Many companies plough money into innovation projects without a clear strategy for their overall portfolio. Here is a method which gives a framework for sorting and reviewing our innovation initiatives.
We can categorise our new product development initiatives into one of four quadrants using the two by two window shown below. On the vertical axis there are markets – the ones we currently occupy and new markets. On the horizontal axis we plot products or technologies – ones we currently have and new products or technologies.
Now we populate the diagram with our projects. In the bottom left quadrant go all our incremental innovation plans – line extensions and new releases of existing products into our current customer set. In the bottom right quadrant go new product or service offerings for existing markets. Similarly existing product offerings adapted for new markets go top left and entirely new products for new markets go top right.
Think of Apple starting with Macintosh computers in the bottom left quadrant. They initially sold mainly into small business markets for applications such as graphic design and desk top publishing. When they took their personal computers into mainstream and corporate markets they were moving top left – which they did with limited success. When Apple launched the iPad the innovation was a new product and technology selling mainly into their installed base so it goes bottom right. The Apple Newton and the iPhone were both radical products aimed at new markets so top right. One was a flop and the other a spectacular success.
It is clear that the safest place to innovate is the bottom left quadrant. Top left and bottom right are very risky and top right is extremely risky but potentially transformative for the business.
Where should we put most of our efforts? Research by Nagji and Tuff published in Harvard Business Review shows that the more successful large companies have around 70% of their projects and spend in the bottom left quadrant, around 20% in top left or bottom right and 10% in the top right. This is a useful indicator but each organisation must choose the risk profile which suits it best. If you are a low technology company with ample scope for growth then you might focus on the left two quadrants with occasional forays to the right. An aggressive high-tech company might risk more ventures into the top right. If you face an existential threat to your current market position – e.g. Kodak, Nokia or Blackberry – then maybe you have to roll the dice and invest considerable resources in the top right quadrant.
Your innovation profile should balance risk and reward and it should play to your strengths and resources. New product initiatives involving new technologies and new markets involve much greater risk but offer potentially much greater opportunity. They also require different skills and management approaches. Placing your new product experiments into the four boxes will help clarify the risk profile that you currently employ and prompt you to consider whether you are playing too safe.