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70:20:10 Rule of Innovation

One of the challenges that companies face is understanding how to manage their innovation resources. Should they go after the disruptive and risky idea? Or concentrate more on incremental innovation, improving their current products that already have generated customer interest? Or maybe entering new markets with existing products?

Many organizations have adopted the 70:20:10 model to drive innovation. The origin of the model does not come from Innovation research; it comes from the theory of learning. It says you learn 70% of the things from doing tough jobs by yourself, 20% of learning comes from people you work with, and 10% from courses and reading. The theory was later picked up by Eric Schmidt, former CEO of Google, who decided to apply the model to Innovation at Google. He asked Googlers to focus on core business 70% of the time, 20% on related projects and 10% of the time on unrelated and new projects.

The idea is simple, you have to focus on your core responsibilities to get the company running, but if you do that all the time, you never evolve or innovate.

70% | Core Innovation

Focusing on core innovation means improving current products and services that align well with the organization’s strategy. It also means allocating 70% of resources to tested, low risk, core activities that have proven to work in the past. 

As core activity focused innovation usually covers the existing processes and customers, the costs for increasing production and adoption tend to be lower. For this reason the most innovative companies like Google and Apple, focus most of their resources on improving the existing product portfolio.

This means that a company should focus most of its resources to sustain  innovations.

20% | Adjacent Innovation

It is useful to think of innovation projects as a portfolio: You need diversity in your portfolio to reduce risks and reach a balance. This is why next to core activities, companies start to explore adjacent markets and capabilities. However, focusing too much on adjacent opportunities could be riskier than focusing on core innovation projects. Thus concentrating on adjacent innovation should only take about 20%of your resources. 

Even if you go into an adjacency, you aren’t fully coming up to something new, as these products and markets already exist somewhere, just not in your company.

If Kodak had followed the 20% rule, the company might not have been hurt so badly by the rise of digital photography. Years ago, Kodak should have dedicated 20% of its resources to develop digital products, meaning exploring adjacent opportunities back when print photography ruled the industry.

10% | Disruptive Innovation

To think ahead and come up with the next big thing, innovative companies focus 10% of their resources to develop breakthroughs and invent things for markets that don’t exist yet. This means considering transformational initiatives that concentrate on creating something completely new. Disruptive Innovation can often be defined as the introduction of a new technology that creates a new industry and transforms the way we do things. This type of innovation usually turns existing products and industries redundant. Also, transformational projects are easier to implement in a sense that change is required to achieve it. This typically doesn’t depend on a current entity that is committed to the old way of doing things.

Succeeding with 70:20:10

Do not forget about the agility; the 70:20:10 principle is a rule of thumb, not a rigid model. There is no need to strictly follow the exact resource allocation to innovate.  Yet, it is useful to apply this model as a guideline to effectively manage your innovation resources. Based on your specific case, it will be necessary to adjust the ratio according to your prevailing context and risk appetite.

Talent

Core, adjacent and disruptive innovation will require diverse skills and talents. Different studies show how some skills are best sourced from outside to the firm while others are best developed in-house to foster innovation.

Integration

Core innovation could do well next to the main business while disruptive innovation teams need to be apart from the core business.

Funding

Core and adjacent innovation costs are additive while disruptive innovation may require a dedicated initial investment.

Pipeline Management

The criteria for moving projects through the innovation process pipeline differs. While incremental and adjacent innovation projects are managed more or less in the linear, e.g. stage-gate model, the right approach to transformational innovation can’t be linear as it is difficult to come up with one approach for a market or a product that does not yet exist.

KPIs

Key performance indicators need to support the types of innovation they tend to measure. KPIs used to measure the success for core and adjacent innovation may not capture the transformational efforts or even make them seem like failures.

Wrap Up

According to Harvard Business Review, companies that invest 70% of their resources on core innovations, 20% on adjacent innovation and 10% on transformational innovations typically outperform peers and have a higher price-earnings ratio. Successful innovation managers build a balanced portfolio across the core, adjacent and disruptive opportunities and ensure their organizations support a sustainable resource allocation to innovate.