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Designing Innovation Portfolios for Exploration and Exploitation

Sarah Leslie

“Any executive with half a brain knows that innovation is essential to success. The problem is that it takes both halves of a brain to make it happen – the imaginative, holistic right brain and the rational, analytic left brain”.

This is still one of my favourite quotes, from over a decade ago, attributed to Darryl Rigby of Bain and Company. That’s the thing with innovation. It’s both an art and a science. And despite an abundance of ideas and ‘innovation’ activity within many large organisations, without leadership at the C-suite level, clarity of overall strategic intent and ambition, robust innovation portfolio management, appropriate governance mechanisms and a supportive culture, the returns on activity can be very disappointing.

When it comes to innovation portfolio design and management, it is imperative to recognise the dichotomy in the approaches, skills and metrics required to explore, test and develop new products, services, value propositions and business models; and to scale, optimise and exploit those that already exist within the organisation.

    Large corporations are generally masters of the latter. Having developed a desirable value proposition, built, borrowed or bought the means to deliver it, and designed a viable business model, they focus, structure and manage for efficiency in execution and predictability of earnings growth. Yet without an equal focus on exploration, which requires a focus on search, and an embrace of messy, iterative experimentation and learning, many such corporations face irrelevance as start-ups with more attractive propositions rise to take their place.

    The portfolio mapping tool developed by Alexander Osterwalder and the team at Strategyzer promotes clarity of thinking around the imperative for this ambidextrous approach at the portfolio level.

    • The visual separation of the two realms of explore and exploit promotes the required focus on both.
    • Their placement communicates the desired 'up and to the right' growth trajectory.
    • The axes make an important distinction in the metrics with which to analyse and map the relative position of initiatives.

    Dual Explore Exploit Portfolio Map

     

    Subjecting innovation initiatives characterised as ‘exploration’ to the same hurdles as would be required to secure organisational resources for an ‘exploitation’ project is clearly misguided. All the data in the world can only tell you about the past. We have no data about the future, and forecasts can be both wildly inaccurate and manipulated to support a resident hypothesis or business case. That is not to say that both portfolios shouldn’t be subject to a detailed level of scrutiny. Or indeed the same overarching requirements of strategic fit and opportunity. They absolutely should, but the focus required is very different.

    • In an 'exploration' portfolio, the focus is on understanding the expected return or impact, and reducing the risk that your hypothesis might be wrong. For any initiative, through an iterative cycle of design, test and learning, you seek to build confidence in the desirability, equitability, feasibility and viability both for the current market and economic conditions, and the adaptability to foreseen changes and trends.

    Ideas that build up sufficient evidence that they are worthy of the corporation’s investment and support for a full launch to the open market can then be transitioned, with great care, from the management of their nurturing and curious creators to those with the expertise to further optimize for efficiency and scale for growth.

    • In the ‘exploitation’ portfolio, the actual financial return or impact of the initiative becomes measurable, whilst the risk focus shifts from that of innovation to that of disruption, decline or death, and the effort to improving, scaling, protecting and reinventing as necessary.

    For every product, service, value proposition and business model that is currently in market, there must be regular an ongoing evaluation of the strengths and weaknesses in relation to the competition, and of the trends driving emerging opportunities and threats. Without a similarly systematic and dynamic, portfolio-based view of these, they too readily succumb to disruption.

    It’s not news that the success rate for new products and services is directly related to the robustness of an organisation’s portfolio management processes. But the vast majority of frameworks were developed for the 20th century, when competing on products and services alone was sufficient. Organisations today increasingly need to compete not solely on products and services but on business models.

    Employing the dual explore and exploit approach to portfolio mapping, brings explicit and vital management focus to every aspect of delivering new. and maintaining the competitiveness of existing, products and services.



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