Evaluating Radical Innovation Portfolios

Here's a process for removing some of the uncertainty surrounding breakthrough innovation projects in large companies. OVERVIEW: Radical innovation in large firms is a risky endeavor, exacerbated by high levels of uncertainty and long cycle times. Moreover, management lacks evaluation tools that are appropriate for the degree of ambiguity of the information available from these types of projects. Add to this the difficulties of managing in the context of the large firm where many processes are tuned toward repetition and continuous improvement, and it becomes clear that commercialization of radical innovation (RI) is a difficult proposition at best. Portfolio managers will almost invariably build a team, learn appropriate processes, clarify their mandate within the company, generate initial projects, and begin to enrich their portfolios, only to have their efforts cancelled out due to an unsatisfactory financial return. The "what have you done for me lately?" question plagues these groups, and ends up costing the company investment of resources in opportunities that are never leveraged. Having an evaluation tool to assess the relative values of projects within the context of the entire radical innovation portfolio, and to track changes in the relative value of the portfolio over time, can help RI portfolio managers articulate their contribution to the company's growth strategy and can aid in innovation strategy development. KEY CONCEPTS: radical innovation, portfolio evaluation, real options. It is truly amazing to observe the growth in management sophistication regarding breakthrough or radical innovation (RI) over the past ten years. Firms that once experienced RI only by happenstance, through the perseverance of strong champions protected from organizational rules by their patrons in senior management, have now developed management systems for encouraging RI. These groups oversee portfolios of potential radical innovations, and are increasingly faced with portfolio-level issues of diversification, pacing, balance, and valuation. What was once considered the exception has become the new frontier of management attention. Indeed, empirical research has established that large firms that successfully engage in radical innovation commercialization efforts are more successful financially than those that do not (1-3). This article presents the principal results of Industrial Research Institute-sponsored empirical research concerning evaluation of a portfolio of potential breakthrough innovations. The research covers 12 years in three phases at more than 30 large American companies that have proclaimed their intention to achieve repeatable breakthrough innovation as a corporate capability. Further details concerning the study and participating companies are provided in a later section. See also (4) for results concerning organizational structures. Radical innovation hubs, or groups responsible for managing these portfolios, continue to be subject to intense scrutiny, especially in times of limited capacity or senior leadership changeover. A company's capacity to invest in potential breakthrough innovations can be limited in many ways. Potentially ruinous litigation proceedings, extraordinary cost overruns on another innovation, collapse of a principal market due to massive overcapacity resulting in potentially fatal financial difficulties, rapid acceptance of a new technological product which results in the dramatic decline of an incumbent product again resulting in severe financial difficulties, or the strategic decision to sell a profitable business unit a year or so into the future are just a small number of events that can limit or even eliminate capacity. Historically, the average life expectancy of a radical innovation hub has been about four years (5), although our research leads us to believe that average life spans are lengthening, especially for those companies going through their second or third version of a hub. …