MGMT8015 Chap.11 Innovation Portfolios and Open Innovation
Innovation Portfolios and Open Innovation
Managing many bets
Large firms run many innovation projects with different risks, so they manage them as a portfolio. The Innovation Ambition Matrix sorts projects into core, adjacent and transformational zones.
Allocating and screening
The golden ratio invests 70, 20 and 10 per cent across the zones, while returns tend to arrive in the reverse proportions.
Talent, integration, funding, pipeline and metrics decide whether the portfolio works, and R-W-W screens each project.
Opening up
Open innovation uses outside ideas and paths to market through acquiring, sourcing, selling and revealing knowledge.
Lessons from the case gallery
Firms that failed tended to protect legacy revenue, underinvest beyond the core, fragment their efforts and react slowly.
Firms that succeeded balanced core and transformational work, accepted cannibalisation, kept strategy aligned and moved capital quickly as markets shifted.
What this chapter covers
- 01
Why firms fail or succeed at managing innovation
- 02
The Innovation Ambition Matrix
- 03
The 70-20-10 golden ratio
- 04
Five factors and the R-W-W screen
- 05
Three horizons of growth
- 06
Closed versus open innovation
- 07
Four quadrants of openness
- 08
Why context changes the ideal split
Worked example · free
Allocate a $20 million innovation budget with the golden ratio
- 1Core: 70% of $20m = 0.70 × 20 = $14 million.
- 1Adjacent: 20% of $20m = 0.20 × 20 = $4 million.
- 1Transformational: 10% of $20m = 0.10 × 20 = $2 million.
- 2Returns run roughly 10, 20 and 70 per cent in the same order, so the small transformational bet carries the largest expected share, but with the highest risk.
Key terms
- Golden Ratio
- The benchmark allocation of 70% core, 20% adjacent and 10% transformational innovation investment.
- R-W-W Screen
- A project screen that asks whether an innovation is real, whether the firm can win and whether it is worth doing.
- Three Horizons
- A framework that pursues the core business, emerging businesses and future options at the same time.
- Adjacent Innovation
- Innovation that takes a firm from its existing business into something new to the company, building on a strength.
Innovation Portfolios and Open Innovation FAQ
Does every company follow the 70-20-10 split?
No. The lecture says context matters. Industrial firms usually follow it, technology firms lean more towards breakthroughs, consumer packaged goods makers lean on core and adjacent work, lagging firms may gamble on transformation, and venture-backed start-ups have little core and tend to go big.
What are the four types of open innovation?
Combining inbound and outbound flows with pecuniary and non-pecuniary rewards gives four: acquiring, such as buying a company; sourcing, such as inviting fan designs; selling, such as licensing patents; and revealing, such as making patents freely available to build an ecosystem.
Why are standard metrics risky for transformational projects?
Financial metrics suit core and adjacent work, where returns are predictable, but they can kill promising transformational ideas whose customers and markets do not yet exist. The lecture suggests internal and non-economic measures for those projects instead.
What is the Innovation Ambition Matrix?
It is Nagji and Tuff’s framework, built on Ansoff’s growth matrix, that sorts innovation into core work for existing customers, adjacent work that takes the firm into what is new to it, and transformational work for markets that do not yet exist. The lecture illustrates all three with one carmaker.
Why should transformational teams be separated from the core business?
The lecture argues that transformational work benefits from separation, financially, organisationally and even physically, because it has to do things differently from the core. It also needs sustained funding that cannot stop midway, sometimes through an innovation tax or a separate company.
Exam move
Draw the investment and return bars from memory. For a firm you know, place three of its projects in the ambition matrix and screen one with R-W-W. Finish by naming the open-innovation quadrant that would help it most and the risk that comes with it. Then classify three open-innovation moves you read about this week into acquiring, sourcing, selling or revealing. Recompute one budget split by hand to fix the ratio in memory.
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