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Governing Innovation: The recipe for portfolio growth

Larry Schmitt

Innovation Partner

Frameworks and taxonomies bring clarity and order to complex practices. This is nowhere more true than in the practice of innovation and within the practice of innovation, to its ‘governance’. By governance, we mean who makes the rules and how, who enforces the rules and how and who has what decision rights. It’s important to separate activities from governance even though it is the governance that directs the activities. This is difficult to do and is something the authors struggle with. Nevertheless there is much to recommend their framework.

The authors make the claim that:

Portfolio Innovation coupled with rigorous governance drives future growth (but) … innovation is not governed extensively today. The reality is that 88% of companies today govern innovation haphazardly. The 12 percent of companies that adopt … “extensive innovation governance,” are achieving double the revenue growth of companies utilizing fewer governance rituals.

To support this, they present a framework and taxonomy of ‘governance rituals’:

1. Business Maturity Level

    • Legacy: The oldest, most mature, businesses; provide steady cashflows
    • Growth: Experiences strong market demand; based on differentiated offerings
    • Emerging: The most nascent ventures; new business models, yet to be scaled

2. Two portfolio models, two investment strategies

    • Mature Portfolio – Investment Strategy Longevity: Majority of innovation investments flow to legacy businesses. Mature portfolio companies generate more than half their revenue from legacy businesses today.
    • Balanced portfolio – Investment Strategy Balance: Majority of innovation investments flow to growth and emerging businesses. Balanced portfolio companies generate more than half their revenue from growth and emerging businesses today

3. There are 12 innovation governance rituals, 6 are especially relevant to the two types of portfolios

Three rituals stand out for mature portfolio companies

      • Experiments are conducted by an innovation lab/digital factory
      • Scale with technology partners
      • Scale through an innovation lab/digital factory

Three rituals stand out for balanced portfolio companies

      • Everyone generates ideas to improve existing offerings
      • Identify disruptive ideas with the help of tech partners
      • Experiments are conducted by an innovation lab /digital factory

The focus is on the allocation of activities and attention (and hence on some of the ‘rules’ of behavior) but it does not address rule formation, rule adherence and decision rights, the true components of Governance. In addition, the authors use their own terms and definitions that are not necessarily compatible with those that others use.

In spite of this, the document is well worth a read and provides a number of graphic illustrations that can be quite useful to innovators designing their innovation system. One does wish, however, that everyone promoting these frameworks and taxonomies could agree on a common set of terms and definitions.