If you ask me which is the concept I have used the most in my Innovation Management talks, I am sure it would be that of the Innovation Horizons, well, probably closely following the definition of Innovation itself. However, I have never explained in this blog my view about this concept and why I believe it is so important, so it is about time I do it.
Several years ago, when I started working in Innovation Management, like most of us who ended up in such a position, I was not an expert on the matter. I had a lot of interest, eagerness and commitment, but not much background on the actual science of innovation, so I started reading. As I explained in a previous post, “The Innovator’s Dilemma” from Clayton Christensen was one of my initial references, as well as “Open Innovation” from Henry Chesbrough. I also learned a lot from another book, “Innovation Tournaments” from Karl T. Ulrich, especially on the systematic process of selecting the best ideas to move through the innovation pipeline.
A very interesting concept I bumped into when reading this last book was the “Innovation Horizons” where (as you can see in the figure below) innovations can be plotted in a two axis diagram according to their Technological Uncertainty and Market Uncertainty. The lower the uncertainty, the closer you would be to the origin (bottom-left). In this way, the author established three areas or “horizons” of similar “combined uncertainty”, or to use a more usual terminology, a similar level of risk. What is really interesting is to relate the risk level to the actual possible market impact, so if you want to do something really new and radical that promises huge gains, well, you need to realise there is a big risk that it will not work. On the contrary, staying on the “safer” area of the graph, usually generates incremental innovations, which are fundamental to stay in the market, but which normally will not bring about great changes.
With this framework in mind, the conclusion was easy for me. In our innovation practice, we cannot manage the same way radical and incremental innovations. They need different things, normally even different people, and the expectations and risks are completely different. So when you need to choose which initiative to fund, you should not make a direct comparison between them to decide. This is obvious, right? Well, apparently it is, but you would be surprised to see how it is not so in many companies around the world. Some people force radical expectations and gains on incremental projects, or on the contrary, incremental processes on radical ideas; in both cases the conclusion is normally the same, frustration and failure.
So what can you do? How can we succeed in this juggling exercise? Here is where the concept of “Innovation portfolio” comes to our help. Somewhat like a financial investment portfolio where you mix products of different risks, in an Innovation portfolio you should mix projects of different risk horizons, ensuring also that you manage them accordingly to their characteristics. This concept is very well explained in the “Managing Your Innovation Portfolio” article from B.Nagji and G.Tuff, which was published by HBR in 2012. They draw the horizons and the axis a little differently, as you can see below, but the idea is basically the same (I normally use now this representation). They define an “Innovation Ambition Matrix” with three areas (Core, Adjacent and Transformational) and explain how the wise answer is to play in the three fields with a distribution depending on the sector and company situation (here the famous Google 70-20-10 rule Larry Page explained years ago). Core innovation is mandatory to stay alive and in-sync with the market, but it is not enough, because as the authors explain, long term return ratio is reversed from risk level, that is, low risk initiatives normally contribute much less to long term returns that those in the high risk spectrum. I recommend you reading this article thoroughly as it is full of interesting insights.
In the end, what we realise is that Innovation Strategy is not a zero-sum game, and that the decision on how you configure your portfolio is really important, but not easy at all. Another important conclusion is, as I said, that you should manage innovations and expectations carefully, being very conscious of what kind of innovation you need and what initiatives you have in your hands. In my experience, understanding this concept is fundamental to ensure consistent innovation returns. Low risk usually implies little room for surprise (good or bad), while the possibility of big surprises normally implies great risk of failing (and hopefully learning, but this is another story for another day). It is just common sense! But as they say, common sense is the least common of the senses…