The big hairy challenge with separating Innovation from the Core Business

Over the last 10 years or so, as companies have matured their new-growth innovation capabilities, two organizational models have emerged. One model carves out new-growth innovation and manages it as a separate portfolio from the core business. The other model keeps core and new-growth projects together in an integrated structure.

In the separate model, companies detach new-growth innovation and dedicate project resources to discover, incubate, and scale highly uncertain, new opportunities. They run these projects as an autonomous portfolio with distinct funding criteria, lean processes, and venture-style governance mechanisms.

New-growth projects are evaluated and prioritized independently from core projects and capacity is only limited by the new-growth innovation budget. Growth Boards govern investment and allocate dedicated resources in increments as unknowns are de-risked and projects progress.

This model has grown in recent years with a sharp increase in corporate innovation labs and accelerators. Thought leaders like Michael Tushman, Charles O’Reilly, Clayton Christensen, Scott D. Anthony, and Alexander Osterwalder have all extolled the benefits of separating innovation from the efficiency-oriented core business and recommend managing as an ambidextrous or dual system.

In the integrated model, common in small to medium-sized companies or business units of large companies, new-growth innovation projects and core business projects are managed together as one portfolio and draw from the same resource pool.

The Big Hairy Challenge with the Separate Innovation Model

A key problem with the separate organizational model is that few companies have the luxury of dedicating resources through all stages of new-growth innovation. As risk and uncertainty are reduced and projects move closer to launch and scale-up, development spend increases and teams get significantly larger.

Physical hardware products need to move beyond minimum viable products (MVPs) to full scale design, supplier qualification, production process development, and test. Unlike software products that are conducive to continuous solution changes that are tested immediately, physical hardware, chemical, and biologic products have lengthy procure, build, and test cycles.

Project teams need to tap deeper into functions like manufacturing, supply chain, procurement, marketing, quality, regulatory affairs, and customer service.

This is where most companies struggle, as core and new-growth innovation project teams end up competing for the same resources. Tensions between the innovation organization and the core organization escalate.

The job of the innovation governance team becomes more complex than simply deciding which new-growth innovation projects to advance. They must join forces with core business leadership and compare the relative value of all investment alternatives and make tough resource trade-off decisions between the business of today and the business of tomorrow.

Without evidence that the new-growth innovation projects are progressing toward an ROI, the safer, more predictable core business projects win out every time.

One way to overcome this challenge is with a portfolio and resource management process led by decisive leaders who can balance this tension. These leaders bring the discipline to:

1 Balance investment and resource allocation across core and new-growth innovation categories without trading off one for the other
2 Stick to the investment allocation targets established by the business’ growth strategy
3 When needed, say “no”, or delay a core product line extension in favor of accelerating a promising new-growth innovation even if the financial payoff is several years out

How to Address the Challenge with the Separate Innovation Model

Tie Resource Allocation to Strategy

Balancing resource allocation across core and new-growth innovation without compromising one for the other is a rare skill. As Clayton Christensen and Michael Rayno point out in The Innovators Solution, “If the values that guide prioritization decisions in resource allocation are not carefully tied to the company’s deliberate strategy (and often they are not), then significant disparities can develop between a company’s deliberate strategy and its actual strategy.

Actively monitoring, understanding, and controlling the criteria by which day-to-day resource allocation decisions are made at all levels of the organization are among the highest-impact challenges a manager can tackle in the strategy development process.”

Anticipate Downstream Resource Needs

Portfolio analysts and resource managers must anticipate the downstream staffing needs of new-growth innovation projects and include them in their short and longer-term demand projections. They must aggregate resource availability for both core and new-growth innovation projects, identify downstream constraints, and align plans with strategic priorities. Armed with this information, portfolio decision-makers can anticipate bottlenecks, reprioritize, and flex capacity where needed to avoid delays and other late stage surprises.

Back-Cast New-Growth Initiatives

The resource allocation core/new-growth tension can also be lessened with purposeful product line planning. One approach is to back-cast new-growth initiatives into lower-risk projects that can start to deliver value sooner.

These building block projects, managed with core portfolio resources, provide near-term financial return and learning as they progress toward transformative new-growth businesses.

An obvious example is Apple’s digital hub strategy. In 2001, Apple envisioned a new-growth area where the computer would act as the hub for a variety of tightly integrated consumer electronics products.

They migrated their way towards that endpoint developing a series of lower-risk products, including an MP3 player, music store, phone, iPad, and a host of enabling technologies.

Build a Bridge to the Mainland

The high uncertainty inherent in new-growth innovation does lend itself to different, more entrepreneurial operating processes and it does help to provide a ‘safe’ environment where failure is viewed as learning.*

But do not set up your new-growth innovation efforts as an isolated island. Providing some separation and air cover for project teams is fine, but you also need a bridge to the mainland — a portfolio management process that allows you to prudently leverage the resources in the core business as well.

Whether new-growth innovation is organized as a separate or integrated operation, portfolio decision-makers need to pay attention to the way resources are deployed and investments are prioritized across the entire portfolio in order to ensure that project teams can be successful through all stages of innovation.

*Note, entrepreneurial or lean operating processes work well when applied wherever there is uncertainty, including the core business. I will discuss this in an upcoming article.

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