Strategic or financial value of the innovation portfolio?
Portfolio optimization objectives
In different companies, I see different criteria (or better: different emphasis across criteria) to discuss what makes the best innovation portfolio. Some insist on a strategic scoring mechanism that weighs in strategic fit and attractiveness criteria. Others insist on financial valuation: e.g. by Net Present Value (NPV) or by Return on Investment (RoI) or similar. How to choose between the two?
Have a look at the bubble plot chart. It shows projects (A,B, C, and D) that score differently on financial value and on strategic score. Obviously, project A is a good project: it scores well on strategic fit as well as on financial value. Project B does not look so well, since it scores low on both axes. So, project A is a good candidate for inclusion in the portfolio, and project B probably not.
Let’s have a look at project C and D. What can we tell about them?
Project C scores high on financial value but low on strategic score. So it gives a good financial return, but it’s not in line with the innovation strategy. It is tempting to include it in the portfolio, since it creates financial value. But maybe some questions need answering first:
- How come this project creates value if it is not in line with the strategy? What properties of C make it valuable, and why are these properties not part of the strategy?
- Could this be a signal that we need to adjust the strategy, or is it an incidental combination of value drivers?
- Does the low strategic score make sense, and do cross-checks support this? For example, I would expect this project C to be riskier than project A, since we should expect more risk if we operate outside our zone of strategic strength.
And what about project D that scores high on strategic value but low on the financial axis? In the end, we expect a good strategy to give a sustained competitive advantage. And this translates into financial value.
- Do project D’s strategic scoring drivers point to a sustained competitive advantage?
- How come this value is not part of the financial evaluation of project proposals?
For all practical purposes, good financial value estimates should be based on clear assumptions and constraints that make projects comparable. This leaves out the more speculative aspects of a project’s impact. And strategic scoring complements for this limitation.
What is the best portfolio?
As regular readers may recognize, the answer should be: the portfolio that best covers all objectives (both financial and strategic). This is the reason I like this bubble plot configuration. It triggers the goal setting, and it triggers the exploration of the key assumptions underneath the projects. That is exactly what tools should do: support the right discussion for better decision-making.