your
Innovation Portfolio
Factor the four classes of innovation By G. Michael Maddock
into how your company contemplates and Raphael Louis Vitón
investing in product development. May 26, 2010
With the rather negative exceptions of Enron, Bernie
Madoff and WorldCom, finance is not the first place we
think of when we hear the word “innovation.”
Still, asset allocation — a staple of financial planning — The Four Classes of Innovation
can be applied to your “innovation portfolio” with terrific
results. We’ll explain. If you want to go down this road (and we think
you should), how would you divvy up your innovation
When it comes to how you divvy up your personal portfolio? Before you can answer that question,
investments, you have always been told that they should you need to determine the classes into which your
be spread among asset classes (stocks, bonds and innovation efforts fall. There are four:
cash) and then diversified further within the classes
themselves. For example, you might hold stocks in both 1. volutionary Innovation. (Technically easy and a
E
foreign companies and domestic ones, enterprises clear customer benefit.)
with large and small market capitalization, retailers and This is the effort you extend to keep current cash
high-tech companies. cows fresh and to grow brands in the market. This
is a hedge against becoming stale in the current
The idea is to capture all the potential gains out there — markets and categories. It is generally the largest
the more bets you place, the greater the chances you portion of any company’s development budget, and
have of being right — while minimizing risk. For example, it’s sometimes over-weighted in companies that tend
if you’re investing in the small cap growth stocks sector to “follow.” Examples would include combining DVR
and it tanks, your bond holdings might mitigate the loss. functions into a cable box and launching a new flavor
variety in an existing product.
You can use exactly the same approach when it comes
to innovation. In determining whether or not to invest 2. ifferentiation. (Technically difficult and a clear
D
in research and development, product tweaks, line customer benefit.)
extensions or new offerings, it is helpful to think of your
budget dollars and people time as assets, then diversify This portion of your innovation budget is used for
them as well. making a distinction between your products and
those of your competitors. Multitouch interfaces
Why? Clearly, these activities present different levels of were studied for years; Apple took on the technical
risk and reward trade-offs. Like stocks, bonds and cash, challenge to put it into a phone.
they are not necessarily correlated to one another; the
success of one is not contingent on another. As with
financial planning, the idea of hedging your bets — while
making sure you are represented in whatever sectors
are hot — just seems to make sense.

2. 3. evolutionary Innovation. (Technically difficult
R
and there’s no way of knowing ahead of time if the
customer will accept it.)
This is the place where you search to find ground- One last point: To take the financial planning metaphor
breaking ideas for products, services and business one step further, automatic “rebalancing” is important,
models. PayPal, iRobot’s Roomba and Fuji’s environ- too. Once an idea develops in the revolutionary or fast-
mentally safe batteries would be examples. This is a fail boxes, it may move to the maintenance box after
bet that the market will move toward your idea and it grows and matures. The budget should be shifted
your company will have a first-mover advantage. accordingly.
4. ast-Fail Innovation. (Technically easy, but no way of
F The nice thing about approaching innovation this way is
knowing if the customer will accept it.) it reduces the subjective “whichever way the wind blows”
process of deciding where to invest to the actionable
This is the activity where you go to market and do
and strategic no-brainer. You have your innovation asset
your testing and learning there. It is the opportunis-
allocation model and you divide the money up accord-
tic segment of your development activity (i.e., it’s
ingly. It reduces the stress at budget time by getting
well within your wheelhouse of capabilities and core
everyone thinking concurrently about how to set priori-
competencies, but far more experimental than usual).
ties. It allows your teams to stay focused on generating
Here you expect to fail quickly before succeeding with
the right ideas and then implementing them versus the
an offering that may literally be refined by your cus-
hamster-wheel scenario of repeatedly guessing at the
tomers’ feedback in market. It is fairly low risk — you
“how much should we spend?” question.
don’t spend much before you send the product out
into the marketplace — and has an extremely high It’s a very handy idea.
potential reward as customers express exactly how
they want you to alter it. Google runs multiple tests
on ads and then goes worldwide with the ones that G. Michael Maddock is chief executive, and Raphael
work best; companies are using Twitter as a potential Louis Vitón is president of Maddock Douglas, an
innovation consultancy that helps clients invent,
customer-relations and resolution channel. Is it pos-
brand and launch new products, services and business
sible that Apple is planning to learn more about the models. Maddock is author of the upcoming book
growing tablet market by introducing the iPad? Brand New: Solving the Innovation Paradox —
How Great Brands Invent and Launch New Products,
MUST BUILD
BUSINESS CAPABILITY Services and Business Models (Wiley, April 2011).
BEAT YOUR TAKE ADVANTAGE
COMPETITION TO OF FUTURE
THE PUNCH MARKETS
INVEST IN REVOLUTIONARY
DIFFERENTIATION INNOVATION
ESTABLISHED
Mike Maddock, CEO
NEW
MARKET MARKET mike@maddockdouglas.com
EVOLUTIONARY
INNOVATION
FAST FAIL
INNOVATION
630.563.6415
MAINTAIN TEST THE WATERS
RELEVANCE AND LEARN
WITH CORE IN MARKET
A CURRENT
BUSINESS CAPABILITY
In more aggressive industries — that is, industries
such as consumer electronics that live and die on
new products — your innovation portfolio development
model might see a higher balance of effort in the
upper right side of the diagram and less on the left.
In more conservative industries, it’s vice-versa.