Build your innovation ecosystem with innovation portfolio management

The new book “the corporate startup”, is definitely recommendable. It integrates very well how to apply lean startup practices in a corporate context. But what I like most is its emphasis on how to build an innovation ecosystem and which vital role innovation portfolio management has in that.

Our approach to building the innovation ecosystem

We believe that in order to achieve long term change it does not suffice to organise the occasional workshop or send a team off to an external incubator. We believe that in order to really bring about change, to get innovation in your organisation’s veins, structure is required. This structure is innovation portfolio management. For this reason, our company Pimcy Innovation & Portfolio Management combines Lean innovation with innovation portfolio management. So, our angle is different from most portfolio management consulting companies. Our starting point is building the innovation ecosystem instead of improving the project management organisation. And we don’t do big bangs, but start small, learn and evolve together with our client. This is our cupcake methodology.

Innovation portfolio management facilitates decision making, ensures the right process is used for a certain type of project and makes sure that metrics and mindset are fit for purpose. All of these are part of our innovation portfolio management approach. And all of these are part of the five key principles that are applied in “the corporate startup” and are the prerequisites for building the innovation ecosystem.

Based on the 5 key principles stated in the Corporate startup, I will outline our approach to innovation portfolio management.

1. Define an Innovation Thesis

Companies need to define a specific innovation strategy. All too often, high level strategic goals are formulated (eg x% more profit, x% cost reduction, become market leader) but they are too generic to guide innovation. Based on your perspective of the world, trends and technologies, you should define where you stand as a company. And in what arena you would like to play ball. You should also define what you are not going to do.

If you have a sound innovation strategy there will be much more focus in your ideation/ idea generation process. Also, it will me much easier to approve or reject certain ideas.

The “corporate startup” provides an innovation thesis template which works really well. Next to this we apply a tool that we call “the dreamcatcher”. We ask (executive) teams to identify relevant trends and technologies and define how they see the world. Then we use a card deck to identify the six guiding values of the team. The team then defines their mission, or in other words: “what role do you want to play in the world you see in your vision”.

We have experienced that by defining these guiding principles and committing to them, it becomes much easier to prioritize and take decisions.

2. Balance your innovation portfolio using the 3 horizons model

In previous blogs I have already described our approach to the 3 horizons model.

Horizon 1/ Core, is about process innovation, or execution of the current business model.

Horizon 2/ Adjacent is about business model innovation. This means that certain elements of your existing business model are changed (for example new target group, new distribution channel, new income model), which may result in other elements of your business model that need to adapt.

Horizon 3/Transformational is both an unknown market and an unknown solution. These are new business models that potentially disrupt the existing ones.

Key premise of the Horizons model is that you compare likes with likes. Each Horizon gets a different budget, and most likely different processes and metrics will apply. Also, a different mindset per Horizon is required. Usually even different types of people are required…

Result of this separated budget buckets is that a very innovative disruptive project with uncertain results will not have to compete for budget or resources against a more secure next generation product with a more predictable ROI. Which almost in all cases will result in the latter being selected.

Instead, with the 3 Horizons model, an allocation is defined amongst the 3 Horizons, based on your Innovation Thesis and Innovation Strategy. A typical division is 70-20-10 (H1-H2-H3), but this percentage will vary based on the context of your business and the arena it is competing in.

3. Choose the right innovation framework to move from search to execute

Source Steve Blank

The 3 Horizons model has already clarified that based on the type of innovation you pursue, a different mindset and different metrics need to be applicable. This is also true for the type of innovation process you use.

The more innovative, the more emphasis should be put on the search and discovery phase. If it is very much business as usual, then the emphasis is on finding the most efficient process that can deliver in time, at cost, in the right quality. In Horizon 1 we see that processes like Lean Six Sigma, Agile/Scrum delivery methods are used. But sometimes also traditional Waterfall approach can work.

For Horizon 2 and Horizon 3 we have experienced that the Lean Innovation Methodology, or at least applying some of the key principles are better, also in the corporate context. For this kind of projects some experimentation space needs to be granted. Also, these projects, especially in Horizon 3 tend to fail more often. In order to limit the waste of failing projects, small budgets are allocated stage per stage. And based on results of experiments and learnings in the market, the decision is made to move on to the next stage or not. It is better to fail fast, then pursue and fail at the end.

In the next graph the red line indicates how project cost typically evolve. Although not always linear, typically the costs in early stages are relatively low, and in later stages relatively high. When applying Lean Innovation you try to follow the knowledge-acquisition curve. But, if the conclusion is that “we are NOT building the right thing”, then either the project is stopped or it is drastically changed. And we rather do that as soon as possible. So, learn to embrace fast-failure.

http://alistair.cockburn.us/Disciplined+Learning

4. Innovation accounting: use the right metrics for innovation

As said before, the Horizons model clarifies that you need different metrics for each horizon. You cannot use ROI as a metric for a wild, disruptive idea. Instead, speed of learning, or number of validated assumptions could be a metric. Appropriate metrics for each Horizon are depending on the context of your company.

5. Innovation practice

Last but not least, we can define all kind of processes, structures and metrics, but it is the people of the organization that have to work with it. If they don’t understand, or don’t have the right skills to apply them, nothing will change. In the end, if you really want to build an innovation ecosystem, this will have impact on your organisation’s culture.

In order to help changing the innovative culture and evolving to a more entrepreneurial mindset, we are using the DOON methodology. This is a combination of innovation best practices, that are laid out in a set of practical tools. Instead of teaching the theory behind these innovation practices, we are coaching people to apply them.

Summary

Five key principles are required to build innovation ecosystems according to “the Corporate Startup”. In this article I have explored these 5 principles and explained how our company applies these principles.