One of the challenges that companies and decision-makers face is understanding how to establish and maintain a competitive advantage and innovate at scale. Should they go after the disruptive and risky idea with the potential to create and define a future market? Or concentrate more on incremental innovation, improving their current products that already have generated customer interest? Or maybe entering new markets with existing products?
We believe that linking strategic objectives with effective innovation portfolio management provides significant business value. In this blog, we would like to share one of our favorite methods to manage innovation, the 70:20:10 rule of innovation.
What is the 70:20:10 rule of innovation?
The 70:20:10 model has been widely embraced by various organizations as a means of promoting innovation and tying efforts to an overall innovation strategy. However, it should be noted that the model's roots lie not in innovation research but in learning theory. According to this school of thought, individuals acquire 70% of their knowledge through personal experience with challenging tasks, 20% through collaboration with colleagues, and 10% through formal education and reading.
Eric Schmidt, the former CEO of Google, later adopted this theory and applied it to promote innovation within the company. Schmidt requested Google employees to prioritize 70% of their time for core business tasks, allocate 20% for projects related to their core responsibilities, and dedicate 10% of their time to new and unrelated projects. This approach aims to maintain a company's operations while also allowing room for innovation and progress.
70% | Core innovation
An emphasis on core innovation involves enhancing existing products and services that align well with the organization's strategy. This approach requires dedicating 70% of resources to proven, low-risk core activities that have a track record of success. Since core activity innovation typically addresses current processes and customers, the expenses for boosting production and adoption are usually less.
Therefore, many innovative companies, such as Google and Apple, concentrate the majority of their resources on enhancing their existing product offerings. This suggests that a company should prioritize sustaining innovations by focusing most of its resources on improving core activities.
20% | Adjacent innovation
When it comes to innovation projects, it is beneficial to view them as a portfolio of diverse investments where the risk profile is managed in alignment with the evolving organizational appetite and capacity for risk. Companies will explore adjacent markets and capabilities in addition to their core activities, however, as this increases risk exposure in comparison to evolving core initiatives, a balance must be struck.
Therefore, it is recommended to allocate only about 20% of resources to adjacent innovation. Even when exploring adjacent markets, it is crucial to acknowledge that these products and markets already exist elsewhere, just not within the company.
A benefit of adjacent innovation is that analogous examples can be found in industries, verticals, and markets outside of an organization's current domain, meaning hypotheses about the proposed value proposition, revenue model, and value chain can quickly be established and tested.
10% | Disruptive innovation
Bold companies allocate 10% of their resources to developing breakthrough innovations, offering novel solutions and technologies that create new markets. Such transformational initiatives focus on the unique challenge of creating and delivering something entirely new to disrupt the market and, often, the world.
The impact of this type of innovation is often referred to as a "Shift"; A situation where it no longer makes sense for the market to return to the old way of doing things and in turn renders existing products and industries obsolete.
The 70:20:10 rule of innovation in practice
Delving into how innovation leaders like Coca-Cola, Netflix, and 3M employ this innovation framework, let's unpack the strategies that keep them at the forefront of their respective industries.
Coca-Cola has been known to adopt the 70:20:10 rule in its innovation strategy to diversify its product portfolio and adapt to changing consumer preferences. This approach to portfolio management has helped the company remain a market leader and introduce new products that cater to emerging trends and demands, helping to facilitate strategic decision-making.
- 70% | Core innovation: Coca-Cola focuses on enhancing its flagship products, such as Coke, Diet Coke, and Coca-Cola Zero. They have also introduced various flavor variations and packaging innovations to cater to different markets and consumer preferences. For example, Coca-Cola introduced smaller-sized cans and bottles to meet consumer demand for portion control.
20% | Adjacent innovation: Coca-Cola invests in expanding its product range to include beverages that cater to different consumer preferences, such as health-conscious customers. Examples include the acquisition of Honest Tea, a company that produces organic, low-calorie teas, and the development of Coca-Cola Life, a lower-calorie soda sweetened with stevia and cane sugar. Coca-Cola has also expanded into the energy drink market with the acquisition of Monster Beverage Corporation and the introduction of Coca-Cola Energy.
10% | Disruptive innovation: Coca-Cola keeps an eye on emerging trends, technologies, and consumer behaviors to stay ahead of the competition. The company has been exploring the use of artificial intelligence and big data to better understand consumer preferences, optimize supply chain operations, and improve marketing strategies. Coca-Cola has also shown interest in the cannabis-infused beverage market, considering the potential for non-psychoactive CBD-infused drinks for wellness purposes.
Although not explicitly following the 70:20:10 rule, Netflix has followed an innovation strategy that aligns with the principles of the model and plays a pivotal role in its strategic planning.
- 70% | Core innovation: Netflix invests heavily in improving its core product, which is the streaming platform and original content. The company focuses on enhancing user experience, recommendation algorithms, and streaming quality. Additionally, Netflix is continuously expanding its content library with a mix of licensed content and original programming.
- 20% | Adjacent innovation: Netflix has ventured into adjacent markets, such as producing movies, documentaries, and unscripted content. Examples include the release of critically acclaimed movies like "Roma" and "The Irishman," as well as popular documentaries like "Tiger King." The company also made efforts to enter international markets by producing local content tailored to specific regions, such as "Money Heist" from Spain and "Sacred Games" from India.
- 10% | Disruptive innovation: Netflix has experimented with transformative innovations, such as interactive content, which allows viewers to make choices that impact the storyline. "Black Mirror: Bandersnatch" is an example of this format, providing a new way for audiences to engage with content. Recent forays into live events and the launch of a suite of games show that Netflix is not slowing down.
You only need to refer to the original name of 3M (The Minnesota Mining and Manufacturing Company) and compare it to their current product offering to understand how transformative they have been since it was established in the early 1900s. With an innovation strategy built upon the pillars of employee engagement, processes, and collaboration and leveraging numerous Innovation Centers and Technical forums, 3M consistently delivers a diverse range of opportunities as a result of their innovation program.
- 70% | Core innovation: 3M focuses on enhancing its existing products and technologies in areas such as healthcare, electronics, and transportation. The company invests in R&D and incremental improvements to maintain its competitive advantage and deliver better products to customers. For example, 3M has introduced improvements to its line of adhesives, abrasives, and films to meet the evolving needs of various industries.
- 20% | Adjacent innovation: 3M explores opportunities in adjacent markets and technologies, often through acquisitions or partnerships. This allows the company to diversify its product portfolio and expand into new markets. Examples include the acquisition of Acelity, a wound care, and regenerative medicine company, and the partnership with ON Semiconductor to develop advanced automotive sensing technologies.
- 10% | Disruptive innovation: 3M dedicates resources to long-term, disruptive innovations that have the potential to transform industries or create entirely new markets. The company's culture of innovation has led to the development of breakthrough products like the Post-it Note and the N95 respirator.
How to successfully use the 70:20:10 rule of innovation
To ensure organizations can successfully implement the 70:20:10 rule of innovation and create a balanced approach to growth, market expansion, and innovation, the following steps are critical:
- Understand the rule: Ensure that the organization's management and employees have a clear understanding of the 70:20:10 rule and how it can be applied within the company. The rule is meant to create a balance between focusing on the core business, expanding into adjacent markets, and exploring transformational innovation, ensuring an overall strategic fit.
- Assess current resource allocation: Analyze the current allocation of resources and time within the organization. This assessment will help identify where resources are being spent and if there is a need for reallocation in line with the 70:20:10 rule.
- Define core, adjacent, and transformational areas: Clearly define the core business activities, adjacent areas for expansion, and transformational projects for innovation. This clarity will help in appropriately allocating resources.
- Align strategic goals: Align the organization's strategic goals with the 70:20:10 rule, ensuring that the goals cover core, adjacent, and transformational areas. This alignment will help create a roadmap for the organization's growth and innovation.
- Allocate resources: Based on the assessment and strategic goals, allocate resources (time, budget, and talent) to core, adjacent, and transformational areas. This may require reallocating existing resources, securing additional resources, or integrating new competencies as needed.
- Implement a culture of innovation: Encourage a culture of innovation and risk-taking within the organization. Employees should feel empowered to experiment and explore new ideas, even if they fail. This culture should be championed by leaders and management.
- Track progress and adapt: Regularly track progress in each of the three areas to ensure that the organization is moving towards its strategic goals. Be prepared to adapt the resource allocation and goals based on the market dynamics and new opportunities that may arise.
- Communicate and celebrate successes: Communicate progress and celebrate successes with the organization, including innovations and expansions into adjacent markets. This will help build momentum and encourage further innovation.
How innovation portfolio management software can help with the 70:20:10 rule of innovation
Portfolio management software like ITONICS can help organizations effectively implement and manage the 70:20:10 rule of innovation by providing the tools and processes necessary to facilitate collaboration, strategic alignment, and decision-making. The ITONICS end-to-end solution assists companies in managing their innovation portfolio across core, adjacent, and transformative projects.
- Portfolio visualization and categorization: ITONICS enables organizations to visualize and categorize their innovation projects according to the 70:20:10 rule – or any other strategic benchmark set by company leadership. By clearly identifying and separating projects into core (70%), adjacent (20%), and transformative (10%) categories, companies can ensure that they are allocating the appropriate resources to each type of innovation. Kanban boards help quickly monitor investments across the three horizons and assess their health status to help inform decision-making.
- Strategic alignment: The software allows organizations to map their innovation portfolio against overall strategic goals and objectives. By drawing and tracking connections between internal efforts and strategic focus fields, companies can ensure their most valuable initiatives receive the resources required to succeed. By linking innovation portfolios to external drivers and trends, companies can significantly increase their innovation hit rates to leverage key opportunities for maximum impact.
- Resource allocation and prioritization: The software assists in effectively allocating resources to different innovation projects based on their categorization in the 70:20:10 model. With KPI aggregations, ITONICS enables companies to identify resource constraints and make informed decisions about where to invest their time, money, and efforts. Relations in the system help companies understand what to focus on or deprioritize depending on both internal and external changes.
- Monitoring and tracking progress: ITONICS configurable dashboards allow organizations to track the progress of their innovation projects and measure their impact. By providing real-time updates and analytics, the software enables companies to evaluate the success of their projects and make adjustments as needed to stay on track with their innovation goals.
- Risk and opportunity assessment: ITONICS helps organizations identify and assess potential risks and opportunities associated with their innovation projects. Use innovation roadmaps to connect initiatives to risks and scenarios to understand the potential impact of these risks and opportunities, and use critical path analysis to make better-informed decisions and manage innovation portfolios more effectively.
- Collaboration and communication: ITONICS enables collaboration and communication among team members, departments, and external stakeholders. This is particularly important in facilitating the 20% of the rule focused on social learning and interactions. The software enables the sharing of ideas, feedback, and knowledge, ensuring that innovation projects benefit from diverse perspectives and expertise, all on one digital platform.
In summary, the ITONICS Innovation Portfolio Management Software can help organizations by providing tools for categorization, strategic alignment, collaboration, resource allocation, progress monitoring, and risk assessment in one central location. This allows companies to optimize their innovation efforts and ensure they are investing in the right projects to drive growth and stay competitive.
Achieve success with the 70:20:10 rule of innovation
As per the Harvard Business Review, businesses that practice the 70:20:10 approach outperform their competitors and have a better price-to-earnings ratio. Successful portfolio managers create space and provide capacity for core, related, and disruptive innovations ensuring their organization continues to thrive and improve its risk tolerance.
Learn more about how ITONICS can help unlock hidden value in your innovation portfolio compiled from our years of experience working with more than 250 innovation leaders from around the globe.
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