From the Washingtons to the Benjamins: measuring the value of your innovation portfolio

So, you just presented to your CEO on the innovation portfolio critical either to maintain your envied competitive position or to enable new sources of, er, profitable growth.  Your slide to communicate the potential was simple: on one side of the chart, you had a stack of George Washington dollar bills; on the other, a stack of Benjamin Franklins.

“Got it, love it, now go”! is what you got in return…. ‘but show me how you’re going to move from the Washingtons to the Franklins and how you’re going to help me articulate the value of the portfolio to our stakeholders.’

And now, the fun begins.

Here’s the issue:

Innovation is about making bets – ranging from incremental to WoWs  – the big bets that move if not markets, then at least new platforms (to use the fancy word of the day) of distinctive and profitable growth.  Bets are always about figuring out the appropriate risk / reward profile you are willing to make.  Such profiles always reflect differing degrees of uncertainty.  So, essentially, figuring how to measure one’s innovation portfolio boils down to how to frame expectations and projections, taking advantage of risk and uncertainty.

And here it gets fun, and pragmatic.

After all, how *do* you measure potential, given risk and uncertainty?  Of course, many techniques exist for doing so.  Internal measures of value can be based on NPV, IRR and expected utility.  External measures can be developed through using options pricing and decision tree frameworks.  And valuing ‘portfolios’ as opposed to specific projects can be done using one of two methods: 1) roll-up of individual project valuations into some set of aggregate valuation or 2) take an ‘outside-in’ / market perspective view based on expectations framed by market indications.    There are certainly plenty of industries and lessons to pull from of techniques to use given different assumptions and objectives.  And yet…

Might there be another, complementary way?

A typical assumption underlying how to value an innovation portfolio is done from the perspective of a ‘known’ market – with the market crudely defined as an aggregation of SIC codes – of actors, competitors, and other stakeholders – from the perspective of a known set of market opportunities and indicators of where spend and customer intention are trending.   All goodness.  But explosive growth has always come from market breakdown, friction or non-consumption.  So, if you focus on breakdown, friction and/or non-consumption, might you get a different framework – and addition of new valuation techniques – around where and how you might a) play from a portfolio perspective and b) value the ‘total ecosystem value’ emerging from such breakdown, friction and/or non-consumption.

Compelling insights might fall from changing the assumption.  Recently, there has been a set of insightful posts and articles on how to value explosively growing platform companies.  Take Uber as one of potentially many examples.  There are clearly a number of ways to value a company like Uber.  Other posts and articles have done a great job at suggesting different ways to do so.  Let’s take a complementary approach to them.

Bluntly, what is the essential value proposition underlying Uber’s explosive growth?  Back to the observation that explosive value always comes from breakdown, friction and/or non-consumption, I’ll suggest that it came from overcoming friction.  Their essential value proposition lies in convenience – on access, of payment, of timeliness, of any form of transaction associated with using a small vehicle to get from x to y.  Did they cannibalize the existing transportation market?  Perhaps in certain areas (again, look at the arguments on both sides of this.)  But what is really striking is that they increased the overall economic value of the travel ecosystem in which they are embedded.  They increased the total ecosystem value… and here it gets extremely interesting, not only of the existing players (taxicabs, livery services) but also of new ones underlying the ‘platform’ that *is* Uber – e.g., telco, analytics firms, etc.  So, of course, they engendered a distribution of economic value across players, but they also gave expanded the ‘total ecosystem value’ in which both existing and new actors do, and will play.

Now, *that’s* interesting.

Would we have seen that using typical portfolio measurements?  Perhaps.  But are there other frameworks that can be brought to bear to complement the traditional tools, based on asking and answering what I believe to be *the* critical strategic question of today – namely, where and how is value being created…. and destroyed… from an ecosystem perspective?

The challenge those of us passionate about moving from the fluff and ‘black box’ / magic of strategy to the rigor and structure it requires (because it’s time) is how to improve our methods for project and program valuation, particularly around ‘WoW’ programs.

The importance of doing so is clear:

bets are risky, resources typically scarce, and stakeholders need to aligned around the former to release the latter. 

Sustainable alignment rests on building the capabilities for and demonstrating how to increase the yield of innovation efforts with speed and scale across an ever-changing portfolio of evolutionary, revolutionary and disruptive programs.  Increasing the yield, in turn, rests on two building blocks:

• clarifying what value is being created (and destroyed) – from an ecosystem perspective, and
• helping to orchestrate its realization across different stakeholders, while measuring the value and mitigating the risks across the different journeys taken.  Much more on this later.

  Hello, Benjamins!

Does it matter? Engaging the market – Two strategic roads with 1 large implication

Warren Buffet once stated that the purpose of a business is to create customers.  Differences exist in terms of how to do so – sustainably, and at scale.  Only two methods exist to meet this purpose.  These methods depend on the choice between two options of how to approach their marketplace.  In short: you can chase the market or you can disrupt it.  That’s it.  Each of these choices has significant implications… on what accounts for your differentiation, on programs you design and on value propositions you offer.

Here’s where it gets interesting. 

It’s about the lines, not the nodes: changing what to look at, and why

I was speaking with someone on my team the other day… we’re working on a big hairy audacious project to support a global roll-out into over 10 countries, based on sophisticated mathematical modeling (underlying the products) and significantly different environments to which the products, technologies, processes, governance and, ok, lots of other stuff needs to be adapted to “fit.”  We’ve been working with “deep experts” in a variety of fields, globally and this person, let’s call her Nell, was intimidated.  “Jump in – and guide the discussion,” I encouraged her.  “But I don’t have the expertise any of these people have,” was her response. 

“So what” on big data – more musings

SO much attention on micro-segmentation may be going down the wrong path.  Sure, the principle that we need MORE data to understand LESS – e.g., specific behaviors – is one of the wonderful ironies, and value, of so-called big data.  HOWEVER, the implication of this need not be to “create micro-segments” as an end in itself, as a blunt hammer.  The challenging, yet important, question is: how do I configure my discrete assets in ways that drive value.  The creation of thousands of micro-segments to support an equal number of customer experiences should, arguably, not be an end in itself.  Granted, it may be an important thing to do operationally.  Yet, it may not offer sustainable value over time…  despite this “creation of thousands of personal experiences” has become arguably *the* hot strategic topic of the day.  Rather, we might want to step back to complement the flurry of activity and ask a simple question: what is it that my customers are doing with me, and what is it they want to do –that “objectives” thing.