Time to Remix Your Innovation Portfolio?

The best leaders watch their investments carefully. That's why if you're in charge of innovation, Wall Street is watching you. After all, according to Harvard Business Review, some 54 percent of a stock's value comes from projected future growth. So where you invest your company's innovation dollars matters.

If you're getting great returns when it comes to your innovation, ask for a raise. If you are not—or don't know whether you are—look over our five signs that your portfolio may need some TLC.

But first let us refresh your memory a bit: In the past we've shown you a foolproof way of initially constructing your innovation portfolio. The analogy we used was personal finance. Just as you divide your personal holdings among various asset classes—stocks, bonds, and cash—you want to divide your innovation efforts among different approaches. There are four:

1. Evolutionary Innovation. (Technically easy and there's a clear customer benefit.) This is where you keep current cash cows fresh and incubate brands in the market.

2. Differentiation. (Technically difficult and a clear customer benefit.) This portion of your innovation budget is used for making a distinction between your products and those of your competitors.

3. Revolutionary Innovation. (Technically difficult, and there's no way of knowing ahead of time if the customer will accept it.) Here you search to find groundbreaking ideas for products, services, and business models.

4. Fast-Fail Innovation. (Technically easy but no way of knowing if the customer will accept it.) You go to market and do your testing and learning there.

With that by way of background, let's talk telltale signs you might be having problems with your portfolio.

Symptom No. 1: Lots of research, no new products

The positive spin on this is that your team is actively seeking ways to make products, services, and business models distinctly yours in response to a customer or consumer need. If, despite this, you aren't launching products successfully, you likely have a culture where people are afraid of failure; they feel safer conducting research than releasing the product into the marketplace where it might fail. You need to fix this.

We recommend you aggressively invest in the fast-fail quadrant. By putting money here, you will naturally find partners who can help you do things outside your wheelhouse. And your people will immediately see that failing—quickly and inexpensively—is smiled upon, since you get to discover winners that much faster.

Symptom No. 2: The procurement department has become your customer

If you're spending more and more time with the procurement of your customers, you are over-invested in the evolutionary quadrant. The good news is that by focusing on things your company can do well and everyone knows your customer wants, your people have become great listeners. The bad news is that your customers are telling your competitors the exact same thing, which means you end up competing on price. (Hence, all that time with procurement.)

We recommend you encourage your team to work on the other three quadrants of the portfolio model, starting with differentiation. They should ask themselves: "Even if we don't know how to do it, what are some ways to respond to this customer desire in a way that we alone can own?" This question is at the heart of innovation. When answered correctly, you have a differentiated product that demands a higher price—that enables you to move conversations upstream away from procurement.

Symptom No. 3: You are invention-rich, but the top line isn't growing

A classic challenge for many self-proclaimed innovative companies happens when R&D is running the show. The folks in the lab coats presume to know what consumers or customers want. They get really excited about the latest and greatest inventions that are rich with features and benefits—many of which you cannot understand. The good news here is that you have some really smart people working for you. The bad news is that they are inventing, not innovating.

Innovation is starting with a market need and then inventing something to meet it. Inventing is starting with the idea and then looking for someone—anyone—who will get excited about it. Maybe there is a market, maybe there is not.

You have two ways to rebalance here. The first one is by following a proven innovation process. If you don't have one, feel free to borrow ours. The second way is by simply investing more in the differentiation quadrant. Why? Because in this quadrant you start with the need, then try to find smart people to help you find a way to solve it.

Symptom No. 4: Lots of bravado, fist-pounding, and epic failures

We call the revolutionary quadrant the home of "dot-gone," because the dot-com bubble was created in part by young dreamers who raised money for "huge" ideas that nobody really needed and nobody really knew how to make happen. Here's the thing: Wall Street and employees love the prospect of revolutionary ideas. CEOs do, too. This is where Goliath falls and legends are made. It's also where fortunes are lost—quickly. If you notice your company tends to put together top secret, special forces innovation teams that spend huge amounts of money but always seem to be coming up with ideas "ahead of their time," you are investing too much in the revolutionary quadrant.

How much is too much? Anything more than 5 percent of your budget. (And in fact we think you should outsource the entire revolutionary quadrant for the reasons just mentioned.)

Symptom No. 5: Your spouse can't understand what you do

We love saying you can't read the label when you are sitting inside the jar. That is another way of saying your experience and expertise are keeping you from seeing opportunities; you know too much to be objective.

One symptom of being in the jar is using language nobody understands, except for the people in your department and your oldest customers. This language often includes abbreviations, acronyms, and technospeak.

If your spouse, or a new hire, doesn't understand what you're talking about, you're probably inside the jar.

To solve this problem, look to the evolutionary quadrant. But instead of listening to your customers—because they are probably in the jar, too—try talking to your customers' customers.

Just as in personal finance, we suggest rebalancing your portfolio once a year. Asking these five questions can help. A great deal.

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