Managing an Innovation Portfolio

This week, my Marketing class discussed innovation strategy, driven particularly by a George S. Day's article, "Is It Real?  Can We Win?  Is It Worth Doing?", printed in the Harvard Business Review in 2007.  Two key points popped out at me from this article:

1. Just like in the world of investments, your innovation portfolio should be diversified in terms of risk.
2. To narrow down the candidates for innovations to pursue, have a team ask the three essential questions that make up the name of the article.

I found the first point particularly interesting.  Day suggested creating a scatter plot of projects, with the x-axis being newness of the intended market (to he firm) and the y-axis being the newness of the technology (to the firm).  Intuitively, he's suggesting that risk increases as the innovation is either more unfamiliar in terms of technology or more unfamiliar in terms of intended market.  The big idea with this is that a firm ought to be able to draw a trendline roughly equivalent to y=x, where the points are evenly distributed between high risk and low risk.   In other words, the ideal strategy includes incremental innovations, big innovations in terms of new markets, big innovations in terms of new technologies, and big innovations in both new markets and new technologies.

As Day points out, most firms focus on the lower-left (incremental innovations).  This makes sense in a risk-averse environment, where a misstep could damage a company's credibility.  But what about an environment where missteps are expected or easily swept under the rug?  I would argue that tech fits that category.  Just take a look at recently failed high-risk projects, such as Google Wave (New technology? Yes.  New market for Google?  It was a project collaboration service - certainly a new space for Google).  Did Wave damage Google's credibility?  Not at all.  Could it have been huge?  Definitely.  In fact, tech demands high-risk projects, as evidenced by the common worry among tech executives that their business could be replaced by "two guys in a garage."  Those two guys in a garage are certainly pushing the envelope of new technologies and new markets.  In order for an incumbent to compete, it needs to beat the two guys to those innovations.

Incumbent tech firms certainly need some incremental innovations to continue steady growth with existing products, but complete risk aversion will lead to steady decline.  Technology moves fast; patents are easily worked around; trade secrets are quickly leaked.  The only sure growth strategy is a healthy mix of risk.