In our Hard Yards Enterprise Portfolio Management course, we introduce the cohort to the concept of deliberately allocating resources for innovation while simultaneously managing expenses for operations, maintenance, and system infrastructure. Most firms spend over three-quarters of an IT budget on O&M and infrastructure, which means many organizations do not approach their innovation spend as a portfolio.
The attached research briefing, published by the MIT Center for Information Systems Research on July 20, 2017, emphasizes that overall innovation spend is less important than allocating funds in an innovation portfolio according to the organization's desired business outcomes.
Nils O. Fonstad, Research Scientist
MIT Sloan Center for Information Systems Research (CISR)
Digital innovation is a top business priority for companies seeking to better understand and competitively address the changing needs of customers and employees. Most companies are spending more money than they have previously on a “portfolio” of innovation efforts—but these efforts are often uncoordinated. Few companies have a coherent view of their innovation portfolio; even fewer understand the portfolio’s impact.
MIT CISR surveyed 201 companies, one respondent per company, across a wide range of industries on their innovation investments and practices. Respondents reported their business performance relative to competitors. Additionally, we drew on qualitative data from more than thirty companies regarding how their innovation practices have changed. From these combined results we were able to identify what investments and practices distinguish the most and least competitive companies across a range of performance outcomes.
PORTFOLIO ALLOCATION, RATHER THAN TOTAL SPEND, IS WHAT MATTERS
Among our respondents, total spend on digital was not a competitive differentiator. The average amount spent on digital innovation varied by industry and company size; but comparatively, controlling for these demographics and along with multiple performance outcomes, the most competitive companies did not spend significantly more on digital innovation than the least competitive companies.
COMPETITIVE PORTFOLIOS CONSIST OF ALL FOUR TYPES OF DIGITAL INNOVATION
Leaders might not think about their innovation spend as asset allocation within a portfolio. However, we found that applying a portfolio perspective to our analysis did distinguish the most and least competitive companies. Analyzing our qualitative data, we identified four distinct types of digital innovation:
1. Employee experience: Producing digital tools or information aimed at greater employee productivity and retention, such as improvements in how people collaborate
2. Business operations: Producing operational processes digitized to increase efficiency, such as automated and standardized internal business processes
3. Customer-facing: Producing new or improved services or solutions—such as services that complement products, e.g., predictive maintenance—and enriched customer experiences—such as ensuring that the services are available across multiple channels, e.g., mobile, web, call center—aimed at increasing revenue per product/service and per customer
4. New business models: Producing new sources of revenue from new customer segments, such as a luxury automobile manufacturer experimenting with mobility services for people who do not own a vehicle5
We analyzed our survey data to determine respondent companies’ total spend on digital innovation and how they allocated it across the four types. Figure 1 shows that on average, respondents spent 40% of their innovation budget on internal innovations (in blue), targeting employees; and 60% on external innovations (in red), targeting customers.
Figure 1: The Average Digital Innovation Portfolio
Represents respondents’ total spend on digital innovation: producing any new (for the company) or significantly improved product, service, or process that relies in large parts on digital technologies such as social, mobile, cloud computing, analytics, and/or the Internet of Things (IoT).
We also found that not all companies are investing in all four types of digital innovation. Figure 2 illustrates that while almost all respondents were investing in business operations, just over half were investing in new business models.
Figure 2: The Percentage of Respondents Investing in Each Type of Digital Innovation
Figure 3 depicts four business outcomes, each with its corresponding competitive portfolio. Regardless of the intended outcome, the most competitive companies invested in all four types of digital innovation, with none of the portfolios comprising spend in equal parts across the four types.
Figure 3: The Competitive Portfolio of the Most Competitive Companies Along Four Business Outcomes
For each business outcome, performance can be predicted by a distinct allocation strategy, with the most competitive companies on any given metric investing more in certain types of digital innovation and less in others, and the least competitive companies doing the inverse. We characterized each allocation strategy by what we term its competitive portfolio: the average of the top 25% of companies on the most competitive end of the strategy.
COMPETITIVE COMPANIES REALIZE SYNERGIES ACROSS ALL FOUR TYPES OF INNOVATION
Our qualitative data revealed that competitiveness is not simply a matter of investing in digital innovation selectively, but also of realizing synergies across all four types of innovation.
CarMax, the largest retailer of used cars in the United States, was founded in 1993 in Richmond, Virginia. By April 2017, CarMax was reporting net sales and operating revenues of $15.88 billion—a year-on-year increase of 5%. The company had a Net Promoter Score of 81 (at the time, better Amazon. com or Apple) and had earned a spot in FORTUNE’s 100 Best Companies to Work For list for thirteen consecutive years.
CarMax has prioritized investments in employee experience in order to produce a competitive portfolio aimed at customer satisfaction. CarMax used an integrated approach when assembling its portfolio of digital innovation activities. For example, to deliver a competitive customer experience, the company reorganized the employee experience around product teams empowered to “operate like small startups.”
These [cross-functional] product teams have specific OKR’s [Objectives and Key Results] and are empowered to determine the best solution for a customer or associate to meet their goals.
SHAMIM MOHAMMAD, CHIEF INFORMATION OFFICER, CARMAX
CarMax also upgraded its technology platforms to empower product teams. Once it did, online product teams could engage in A/B testing, proving and validating an idea within a matter of hours rather than over days, weeks, or months.
The benefits reaped by Monsanto Company Inc. from its investments in new business models demonstrate why such investments are important to a competitive portfolio.
New business model investments have helped Monsanto, a leading global provider of agricultural products for farmers, identify and prioritize improvements to business processes and tools that enable employees to innovate in an iterative manner with evidence.
We have to make sure that innovation does not sit at the periphery; it has to be embedded into the core because then we can disrupt the next technology. You can’t digitize on the outside unless you digitize on the inside. Don’t think you can do it half-baked. You need to think about how you run your business internally the same way you run it with your external customers.
JAMES SWANSON, CHIEF INFORMATION OFFICER, MONSANTO
For example, the IT group integrated multiple internal and external sources of data and made the data accessible to cross-functional product teams via APIs. This enabled the teams to iterate through prototypes of new services and business models faster and with better evidence, and to single out the least and most promising prototypes for discontinuation and improvement respectively.
Notably, both Monsanto and CarMax have invested in all four types of digital innovation. Each company’s IT groups have collaborated at both the team and senior management levels to realize complementarities across the different types of innovation.
DESIGN AN INNOVATION PORTFOLIO
To be competitive in the digital economy, a company needs to design its innovation portfolio purposefully. Our key recommendations are:
• Invest in all four types of digital innovation.
• Capitalize on synergies across the four types of digital innovation, specifying who will identify and orchestrate the synergies and how they will do this.
• Nurture investments in the employee experience and new business models:
ᴏ Ensure that teams are sufficiently empowered to innovate iteratively with evidence.
ᴏ Make investments in new business models to help identify and prioritize operational improvements that could enable future sources of revenue.
Amidst the uncharted waters in the sea of digital innovation, a company can use an innovation portfolio of coordinated investments as a compass to navigate towards the company’s most important business objectives.
You can access the full MIT CISR Research Briefing here.