One of the things I always get asked about from the companies I work with is how to manage their innovation resources. Should they bet big on an unproven, but possibly breakthrough idea? Or focus on improving the products that they already know their customers want? Or maybe leveraging existing resources into a new market?
This is an important question. As Steve Blank recently pointed out in an article in Harvard Business Review, it was the failure to deal with this issue that led to many of General Electric’s current problems. The company became so focused on “disruptive opportunities” that it let execution slip.
Fortunately, there is a good rule of thumb to follow called the 70–20–10 rule. Many point to a book called The Alchemy of Growth as its origin. Others say that it dates back as far as the 1950s. Whatever is the case, many organizations, Google among them, find it a very useful way to guide investment and it’s amazingly simple to learn and apply.
70% — Sustaining Innovation
Sustaining innovations are improvements to existing products and services that align well with your organization’s current strategy. While these types of innovations are often derided as “incremental innovations” that pale in comparison to “disruptive” or “radical” innovations, that seem more exciting, they are at the heart of any strong innovation effort.
The truth is that it is sustaining innovations that create by the the vast majority of value. To understand why, think about Moore’s Law. A new generation of computer chips may not seem that exciting, but the incremental improvements over the past 50 years are what has driven the digital revolution and made many “radical” innovations possible.
Another aspect of sustaining innovations is that they tend to fit in well with current processes and customers, so costs for ramping up production and gaining adoption tend to be far lower. That’s why even when you look at wildly innovative companies like Google and Apple, most of their budgets are focused on improving existing products.
Most of your resources — about 70% — should go toward sustaining innovations.
20% — Exploring Adjacencies
Every business, no matter how successful, eventually declines. You can be the most efficient buggy whip maker in the world and you still won’t make much money, simply because there is not a huge market for buggy whips these days. At some point, every square-peg business meets its round-hole world.
You always want to be exploring adjacent markets and capabilities. Amazon greatly improved its business by exploring product categories other than books and car manufacturers are currently investing billions in electric car technology in order to be able to compete in a post-carbon world.
Unfortunately, adjacent opportunities are far riskier than sustaining innovations. Amazon is doing great with its Echo smart speakers, but completely flopped with the Fire smartphone. So you don’t want to bet your future on customers and technologies in which you don’t already have a strong operational presence.
Still, by going into an adjacency you aren’t completely taking a shot in the dark, because these markets and capabilities already exist somewhere, just not in your organization. So you may very well be able to leverage your existing resources to create something significant.
10% — Building A New Paradigm
Over the past 100 years, just about every business IBM has dominated has hit the skids. It was a pioneer in tabulating machines, mainframe computers, personal computers, and installed IT services, just to name a few. Nevertheless, every 20 years or so, each one of these business has been disrupted.
Yet still, IBM remains one of the most valuable companies in the world because it keeps developing new technologies. Today, as its business for installed solutions continues to decline, it’s building completely new businesses based on technologies like artificial intelligence, quantum computing and neuromorphic chips.
Of course, creating something fundamentally new is highly speculative, so you want to limit your investment to what you can sustain over a long period of time without incurring material risk to your organization. You don’t necessarily need a massive research budget. In fact, there are many options for even small companies to access world class research.
One of the most interesting things I found in researching my book Mapping Innovation is that the firms that invested in basic exploration eventually hit on something big . What’s more, the massive return on investment it generated paid for all of the failed projects many times over.
Feeding The Pipeline
The most important thing to remember about the 70–20–10 principle is that it is a rule of thumb, not a physical law. You don’t want to go to the trouble of auditing your development budget to ensure that you are strictly adhering to the exact proportions. However, you do want to use it as a guide to investing wisely.
In my work advising companies, one of the things that I’ve noticed is that it is the last 10% of investment, into completely new businesses and technologies, that is the most neglected. It’s far easier to see how to improve existing products or to leverage capabilities into a new area than it is to imagine something completely new.
But make no mistake, innovation needs exploration and, if you don’t make a conscious effort to widen your boundaries, it will limit your ability to compete in the long term. So invite experts to speak at your office, join a manufacturing hub, go to a conference outside your industry or even get in touch with a national lab. Embark on a grand challenge. None of these things are beyond the resources of any organization.
The one absolute certainty about innovation is that you need to constantly feed your pipeline with new ideas or you will inevitably begin to decline.
An earlier version of this article first appeared in Inc.com