Do you measure return on investment for innovation in your company?

We noticed that many innovators tend to avoid answering the question about what returns their projects bring. We believe that every innovation should give back for the effort we put in. Our focus on ROI is not just about numbers; it's about making sure our hard work leads to real success. Let's learn how to balance our ambitions with data, ensuring that our innovations are not just groundbreaking but also make economic sense.

Explore—Exploit

Close followers of Strategyzer are likely not strangers to the concept of the Explore—Exploit spectrum, and here is where it is incredibly important. Recently, we shared insights in a paper about the dual mindset organization, highlighting the ability to navigate both exploration and exploitation in your company.

It all begins with an idea—sparking a startup or enhancing a business. Then, we search for the right business model, value proposition, or solution. Once found, we step into scaling and management—the exploit phase. The exploration side is a bit chaotic, needing a unique approach to investment and return measurement.

Three key points emerge:

• Firstly, uncertainty differs on each side. In the exploit world, where we know our customers and business models, we plan and execute traditionally. On the left side, it's unpredictable, requiring fast iteration.
• Investment strategies differ. Large bets for exploitation, small investments for exploration, doubling down only on successful ideas. You don’t pick the successful ideas — they emerge.
• Lastly, leaders, especially CEOs, must adjust their mindset and ask different questions. On the exploit side, focus is on plans and budgets. On the explore side, a CEOs questions must shift to learning and the worthiness of continued pursuit.

Metrics and processes change on each side. To optimize results, it's crucial to measure return on investment for both exploration and exploitation, ensuring the organization unlocks its full potential.

Shifting from “Return on Project” to “Return on Portfolio”

Leaders recognize that measuring ROI from innovation investments is the ultimate gauge of success. Shifting from “Return on Project” to a “Return On the Portfolio” helps us sidestep excuses for avoiding ROI measurement. Let's consider the three types of innovation: Efficiency, Sustaining, and Transformative.

ROI calculations vary based on the type of innovation we are working on.

• In the Exploit side, Efficiency Innovations have a higher success rate due to known factors.
• Sustaining Innovations involve more risk.
• Transformative Innovations require numerous bets for success. You may need to make 100 bets to find 10 that are successful.

In Exploration, ROI per project isn't sufficient; tracking Return On Portfolio is crucial. For example, Bayer invested in 74 ideas, with 17 succeeding, demonstrating the importance of measuring overall portfolio returns.

A crucial takeaway is starting with quick wins in efficiency and sustaining innovations before venturing into transformative ones. This approach builds trust and sets the stage for a diversified portfolio that yields significant returns.

Time horizons for different innovations

We also explored the time horizons of innovation, recognizing the distinct timelines for Efficiency, Sustaining, and Transformative approaches.

• In the exploit phase, Efficiency Innovations deliver quick results within 1-2 years, offering immediate returns such as a new app for the sales force.
• Sustaining Innovations involve new products or channels. Extend this horizon to 2-3 years.
• With Transformative Innovation, the benefits are more long-term, taking at least 3-5 years. It sustains growth over an extended period.

Examining time horizons, we noted that Efficiency Innovations yield rapid but short-lived revenue growth. Sustaining Innovations, though more challenging to launch, contribute to medium-term success, necessitating the replacement of expiring revenues with new products. Transformative Innovations, resembling the startup's hockey stick growth, involve a longer journey from testing to sustainability, creating a lasting impact that proves difficult for competitors to replicate.

When confronted with the desire for immediate returns, the analogy of S-curves showcased how Efficiency Innovation provides early returns that decline over time, while Transformative Innovation offers smaller initial returns that increase over time.

How to achieve a 10x ROI for innovation

The journey to a 10x ROI involves strategic portfolio management and a nuanced understanding of risk and return. Tendayi emphasized the need for a balanced and dynamic approach to portfolio management that includes quick wins (efficiency), intermediate returns (sustaining), and long-term transformative successes, as shown in the graph.

The discussion emphasized the need to make more bets in transformative innovations, even acknowledging the boldness required. "If you want to get 50 times return, you have to be making many more bets," Alex stated, reinforcing the idea that transformative innovation demands a different risk appetite.

Calculate the Return On Investment not just for individual projects but for the entire portfolio. As Alex highlighted, "the ones that become successful... pay for the multiple failures that we invest in." The emphasis on a holistic view of the portfolio aligns with achieving sustained success, ensuring that organizations not only focus on immediate gains but also foster innovation endeavors with long-term impact.

In the role of balancing S-curves, leaders play a key part in keeping the company resilient when one area dips. It's about intuitively understanding and visually representing the importance of a balanced approach. Calculating returns becomes a dynamic process. The logic presented offers CEOs a practical approach to managing a balanced plan, sidestepping the challenge of communicating to stakeholders about a revenue dip before seeing returns. Instead, it provides a groundwork for sustained, long-term success.

At Strategyzer, we’ve become really focused on this approach—blending the flexibility of startups with the precision needed for significant corporate investments. Not measuring these aspects is a risk you can't afford. While we're still in the early stages, we're becoming adept at measuring and reducing risks, both in terms of the project portfolio and its value. In the end, what truly matters is the financial return, which starts showing up in about two years and continues for the next decade.

We hope you gained some interesting insights from this discussion. Don’t forget to subscribe to our newsletter below to stay up to date on future events.