Business Strategy and the Innovation Portfolio

The innovation portfolio is designed to fill the innovation gap.

There are three important elements involved in understanding the role of a business and its objectives.

1. Having a Mission. Often expressed in a Mission Statement.

2. Having a Vision. Knowing where the business wants to be in the future.

3. Having a Strategy. How to get from where we are now to where we want to be; achieving the Vision.

Figure D2. The Formulation of a Business Strategy

Without these three elements it is very difficult for other parts of the company, e.g. R&D, to know where they fit in and what should be their priorities.

By creating a long-term plan and setting objectives the company can formulate a strategy for the business. In order to do this it needs to look at the environment in which it is operating; the strategies of competitors, changing market conditions, technological developments, defining both threats and opportunities (see Section C, 1.6.2). It also needs to look at its current capabilities; its skills heritage and competencies; its resource capabilities, both people and financial [D-1]. The process is illustrated in Figure D2.

In the early 1990's, Kaplan and Norton devised a new strategic management tool, the balanced scorecard, designed to help companies clarify their vision and strategy and translate them into action [D-2]. This model contains some of the key concepts ofTQM as it involves customer-defined quality, continuous improvement, employee empowerment and measurement-based management and feedback. The balanced scorecard involves developing metrics that are used to collect information on strategies and processes as data, which are analysed and fed back into the system, thus helping managers to make more effective long-term plans. This all-important feedback allows for continuous improvement of the strategic performance of a company against its vision. The methodology involves looking at the organisation from four perspectives; the internal business, financial, learning and growth, and the customer. R&D has a big input to the learning and growth perspective of this model and the sort of data that R&D might collect will be discussed later in this Section. The process is illustrated in Figure D3.

Interaction Model Communication
Figure D3. The Balanced Scorecard

From the financial model it is possible to identify two financial measures that are very important when looking at the extent of the need for innovation within a company. The first is the "do-nothing" model; what would be the financial consequences of just maintaining the ongoing business. The second is the so-called innovation gap, the financial gap between the ongoing business model and the growth ambitions of the business [D-3]. This innovation gap is the one that needs to be filled by creating a number of projects, leading to innovation portfolio management. The total financial rewards from the projects within the portfolio should fill the gap between the ongoing business and the growth model for the business, whilst making due allowances for the time frame and potential success rate. Consequently, the company's strategy will not only have business objectives but also an innovation/technology strategy that acts as an umbrella for the R&D strategies of each of its individual businesses.

This innovation strategy needs to be aligned to a portfolio of innovation projects, which are designed to fill the innovation gap, and which in turn can be translated into a portfolio of projects for R&D. Once again this is an iterative process involving feedback from the results, learning and knowledge gained during the innovation cycle. Identification of the specific innovation needs of the company is achieved via customer studies and idea creation, as described in Section C, 1.6.1. This generates short, medium and longer-term targets for R&D groups. In turn, work on these targets by R&D will provide results and learning, leading to new knowledge, which can be fed back into the system, thus helping to refine the innovation strategy and assist the management of the portfolio. The process is shown diagrammatically in Figure D4.

The need for an effective project evaluation methodology is highlighted by the fact that for projects in early development the odds of success are only 11%. This rises to

Figure D4. Development of an Innovation Strategy

around 25% in the later development phase, as weaker projects fall by the wayside, but even after commercial launch the likelihood of success only rises to 60%. This means that 40% of projects carried to completion are a waste of money, largely due to inadequate market analysis and poor risk assessment before the start of a project. This is covered for new product developments in Section D, Most companies use some form of stage-gate process for the management of their projects, and to assist in improving innovation are adding a discovery stage at the front end of the process (see 2.1 below).

In summary, it is essential that the following four actions are performed in developing an adequate innovation portfolio.

• Make sure that a detailed study of the market is carried out

• Perform a thorough financial and business analysis

• Carry out appropriate test marketing or field trials

• Put a maximum effort into product launch

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