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Golden Ratio for Innovation

James AlexanderMentor

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70 20 10 rule of innovation

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a little about me

• Strategy and delivery executive at IBM iX

• Product management executive at Adobe for 7 years

• Three start-ups…two exits• 12 patents

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history of 70-20-10Google’s golden rule for managing innovation

“The test that I apply – and we do this every day, 70/20/10 – is to ask how a feature will extend the core, the adjacent, or the innovative stuff to fulfill our mission. That's the sort of drug that we all take, and it works really quite well.”

Google CEO Eric SchmidtDecember 2005Business 2.0 Magazine

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3 kinds of innovation

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HBR research backs it up

Bansi Nagji and Geoff Tuff publish “Managing Your Innovation Portfolio” in HBR in 2012

looks at industrial, tech & CPG

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finding no. 1

Companies that allocated about 70% of their innovation activity to core initiatives, 20% to adjacent ones, and 10% to transformational ones outperformed their peers, typically realizing a P/E premium of 10% to 20%.

Managing Your Innovation PortfolioHarvard Business Reviewhttps://hbr.org/2012/05/managing-your-innovation-portfolio

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finding no. 2

The return ratio is roughly the inverse: Core innovation efforts typically contribute 10% of the long-term, cumulative return on innovation investment; adjacent initiatives contribute 20%; and transformational efforts contribute 70%.

Managing Your Innovation PortfolioHarvard Business Reviewhttps://hbr.org/2012/05/managing-your-innovation-portfolio

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Is There a Golden Ratio?Analysis reveals that this allocation of resources correlates with meaningfully higher share price performance.

How Innovation Pays the BillsAmong high performers that invest in all

three levels of innovation, HBR reports the distribution of total returns is inverse the

allocation of resources.

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why do investments in transformational innovation have higher returns long term?

• Compete in existing market space• Beat the competition• Exploit existing demand• Make the value/cost trade-off• Crowded space lowers profits

and growth as products become commodities

• Create uncontested market space• Make the competition

irrelevant• Create and capture new

demand• Break the value/cost trade-

off• Growth is profitable and

rapid

core market realities transformational possibilities

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innovation is a big business…top 20 R&D spenders invested $165.3 billion in 2014

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$165.3 B$481.7 B

$48.5 B$1,083.7

B

The top 1,000 R&D spenders have 40% share of innovation spend.The next 1,000 companies have just 3% share of spend.

…companies invest on average 3.5% of revenue…top 1,000 R&D spenders invested $657 billion in 2014

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…but money can’t buy love.only 5 top spenders were ranked most innovative…the top 10 most innovative spent 43% less then the top 10 spenders

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pioneer-migrator-settler mapcreate a balanced portfolio; pioneers will be imitated

Settlers are businesses offering me-too value; migrators are businesses with value improvements over competitors'; and pioneers are businesses that offer unprecedented value—blue ocean offerings.

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pioneer-migrator-settler mapcreate a balanced portfolio; pioneers will be imitated

Settlers are businesses offering me-too value; migrators are businesses with value improvements over competitors'; and pioneers are businesses that offer unprecedented value—blue ocean offerings.

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succeeding with 70/20/10

• Talent• Core, adjacent and transformational innovation require different skillsets

• Integration• Core innovation might do well to be with the main business where transformational innovation

teams need distance from the core business• Funding

• Core and adjacent innovation costs are incremental whereas transformational innovation may require significant, sustained investment

• Pipeline management• The criteria for moving projects through the innovation process must differ. Transformational

innovation is hard to manage in the linear, stage-gate model used for core and adjacent innovation because it’s difficult to know what the right approach is for a market that does not yet exist.

• Metrics• The metrics used to measure success for core and adjacent innovations may make transformational

innovations look like failures too soon. Metrics need to match the types of innovation they’re supposed to measure.

organize and manage the innovation system

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wrap up

• Companies that invest 70% of resources on core innovations, 20% on adjacent innovations and 10% on transformational innovations typically outperform peers and have a higher P/E • Companies spend $1 trillion annually on innovation• Innovating thoughtfully saves cost and amplifies impact• Many existing industries are crowded and commoditized• Transformational innovation eliminates competitors by identifying

entirely new markets where no competitors exist• Successful product managers will build a balanced portfolio

across core, adjacent and transformational opportunities and ensure their organizations are tuned to the innovation system

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sources & resources

• Identify Blue Oceans by Mapping Your Product Portfolio• https://hbr.org/2015/02/identify-blue-oceans-by-mapping-your-

product-portfolio• PWC 2015 Global Innovation Study• http://www.strategyand.pwc.com/innovation1000

• Managing Your Innovation Portfolio• https://hbr.org/2012/05/managing-your-innovation-portfolio