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Research Briefing

Designing a Competitive Innovation Portfolio

Our analysis 201 companies reveals that portfolio allocation, rather than total spend, is what distinguishes the most competitive companies.
Abstract

Although most companies are spending more money than ever before on a “portfolio” of innovation efforts, few have a coherent view of their innovation portfolio, and even fewer understand the portfolio’s impact. Our analysis of survey data from 201 companies reveals that portfolio allocation, rather than total spend, is what distinguishes the most competitive companies. Drawing on both quantitative and qualitative data, this briefing describes the key aspects of competitive portfolios.

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Digital innovation[foot]Digital innovation describes a generative process, as well as its end result: any new (for the company) or significantly improved product, service, or process that relies in large part on digital technologies such as social, mobile, cloud computing, analytics, and/or the Internet of Things (IoT).[/foot] 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.[foot]MIT CISR Survey on Digital Innovation, September–November 2016 (N=201); respondents were CIOs or their equivalents from companies based globally, though predominantly in the United States and Europe.[/foot] 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.[foot]Qualitative data, collected by MIT CISR research scientists from 2015 to 2017, were sourced from the center’s Designing Digital Organizations, Supply Orchestration, and Expanding Digital Innovation projects.[/foot] 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.[foot]The research findings in this briefing are the result of a team effort. I am grateful to Dr. Alejandro Neut of BBVA Research for his collaboration and his contributions to the statistical analysis; as well as to my MIT CISR colleagues for their help in framing and communicating the results.[/foot]

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 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 vehicle[foot]Read detailed examples of AUDI AG’s portfolio of innovations—including experiments in mobility services—in N.O Fonstad and M. Mocker, “Expanding Digital Innovation at Audi,” MIT Sloan CISR Working Paper No. 415a, October 2016.[/foot]

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.

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 3 depicts four business outcomes, each with its corresponding competitive portfolio.[foot]For each business outcome, we regressed the performance of all companies in the sample to a combination of three independent allocation trade-offs between investments in two or more of the four types of digital innovation—tradeoffs that we identified through factor analysis and can be combined to characterize any company’s portfolio. We refer to the resulting significant correlation as the “allocation strategy.” We then calculated the average portfolios of the top 25% of companies on the most competitive end of the allocation strategy—i.e., the competitive portfolio—and the bottom 25% of companies on the least competitive end of the strategy.[/foot] 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 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).

Figure 2: The Percentage of Respondents Investing in Each Type of Digital Innovation

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.

Sources for the three figures: MIT CISR Survey on Digital Innovation, data collected September–November 2016 (N=201); and qualitative data, collected from 2015 to 2017, from MIT CISR's Designing Digital Organizations, Supply Orchestration, and Expanding Digital Innovation projects.


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.[foot]Kimberly A. Whitler, “The Next Generation of Customer Centricity: A Methodology to Drive Rapid Innovation,” Forbes, September 25, 2016.[/foot]

CarMax has prioritized investments in employee experience[foot]For more on employee experience, see K. Dery and I.M. Sebastian, “Building Business Value with Employee Experience,” MIT Sloan CISR Research Briefing Vol. XVII, No. 6, June 2017.[/foot] 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 to 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 sin- gle 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:
    • Ensure that teams are sufficiently empowered to innovate iteratively with evidence.
    • 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.

© 2017 MIT Sloan Center for Information Systems Research, Fonstad. MIT CISR Research Briefings are published monthly to update the center's patrons and sponsors on current research projects.

 

About the Author

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Nils O. Fonstad, Research Scientist, MIT Sloan Center for Information Systems Research (CISR)

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