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Get the balance right! • 5
Visualizing the innovation portfolio
Service providers need to leverage resources effectively to drive innovation and achieve desired outcomes over time. Smart visualizations of the innovation pipeline and portfolio might help leaders and teams drive fruitful discussions, uncover interconnections, make informed choices, build alignment, and ultimately get the balance right. In the first four blog posts, I expanded the scope of service innovation and explored ways to visualize the innovation portfolio of a service provider. In the final blog post of the series, I cover alternative ways to visualize uncertainty and risk.
Spreading bets in an uncertain world
Operating in an uncertain world, service providers place strategic bets and take calculated risks on innovation projects to unlock value in the core/legacy business and uncover new sources of value in transformational endeavors. (Adapted from Meyer, 2020, to fit the three tensions of service innovation.)
Strategists and innovators spread their bets across the innovation portfolio, balancing sure and safe bets that may have lower returns with solid, side, and slim bets that may have higher returns. At one end of the spectrum, sure bets are no-regret options with a high chance of success in all future scenarios (for a specific time horizon). At the other end, slim bets are long-shot options with a chance of success in only one or two scenarios. (Adapted from Meyer, 2020, to fit the three tensions of service innovation.) See figure 1.
Figure 1. Five types of strategic bets placed on a spectrum from low to high chance of success (slightly adapted from Meyer, 2020)
Strategists and innovators take calculated risks, placing bets after careful consideration of potential benefits, required commitments, and the chance of success/failure (based on Meyer, 2020).
Potential benefits cover financial impact (↑ revenue, ↑ productivity, ↓ waste, ↓ costs, ↑ customer lifetime value, etc.) as well as non-financial impact (↑ differentiation, ↑ brand equity, ↑ customer engagement, ↑ organizational learning, ↑ leadership commitment, ↑ organizational responsibility, ↑ employee engagement, ↑ barriers to entry, etc.). (Inspired by Meyer, 2020.)
Required commitments include resource commitment (dedicating money, capabilities, time, and attention), political commitment (securing internal support and putting your reputation on the line), cognitive commitment (embracing certain perspectives and endorsing certain scenarios), and emotional commitment (investing your heart and attaching yourself emotionally). In other words, people invest financially, reputationally, intellectually, and emotionally to make their strategic bets a success, limiting their ability to ‘play the field’ and pursue other options. (Meyer, 2020)
Failure is broadly defined as significantly missing the objectives that were used to justify the investment (Day, 2007). In a world of uncertainty, the chance of failure increases (the chance of success decreases) when:
The process of developing, implementing, launching, and scaling envisioned solutions is deemed ‘difficult’ due to internal and external innovation hurdles (adapted from Matheson & Matheson, 1997; Matheson, n.d.).
The evidence to support the desirability, viability, feasibility, and adaptability of envisioned solutions is limited to ‘slides and spreadsheets’ (Osterwalder et al., 2020).
The familiarity/fit of envisioned solutions with existing business models, technical competencies, and markets is deemed distant/poor (Abernathy & Clark, 1985; Day, 2007; Pisano, 2015; McGrath, 2020a).
Visualizing levels of uncertainty and risk
One way to visualize uncertainty and risk in the portfolio is by mapping the relative impact of individual projects against the chances of success/failure.
According to Matheson & Matheson (1997), impact is defined as the expected size of commercial value (NPV, net present value) and chance of success as the probability of overcoming internal and external innovation hurdles (the level of ‘difficulty’).
Subsequently, using a classic two-by-two matrix, innovation projects fall into four categories. Bread-and-Butter projects (low impact, low difficulty) produce reliable, if unexciting, returns. White Elephants (low impact, high difficulty) should be killed or repurposed. Oysters (high impact, high difficulty) are typically early-stage projects with blockbuster potential. Pearls (high impact, low difficulty) are exceedingly rare, only found by ‘opening a lot of oysters.’ (Matheson & Matheson, 1997; Matheson, n.d.)
According to Osterwalder et al. (2020), impact is loosely defined as how lucrative the business idea could be for the company if it turned out to be successful (‘financial potential’). Chance of failure is determined by the lack of evidence beyond slides and spreadsheets to prove desirability, viability, feasibility, and adaptability (‘innovation risk’). Subsequently, innovation projects fall into four overlapping categories: Safe Plays (small financial potential, strong evidence of success); Niche Opportunities (small potential, weak-to-no evidence); Promising Concepts (large potential, weak-to-no evidence); and Rising Stars (large potential, strong evidence).
In figure 2, I have combined Matheson & Matheson’s Innovation Screen (R&D Grid) with Osterwalder et al.’s Explore portfolio into one 2x2 matrix.
Figure 2. Mapping the relative impact of innovation projects against the chances of success/failure (Matheson & Matheson, 1997; Osterwalder et al., 2020)
A second way of visualizing uncertainty and risk is to map different types of uncertainty against each other (based on the familiarity or fit with existing business models, markets, technical competencies, etc.). For example, McGrath’s Opportunity Portfolio (2020a, 2020b) visualizes how the service provider is investing across different levels of uncertainty. Other similar visualizations include Day’s Risk Matrix (2007), Nagji & Tuff’s Innovation Ambition Matrix (2012), and Pisano’s Innovation Landscape Map (2015).
On a similar note, it is possible to map three levels of uncertainty to the innovation portfolio of service providers (see blog post Get the balance right! • 4). Uncertainty is here defined as the lack of organizational (or ecosystem) knowledge required to improve existing solutions and/or create new solutions. Projects with medium or high uncertainty require knowledge that the service provider (or ecosystem) does not yet possess. Strategies to reduce uncertainty include: strategic foresight; exploratory research; sensemaking; experimentation; prototyping and evaluative research; continuous deployment; and piloting. See figure 3.
Figure 3. Mapping three levels of uncertainty to the innovation portfolio of service providers
References
Abernathy, W.J. & Clark, K.B. (1985). Innovation: Mapping the winds of creative destruction. In: Tushman, M.L. & Moore, W.L. (Eds.), Readings in the management of innovation (2nd ed.). Harper Business.
Day, G. (2007, December). Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio. Harvard Business Review.
Matheson, D. (n.d.). SmartOrg has invented methods that support great portfolio conversations. SmartOrg.
Matheson, D. & Matheson, J. (1997). The smart organization: Creating value through strategic R&D. Harvard Business Review Press.
McGrath, R. (2020a, December). Building a proficiency for game-changing innovation and growth: Mastering the Opportunity Portfolio. Medium.
McGrath, R. (2020b, December). Put your resources against your best opportunities! Innovation Roundtable. YouTube.
Meyer, R. (2020). Strategic bets framework. TIAS School for Business and Society.
Nagji, B. & Tuff, G. (2012, May). Managing your innovation portfolio. Harvard Business Review.
Osterwalder, A. et al. (2020). The invincible company: How to constantly reinvent your organization with inspiration from the world’s best business models. Wiley.
Pisano, G. (2015, June). You need an innovation strategy. Harvard Business Review.
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Get the balance right! • 4
Visualizing the innovation portfolio
Service providers need to leverage resources effectively to drive innovation and achieve desired outcomes over time. Smart visualizations of the innovation pipeline and portfolio might help leaders and teams drive fruitful discussions, uncover interconnections, make informed choices, build alignment, and ultimately get the balance right. In the first three blog posts, I expanded the scope of service innovation by unpacking three tensions. Now, I explore alternative ways to visualize the innovation portfolio of a service provider.
Visualizing tension 1 (WHY) and 2 (WHAT)
I have devised a simple three-by-three matrix to show the mix of innovation projects within a service organization or ecosystem. One dimension in the matrix represents value creation (how customers create value), and the other represents value facilitation (how the organization facilitates value creation). In addition, each cell in the matrix represents an opportunity for value co-creation (how customers engage in the production process). See figure 1.
Figure 1. Visualizing the mix of innovation projects within a service organization or ecosystem across the two dimensions value creation and value facilitation.
Each bubble in the matrix represents a specific project in the portfolio. Bubble size (area, not radius) depicts relative project size based on funding, projected return, team size, or development time. Bubble color classifies projects based on strategic importance, development phase, complexity, risk, probability of success, market segment, target audience, team health, or ownership. Connecting lines between bubbles highlight dependencies (and line thickness degree of affinity).
The matrix can also be used to visualize the balance between investments in core/legacy businesses (to unlock value) and investments in new, transformational endeavors (to create new sources of value). See figure 2.
Figure 2. Visualizing the tension or balance between investments in core/legacy businesses and investments in new, disruptive endeavors.
Visualizing tension 3 (WHEN)
The Futures Cone (Voros, 2001) is a common way to depict the range of possible futures for the near future, the intermediate future, and the distant future. See figure 3.
Figure 3. The Futures Cone (slightly adapted from Voros, 2001).
The cone is typically divided into three cross-sections; each plane (in the shape of a circle) is here used to show the distribution of scenarios and projects across the four types of futures for a specific time horizon. All innovation projects should arguably be linked to one or more scenarios. In addition, each plane can show the distribution of scenarios and projects across two or more sectors (geographical territories, market segments, customer groups, solution areas, etc.). See figure 4.
Figure 4. The Futures Cone (adapted from Voros, 2001). The cross-sections are used to show the distribution of scenarios (S1, S2, etc.) and innovation projects (A, B, etc.) across the four types of futures for specific time horizons.
In my next blog post, I will explore alternative ways to visualize uncertainty and risk in the innovation portfolio.
Reference
Voros, J. (2001, December). A primer on futures studies, foresight, and the use of scenarios. Prospect, Foresight Bulletin, 6. Swinburne University of Technology.
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Get the balance right! • 3
Three tensions in service innovation
Before diving into the intricacies of innovation portfolios, we need to expand the scope of innovation beyond the unimaginative, product-centric definitions of innovation that merely pay lip service to services. Let’s do this by unpacking three tensions in service innovation. The third one is covered below.
Tension 3: Innovation for the near future vs. innovation for the distant future
Service providers need to get the balance right between investing in innovation for the near future, the intermediate future, and distant future. This is ultimately about leaders and employees making sense of weak signals, placing strategic bets, and actively shaping the future they want to happen.
McKinsey’s influential framework ‘Three Horizons of Growth’ (Baghai et al., 2000) is based on the assumption that it might take years for an organization to build new and profitable businesses to displace the core ones. Horizon 1 encompasses the businesses that are at the heart of the organization; the management challenge is shore up competitive positions and extract as much value as possible before the inevitable decline and death. Horizon 2 comprises fast-moving, entrepreneurial ventures (‘emerging stars’) that are expected to complement or replace current core businesses. Horizon 3 contains strategic bets or options on future opportunities (‘the seeds of tomorrow’s businesses’) based on research projects, test-market pilots, minority stakes, alliances, etc. (i.e., real investments in the future as opposed to ideas on post-it notes). Each horizon requires different focus, management, tools, and goals. The organization should allocate its R&D and innovation budgets across all three horizons.
McKinsey’s Three Horizons of Growth and similar time-based frameworks are arguably based on the notion of diminishing returns of current technologies and the performance-improving potential of new and disruptive technologies (for more information about technology S-curves and the timings of technology transitions, see, e.g., Foster, 1988).
However, critics argue that the three horizons are no longer bound by time, and that Horizon 3 initiatives can in fact be delivered as quickly as Horizon 1 and 2 projects. According to Steve Blank (2019), “In fact, it’s the speed of deployment of Horizon 3 products, strategies, and capabilities that are a devastating upset to the status quo.” Airbnb, Uber, and Tesla are all examples of Horizon 3 disruptions based on existing technologies and unique business models, deployed and scaled in short periods of time (Blank, 2019).
A potentially more powerful way of thinking about time and innovation is through futures studies (also called strategic foresight or futures thinking), which provide the mindset, process, methods, and tools required to reflect upon the future in a structured, open, and collaborative way (see, e.g., Voros, 2001).
Voros (2001) proposes three fundamental premises or laws of futures studies. (1) The future is not predetermined; we should therefore consider many potential alternative futures. (2) The future is not predictable; we are therefore able and forced to make choices among many potential alternative futures. (3) Future outcomes can be influenced by our choices (and inactions) in the present.
Alternative futures can be classified in four ways: possible futures (what may happen), plausible futures (what could happen), probable futures (what will likely happen), and preferable futures (what we want to happen). The interrelationships between these four types of futures can be visualized using the Futures Cone. (Voros, 2001)
The creation of scenarios is one means of generating forward views, but, according to Voros (2001), “[it] should come at the end of a careful and detailed process of wide information gathering, careful analysis, and critical interpretation.” An alternative view is that we should move away from carefully crafted and well-written scenario narratives to immersion and interaction in participatory scenario workshops (Hines & Bishop, 2015).
In my next blog post, I will explore alternative ways to visualize the innovation portfolio of a service provider.
References
Baghai, M., Coley, S. & White, D. (2000). The alchemy of growth: Practical insights for building the enduring enterprise. Basic Books.
Blank, S. (2019, February 1). McKinsey’s Three Horizons Model defined innovation for years. Here’s why it no longer applies. Harvard Business Review.
Foster, R.N. (1988). Timing technological transitions. In: Tushman, M.L. & Moore, W.L. (Eds.), Readings in the management of innovation (2nd ed.). Harper Business.
Hines, A. & Bishop, P. (2015). Thinking about the future. Guidelines for strategic foresight (2nd ed.). Hinesight.
Voros, J. (2001, December). A primer on futures studies, foresight, and the use of scenarios. Prospect, Foresight Bulletin, 6. Swinburne University of Technology.
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Get the balance right! • 2
Three tensions in service innovation
Before diving into the intricacies of innovation portfolios, we need to expand the scope of innovation beyond the unimaginative, product-centric definitions of innovation that merely pay lip service to services. Let’s do this by unpacking three tensions in service innovation. The second one is covered below.
Tension 2: Innovation for value creation vs. innovation for value facilitation
Service providers need to get the balance right between investing in innovation for value creation and investing in innovation for value facilitation. This is ultimately about empowering customers to create value and empowering employees to facilitate that value creation. (If this feels a tad too commercial, simply replace ‘customers’ with passengers, guests, patients, residents, citizens, clients, etc.)
Value co-creation is a relatively new paradigm in the domain of innovation, management, and marketing. Multiple theoretical perspectives on value co-creation compete for attention (Galvagno & Dalli, 2014); for the purpose of this blog post, I will use Christian Grönroos’ rather pragmatic perspective (2011) to capture the fundamentals of (and differences between) value creation and value co-creation:
Reciprocal value creation is the fundamental basis of business, with service as a mediating factor.
The service provider is fundamentally a value facilitator. The provider is in charge of its own production process, where resources for customer use are designed, developed, manufactured, and delivered without direct interactions with customers.
The customer as the user and integrator of resources is a value creator. Value-in-use means that value is created by the user for the user (and is the one who determines whether value emerges or not).
Co-creation of value only takes place in service encounters (interactions) between the service provider and the customer. In other words, co-creation of value emerges when the customer is engaged in the production process as co-researcher, co-developer, co-designer, co-producer, co-marketer, and so on.
Needless to say, interactions between the service provider and the customer may also have a negative impact on the customer’s value creation process (i.e., value destruction).
By supporting and facilitating the customer’s value creation process, the service provider can gain financial and non-financial value in return.
Based on Grönroos (2011), I have teased out eight opportunity areas for service innovation:
New/untapped sources of value creation (as identified by underserved/overserved customer needs, segments, markets, geographies, etc.)
New/improved value propositions and customer offerings (core products and supplementary services)
New/improved pricing strategies, profit models, risk-sharing schemes, incentive programs, etc.
New/improved ways to enable and empower customers in their value creation processes
New/improved ways to entice, engage, and empower customers and employees in value co-creation
New/improved ways to enable and empower employees in value facilitation
New/improved ways to produce resources and facilitate customer value creation
New/improved ways to continuously learn, improve, and innovate
The eight opportunity areas can easily be tagged to the four elements of a business model (who, what, how, why), the three layers of the Golden Circle (why, how, what), the two dimensions of dual transformation (what we do, how we do it), and the five questions in the play-to-win strategy (e.g., where will you play, how will you win) (Gassman et al., 2014; Sinek, 2009; Gilbert et al., 2012; Lafley & Martin, 2014).
In my next blog post, I will unpack the third tension in service innovation.
References
Galvagno, M. & Dalli, D. (2014). Theory of value co-creation: A systematic literature review. Managing Service Quality, 24(6), 643–683.
Gassman, O., Frankenberger, K. & Csik, M. (2014). The business model navigator. FT Publishing.
Gilbert, C., Eyring, M. & Foster, R. (2012, December). Two routes to resilience. Harvard Business Review.
Grönroos, C. (2011). Value co-creation in service logic: A critical analysis. Marketing Theory, 11(3), 279–301.
Lafley, A.G. & Martin, R. (2013). Playing to win: How strategy really works. Harvard Business Review Press.
Sinek, S. (2009). Start with why – how great leaders inspire action [Video]. YouTube. TEDx talk.
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Get the balance right! • 1
Three tensions in service innovation
Service providers need to leverage resources effectively to drive innovation and achieve desired outcomes over time. Smart visualizations of the innovation pipeline and portfolio might help leaders and teams drive fruitful discussions, uncover interconnections, make informed choices, build alignment, and ultimately get the balance right.
Before diving into the intricacies of innovation portfolios, we need to expand the scope of innovation beyond the unimaginative, product-centric definitions of innovation that merely pay lip service to services (see, e.g., Keeley et al., 2013; Viki et al., 2019). Let’s do this by unpacking three tensions in service innovation. The first one is below.
Tension 1: Innovation for core businesses vs. innovation for new businesses
Service providers need to get the balance right between investing in core/legacy businesses (to unlock value) and investing in new, transformational endeavors (to create new sources of value). This is ultimately about determining the overarching purpose and desired outcomes of innovation efforts.
Incremental innovation: Service providers can unlock value in core/legacy businesses by identifying and exploiting opportunities to
drive growth (↑ desirability, ↑ inclusion, ↑ differentiation, ↑ loyalty, ↑↓ price, ↑ revenue streams, ↑ channels, ↑ segments, ↑ geographies), and
improve organizational performance (↑ focus, ↓ waste, ↑ service productivity, ↑ service quality, ↑ employee engagement, ↑ customer experience).
Transformational innovation: Service providers can uncover new sources of value by identifying and exploiting opportunities to
adapt, reinvent, and reposition the core businesses (think Netflix),
create adjacent, ‘close-to-the-core-business’ businesses (think Facebook, Virgin, or Easy),
create ‘new-to-the-core-business’ businesses (think Amazon Web Services), and/or
create uncontested market spaces (think Cirque du Soleil).
This tension rhymes with influential frameworks and mental models such as Product-Market Strategies for Business Growth (Ansoff, 1957), Seven Degrees of Freedom for Growth (Baghai et al., 2000), ‘little i’ and ‘Big I’ Innovations (Day, 2007), Hierarchy of New Service Categories (Wirtz & Lovelock, 2010), Innovation Ambition Matrix (Nagji & Tuff, 2012), and Transformation A and B (Gilbert et al., 2012).
In my next blog post, I will unpack the second tension of service innovation.
References
Ansoff, I. (1957, September–October). Strategies for diversification. Harvard Business Review, 113–124.
Day, G. (2007, December). Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio. Harvard Business Review.
Gilbert, C., Eyring, M. & Foster, R. (2012, December). Two routes to resilience. Harvard Business Review.
Keeley, L. et al. (2013). Ten Types of Innovation: The Discipline of Building Breakthroughs. Wiley.
Nagji, B. & Tuff, G. (2012, May). Managing your innovation portfolio. Harvard Business Review.
Viki, T., Toma, D. & Gons, E. (2019). The corporate startup: How successful companies can develop successful innovation ecosystems. Management Impact Publishing.
Wirtz, J. & Lovelock, C. (2010). Services Marketing: People, technology, strategy (8th ed.). World Scientific.
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