Portfolio Innovation

Why Invest in Innovation Portfolio Management During a Downturn?

Here's why business leaders should think twice before pausing innovation programs in 2023, plus tips for adopting a portfolio approach to innovation management that minimizes risk and maximizes ROI.

Signs of economic instability are all around us. From January 2021 to January 2022, CPI inflation in the U.S. climbed from 1.4% to above 6%. BlackRock forecasts that inflation in the U.S. will linger in the 4-6% range through late 2023, and J.P. Morgan predicts that the U.S. will slide into recession before the end of 2024, with an unemployment rate around 5% and a slightly elevated volatility index around 25.

Given the uncertain climate we’re in, innovation programs are on the chopping block. The share of executives reporting innovation as their number one or number two priority has dropped 32 percentage points since before the pandemic. Meanwhile, the share of executives listing efficiency as their number one or number two priority spiked 23 percentage points in the same period.

But innovation is a long game — and, when executed well, it delivers outsized returns over time. In this article, we’ll walk through why business leaders should think twice before winding down innovation programs in 2023, plus tips for adopting a portfolio approach to innovation that minimizes risk and maximizes ROI. Let’s dive in.

In recessions, smart innovators win

Economic slumps introduce great uncertainty, but also great opportunity. After all, some of today’s top-performing companies, including Microsoft, Apple, IBM, Nokia, Amazon, and Google, launched during downturns. That isn’t to say that you should drop everything and make big bets on bold new programs and product lines right away. But as we move towards a potential recession, the companies that weather the storm will be those that not only prioritize efficiency but also lean into smart innovation. As Vijay Govindarajan, Professor of International Business at the Tuck School of Business, shared back in 2010:

“Innovation is very critical now. But you can’t be doing innovation the same way you did before. Clearly, the number one priority is cost control [...] But at the same time we cannot put innovation on the backburner. Because if you do that, you are not only going to suffer today but you are going to suffer three years from when the recession is over. [...] Don’t put zero emphasis on innovation. Companies [that] do it right are really going to come out as winners.”

Recessions separate the winners from the losers. Bain Capital found that the growth rates of high-performing companies during the 2008 crisis outpaced those of low performers by 17%, and the performance gap only continued to widen in subsequent years.

Source: Bain Capital

Winning companies follow a few key practices during downturns, combining smart innovation with a laser focus on business fundamentals:

▶ They cut unnecessary costs

▶ They re-invest in areas of competitive differentiation (i.e. innovate)

▶ They lean into M&A opportunities

Succeeding during and after a recession isn’t about dialing back innovation efforts altogether. It’s about taking a strategic approach to innovation that balances just enough risk with high (potential) rewards.

Mitigate risk with portfolio management

The reality is, what many of us might think of as “playing it safe” — killing projects with longer timelines or uncertain outcomes, focusing on your core business, saving money, and avoiding risk — is the exact opposite of what needs to happen in uncertain times. This kind of short-term thinking is mortgaging your future to pay for your existing problems.

Sure, get your balance sheet in order and cut back on unnecessary costs. But too much risk aversion can have a negative impact on performance in the long run.

This has been especially true for U.S. corporations over the past 15 years. According to a McKinsey report, S&P 500 companies that invested in a portfolio of innovation initiatives through the 2008 recession performed better than counterparts who didn’t, both during the crisis and in the years afterwards.

Source: McKinsey

The takeaway? Downturns aren’t the time to press pause on your innovation program. Instead, they’re an opportunity to build a strategic portfolio of innovation projects.

How to build an innovation portfolio

Instead of investing all of your organization’s time and resources in your core business, open the door to new growth opportunities by building a smart, diversified portfolio of innovation projects.

Pro tip: on average, companies that govern innovation in this way achieve up to 2x the revenue growth of companies that don’t.

First, identify an outcome that you’d like the portfolio as a whole to achieve over time. Then, set up maturity stages for your innovation projects, as well as decision criteria for moving from one stage to the next. Here are some examples of stages you can use to structure your portfolio:

Stage 1: Concept — align on a problem to solve and the value of solution

Stage 2: Prototype — test the desirability, feasibility, and viabilities of your solution

Stage 3: Pilot — test the solution in a specific use case for outcomes

Stage 4: Scale — sustain the solution in a specific use case and test the solution for broader use

Once you've defined maturity stages, you can start to make small bets on early-stage ideas and deepen your investment in the ideas that show real traction over time. Eric Ries, author of The Lean Startup and The Startup Way, refers to this practice as “metered funding.” Taking an incremental approach to investing in projects ensures that measurable learnings and results are the only true drivers of resource allocation.

Tip: When ideas don’t meet the decision criteria for moving from one maturity stage to the next, simply press pause and cut them from your portfolio. Killing ineffective projects early isn’t a sign of failure — it’s something to celebrate! After all, fast decision cycles save your company time and money. Tektronix literally pays people bonuses for shutting down innovation initiatives sooner, and their corporate innovation team even holds an annual “Day of the Dead” ceremony to celebrate the innovation programs they’ve said “no” to. When it comes to innovation portfolio management, efficiently leveraging resources is the name of the game.

What you'll achieve with a portfolio approach

Drive towards strategic organizational outcomes.

Structuring a portfolio of projects around a specific innovation goal gives you the highest possible chance of knocking that objective out of the park. By incrementally funding multiple approaches, you’ll boost your likelihood of finding 1-2 big winners that not only achieve your desired outcome but also pay for the losers many times over.

Track the right metrics at every stage of the innovation process.

Just because an idea is early-stage doesn’t mean it should be a no-go during a downturn. By making stage-appropriate assessments of all your innovation projects, you’ll build a healthy pipeline of growth opportunities while saving the bulk of your budget for projects with the most potential.

Optimize people & resource allocation.

Investing too little in innovation projects could hamper performance, especially during a downturn. (Gartner has found that 91% of companies fail to create enough capacity to make growth initiatives a success)! But with a multi-stage portfolio of innovations, you'll make smart investment decisions rooted in each project’s performance. This will not only maximize your potential ROI but will also help stakeholders across your organization understand where you’re investing innovation dollars and why.

Hedge your bets with multiple staged experiments.

A portfolio strategy brings fast, staged experimentation to the forefront so you can learn and grow — without draining your overall budget. This is especially useful in a challenging economic environment. Take Booking.com, for example. The company’s culture of experimentation has fueled its rapid growth over the past two decades, even through times of economic uncertainty. The product team at Booking.com leverages an in-house platform to run hundreds of A/B tests simultaneously, totaling upwards of 25,000 tests per year. This helps them validate that new features have the desired impact on user behavior — and deactivate any features that don’t.

Plus, to simplify the decision-making process, every experiment at Booking.com progresses through the same series of stages:

1. Identify the purpose of the experiment

2. Set the experiment live

3. Keep a pulse on core metrics for the first few hours and pause or continue the test accordingly

4. Administer ongoing data quality checks and address warning messages from the experimentation platform

5. Analyze experiment results and finalize successes, failures, and decisions

6. Publish takeaways in a centralized experiment repository

Only about 10% of Booking.com’s experiments lead to a measurable improvement in business outcomes — but the sheer volume of tests ensures that the company drives continuous improvement over time and keeps the cost of failure to a minimum. To sum up, innovation portfolios are a numbers game. When you develop and test multiple ideas at once, you're more likely to hit a home run.

Make confident decisions with innovation software

Managing the full innovation lifecycle is hard, but an innovation portfolio management platform can help. While project management tools make sense for work associated with your core business, portfolio platforms are best for programs that involve risk or uncertainty. That way, your leadership team can see how innovation initiatives are measuring up to stage-specific criteria, pause unsuccessful projects, and incrementally allocate resources based on performance. Learn how Productable can help you manage a portfolio of innovation bets and drive towards outcomes that count.

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