KNOWBOT - INNOVATION PORTFOLIO OPTIMIZATION

A key trick here is not to talk about money at this stage, because often the return on investment argument kills an idea that has strong potential. Therefore, the progressive selection of a candidate is based on robustness of the idea above anything else. We use a very reliable tool, called Real Worth Wins (RWW), where the ideas are tested for their robustness and potential pitfalls under three aspects:

• Real – Does the idea have a real market, where there is a need for the product and customers available to buy it and whether there is a real product that can be manufactured and potentially satisfy the need of the customer?
• Win – Can the product be competitive with clear advantages and whether that competitive advantage can be sustained in the long run and, if the company is competitive enough to support the product with adequate resources and appropriate management?
• Worth – Is there a suitable risk to reward ratio and whether the product launch makes strategic sense at this moment?

Every idea is scored against a set of questions under each category and based on the average score, a first project priority list is identified. For example, in the Covid-19 times, the idea of a beer company choosing to produce sanitizers from their plants might score big in RWW model.

STEP-2 Risk Evaluation

The criteria for the chosen ideas are measured from the perspective of both market risk and technical risk, where each idea is scored on different parameters. Within Market Risk, we evaluate the customer’s behavior and decision-making process, which in today’s world is highly influenced by e-commerce, as people feel safer shopping from their mobile phones rather than visit a store in-person. This also includes evaluating the existing sales and distribution network to push the idea into the market. In addition, each idea is scored on the extent of relevance with the brand promise and current customer relationship, to ensure the new idea doesn’t take away a positive brand image from consumers’ mind. From the Product Risk perspective, foremost are current development capabilities and the technical competency to produce. Take the example of a Shirt manufacturer evaluating the innovative idea of introducing a new shirt that can measure body temperature, heart rate and/or blood pressure. However upbeat the idea, it is critical to evaluate the required knowledge and science behind product development and the necessary sales and service functions.

The ideas that score low in both market and product risk become contenders for the portfolio and move to the next step. But we have also experienced 20% of ideas from the high-risk category moving ahead, simply because they are truly strategically aligned and might just give phenomenal returns.

STEP-3 Customer-Technology Matrix

The Customer–Technology (CT) matrix is based on measuring the innovation scale from the perspectives of Customer Perception and Technology. This step is critical for bringing in the element of innovation in portfolio and not just measure the success of projects based simply on management by objectives (MBO). It might be easy to successfully execute lots of projects, but true innovation portfolio management cannot be a reality without screening projects on the CT matrix. For example, a company like Apple only chooses projects that are a technological breakthrough and will provide the ultimate customer experience on innovation. However, not every company has the luxury of being able to allocate resources solely based on CT score, nevertheless, it makes a lot of sense to also evaluate the innovation dimension, as well as the RWW and Market/Product risk for ideas/projects and see the distribution of the portfolio with respect to business strategy. Another example could be Ferrari planning to invest in the idea of connected cars. Now if Ferrari chooses to invest in an innovation platform such as “connected cars” for a single model launch, then it is a very expensive and risky bet, but if Ferrari strategically decides to build it as a platform for all future models, then it makes a lot of sense.

STEP-4 Risk vs Value Matrix

Through the previous steps, we work to clean the list of candidates to a large extent. A further screening of ideas comes from the comparison of projects through financial and risk perspective. We use the concept of Zero-based prioritization, as promoted in a Gartner report, wherein we clear the complete pipeline of projects and start afresh by populating all the existing and shortlisted projects on the Risk (x-axis) vs Value generation (y-axis) Matrix. This matrix provides the opportunity to choose the priority projects starting from the left of the matrix, that is starting from low risk projects to high risk. It also gives us a quantification of the generation plans by consolidating expected profit growth from current products, ongoing projects and future opportunities. Hence, a clear output of step-4 is the creation of a Quantified Project Roadmap, both of costs and benefits, based on priority, and it must include details of the strategic milestones (when); market trends and regulatory requirements (why); product platform, features, performances (what); technological capabilities (how); and partners, resources and infrastructure requirements (who).

STEP-5 Workload Profile

The next step is about managing the workload profile of the various departments who will come onboard for the execution of the project plan. The idea is to ensure that the portfolio generates a workload that is in sync with available capacity, and if it is not, then the management needs to work on the adjustment of capacity to honor the timelines in the roadmap.

STEP-6 Cost and Gain Curve

Finally, the portfolio is profiled based on the investment required for each project against the potential gains or benefits it is expected to provide in the coming quarters / years. The profile of costs and gains gives a final element to evaluate whether the portfolio is consistent with the business strategy and can fill the gap as per the portfolio sufficiency matrix, as discussed in the previous chapter.

CLOSE THE LOOP

So, these 6-steps close the loop for Innovation Portfolio Optimization and provide any enterprise with a clear roadmap for execution of projects aligned with business strategy. Typically, based on the industry it caters to, an enterprise can go back to the portfolio optimization loop every quarter (3-months) to test the robustness of existing projects and use the zero-based prioritization and rearrange the project roadmap, as necessary. A basic condition in order to make this process effective and improve continuously (that in our experience is not always respected), is an existing attitude to consistently evaluate the performance of each product in terms of volumes and real margins (better if in a “full margin perspective”). In the absence of this “Lesson learning process”, based on the comparison between the real results and the original Business Case (step 6) the organization cannot continuously refine the way it evaluates the potentiality of new projects, taking the risk to increase complexity (and therefore costs) due to unprofitable products.