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Managing the opportunity portfolio: innovation and corporate strategy must feed off each other through dialogue. The portfolio planning process described here provides the foundation for that dialogue.

Article Excerpt
Imagine you have to take over a struggling soccer team. As coach, you would face two difficult questions: what type of soccer you want your team to play--you could stress offense or defense--and which players you should pick. The composition of your team has insights for the management of an innovation portfolio, the subject of this paper:

* You cannot choose a strategy without knowing the skills of your players, and you cannot pick the players without knowing your strategy. The decisions are intertwined.

* You cannot evaluate a player in isolation. You can have the best player in the league, but without capable support for him, your team will not win. The value of the team matters, not the value of each individual player.

What players are to a soccer team, opportunities are to an innovation portfolio. And portfolio planning is where individual opportunities collide with firm-level objectives: opportunities get created unpredictably and singly, while company resources have to be allocated quarterly, and managers have to tend to the performance of the firm as a whole. Inventors fret about the success of their individual opportunities, while managers worry about meeting firm-wide financial targets. This paper outlines the essential tools for a rigorous portfolio planning process.

Portfolio Planning Process

An oft-used concept in portfolio management is that of balance, a means by which a firm can achieve its financial objectives in a world of competing demands and incomplete information. From one side, you have the flow of opportunities, which arrives as a result of your overall innovation process. In process parlance, this flow corresponds to a push--the arrival of these opportunities is not triggered by the need for them (demand) but by their availability (supply). The second flow, from upper-level managers, moves in the opposite direction. Unlike inventors and project managers pushing opportunities forward and hoping for resources, here you confront a pull. Top managers see gaps in the current portfolio and want them addressed. They try to pull them through the process.

Complicating matters, innovators also have to find a balance between using their existing strategies to assess opportunities and exploring the possibility that innovations can enable them to redefine their strategies. Taking existing strategy as given and using it to shape the innovation portfolio is often referred to as a top-down approach to managing an innovation portfolio, while using innovation to redefine a strategy can be thought of as a bottom-up approach as seen in Figure 1.

[FIGURE 1 OMITTED]

Given this balancing act, any portfolio-planning process will always require some iteration, and it is unlikely that you will immediately find a perfect balance between the competing strategic demands.

Despite the necessary improvisation, we believe that portfolio planning can be executed with the same methodological rigor that applies to other parts of the innovation process. We will outline a portfolio planning process (Figure 1) and provide a toolbox for applying it. Not every tool will work for everyone. But used as needed, these tools will help you address the five basic tasks, listed below, that are critical to building your portfolio strategy. The tools outlined in this paper will help you to:

* Identify current gaps relative to business strategy.--Tools such as the traffic-light method and analyses of your technology position and product and service attributes can help you identify gaps and the need for innovations.

* Identify future gaps.--Based on expected changes in your business environment, you can envision future gaps. Tools such as scenario analysis and technological life cycles help you to identify these gaps and anticipate them in your planning.

* Balance between strengthening your current strategic position and exploring future strategies.--Decide on the extent to which you want to lead in the exploration of new markets or technologies. A firm aiming for leadership needs to allocate a larger part of its innovation budget to opportunities with high uncertainty (opportunities so risky that you cannot even consider a formal financial valuation). The strategic-bucket framework helps to allocate resources across the different horizons.

* Create the innovation portfolio for each horizon or strategic bucket.--Based on your opportunities with low uncertainty and medium uncertainty (i.e., opportunities associated with risks that are hefty enough to prompt the cancellation of the project during either development or following launch), aim to create a portfolio with the highest potential financial value. Add a set of high-uncertainty opportunities to strengthen your future position or hedge against changes in your industry.

* Seek opportunities to redefine strategy.--Always explore the extent to which you can redefine the competition in your industry. Analyzing dimensions of merit and identifying discontinuous change help you decide when you should redefine your strategy.

In the remainder of this paper, we outline how to accomplish these five tasks. We shall then discuss two portfolio tools that are commonly used in practice and point to their shortcomings.

Identify Current Gaps In Business Strategy

When formulating your innovation strategy, it can be helpful to ask some basic strategy questions (1-3).

* Who are your target customers?

* What products or services do you offer?

* Why do customers buy your products or services and what value proposition distinguishes you from competitors?

* How do you create a product or service that meets this value proposition and what is your competitive advantage?

* What if a specific change in the competitive environment happens?

The answers to these questions will give you a good picture of your firm's strategic intent as top management defines it. Unfortunately, this intent might not--in fact, it often does not--correspond with the current realities...

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