Feb 17, 2021
Innovation
Creativity
Portfolio approach
Product Management
Tech
Beating the Odds at Innovation
How many bad ideas does it take to arrive at a good one? Quite a lot. A lot more than most people think.
Stories on how creativity and innovation happen to tend to take on a near-mythical tone. From how they're told, you would think that ideas simply fall from the sky into the heads of exceptional individuals. The process in which breakthrough ideas come to life is, in reality, a lot more complicated than that. There is no straightforward way to make innovation happen. It involves assuming steep risks, working through lots of uncertainty, and facing plenty of failures. Innovation is truly a numbers game and the guarantees of success are — even in a best-case scenario — just a bit above zero.
The good news is that there are ways to control that risk. Organizations seeking to reduce the uncertainty of betting on innovation have developed a system to beat the odds that is not too different from investing in a variety of stocks to minimize losses or buying multiple lottery tickets to up your chances of winning. It’s a strategy known as the portfolio approach. It provides a way to explore the viability of various pursuits before going all-in on any given one. The idea is that running parallel ventures will increase the chances of success and that spreading resources across different projects will minimize losses in case of failure.
The 70–20–10 rule
Why is Alphabet, a company better-known for Google Search and Android, investing in researching smart homes, artificial intelligence, and self-driving cars? Because it understands that disruptive innovation is the key to securing its future. Exploring all these new opportunities at once improves Alphabet’s odds of succeeding in at least a handful and ups its chances of developing innovative products and services.
The company follows a 70–20–10 rule to investing in projects. This corresponds to the level of risk associated with each type of innovation: core, adjacent, and transformational. Core innovation involves making improvements to existing products and services. It’s the easiest type of all three to achieve because it doesn’t require you to rewrite the playbook — just add new pages to it. For Alphabet, this would entail improving its core businesses, such as Google Search or Android. Projects adjacent to the company’s main business that carry a medium risk get 20% of the resources. These include ventures into e-commerce, digital services, or developing hardware products.
On the far side of that spectrum is transformational innovation. It’s the type of idea with the potential to change the course of a company’s business or even the market. This is a difficult feat to achieve. It requires an environment that nurtures creativity, experimentation, problem-solving, and — more importantly — the opportunity to fail. Alphabet dedicates 10% of its resources to these offshoot programs. It has an entire division dedicated to these seemingly wild endeavors called the Moonshot Factory or “X.” It works as an incubator for new technologies aiming to bring about radical change — not unlike Google Search once did. Google Glass is, by far, one of their better-known projects but not the only one. Newer ventures include projects that steer far from Alphabet’s core businesses, such as Dandelion or Tidal. The first one seeks to become a carbon-free alternative to heating and cooling homes using geothermal energy. Tidal uses AI to explore oceans and promote data-driven sustainable fish farming practices.
Alphabet’s approach has had significant payoffs. “70% of our resources are spent in our core business, and 10% end up in unrelated projects, like energy…People might think we’re wasting money or whatever. But that’s where all our new stuff has come from”, explains Google co-founder Larry Page. The system has worked very well for others too. HBR found that companies that use portfolio approaches tend to outperform their peers. Their research confirmed what Mr. Page stated above: the return ratio on these small investments is huge. Projects aimed at transformational innovation regularly yielded a 70% return on their investment.
Fighting uncertainty
Portfolio approaches to innovation are, in short, the organizational equivalent of not putting all of your eggs in one basket. Some of today’s most innovative companies, such as GE or P&G, know that betting it all on a single project is not a good long-term plan. Exploring different possibilities simultaneously keeps them ahead of the curve and gives them plenty of cushion to fall back on in case of failure.
Microsoft credits a big part of its success to Gate’s decision to run parallel projects in its early days. In the 1980s, the company faced stiff competition from Apple and IBM. Gates debated whether pursuing Windows was worth it or if it was better to drop out of the race entirely. Their future was uncertain and banking solely on Windows’ success would be risky. To control that risk, Gates chose to push forward with six different projects — Windows included — geared towards competing in the PC software market. Bit by bit, the projects that were not viable failed and Windows emerged as the winner.
We have every reason to believe that most of our ideas will not be successful. Most of the time, however, we also have no way of knowing which ones will be the exception. This is why exploring them is a worthwhile pursuit and why having a backup plan matters. When we have a cushion to fall back on, the blow of failure doesn’t necessarily have to knock us out.
Playing the numbers game
Solving problems and reaching specific goals requires us to cycle through many experiments and failures. The more we create and the more possibilities we explore, the better our chances of a positive outcome. One of the most significant benefits of portfolio approaches is creating spaces for experimentation and failure. And that is paramount if you’re looking to push boundaries.
The design process at Skyline, a toy design lab within IDEO, shows how a strategy in which failure and experimentation are encouraged can be applied across a wide range of industries. It also shows how much we underestimate the number of bad ideas needed to produce a single good one. A study found that — to arrive at two or three successful products — the Skyline team had to regularly pool thousands of concepts. Designers would start with about 4,000 ideas for toys. They would then choose around 230 of them to develop into prototypes. Of those 230 prototypes, only 12 managed to get the attention of toy-makers interested in purchasing them. Even fewer of these prototypes would make it into production. Around two or three of the original 4,000 concepts became commercially successful toys. At the end of this long process, roughly 5% of the team’s ideas had been considered good enough to sell, and just 1% made it into kids' hands. That’s a very steep failure rate, especially when you’re doing it on a near-constant basis.
Creative people know that dumb ideas and failures are part of the game. As Brendan Boyle, one of the team’s members puts it: “You can’t get any good new ideas without having a lot of dumb, lousy, and crazy ones. Nobody in my business is very good at guessing which are a waste of time and which will be the next Furby”. He understood that you have to dig through a lot of dirt to get to the shiny gems. Innovation and creative work entail embracing that process and the uncertainty that defines it.
Ideas breed more ideas
A culture of exploration and experimentation is good for producing new ideas and improving existing ones. Ventures can be unsuccessful and yet still deliver solutions that may be useful when applied elsewhere. Loon, another one of Alphabet’s Moonshot projects, is an excellent example. It aimed to bring wireless internet connectivity to remote areas using balloons suspended in the atmosphere. Although it recently folded, the technology developed through it has benefited many of Alphabet’s existing projects and even led to new ones.
Solving how to program Loon’s balloons to withstand changing weather conditions helped Alphabet further its AI deep-learning technology. Likewise, the technology developed to interconnect the balloons gave way to another program: Taara. This new venture is currently experimenting with using the light beam technology developed at Loon as a wireless alternative to fiber optic cables for internet connectivity. It may have the commercial success that eluded Loon.
Conclusion
Thomas Edison is almost as famous for his astronomical number of failures as he is for his accomplishments. The small number of successes he had, however, went on to change history. Inventions like the lightbulb, the telegraph, or the phonograph are all products of a lifetime of continuous experimentation and plenty of things gone wrong. The pantheon of creative geniuses he now belongs in is filled with individuals who got very good at dusting off the shortcomings of failure and learning from them. These creators understand that failure is the price of innovation. Any organization or individual hoping to achieve the same must adopt that resiliency ethos.
The basic idea behind the portfolio strategy — to try different things and to do so often — is an approach to business and creativity that both individuals and organizations can benefit from. When paired with the right mindset, it fosters an environment where discovery, experimentation, and innovation can flourish. It teaches us to make friends with failure and to start seeing it as an integral part of the process rather than the end.
