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Golden Ratio for
Innovation
James Alexander
Mentor
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@thinkerings
70 20 10 rule of innovation

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@thinkerings@thinkerings2
a little about me
• Strategy and delivery executive at
IBM iX
• Product management executive at
Adobe for 7 years
• Three start-ups…two exits
• 12 patents

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history of 70-20-10
Google’s golden rule for managing innovation
“The test that I apply – and we do this every day,
70/20/10 – is to ask how a feature will extend the core,
the adjacent, or the innovative stuff to fulfill our mission.
That's the sort of drug that we all take, and it works really
quite well.”
Google CEO Eric Schmidt
December 2005
Business 2.0 Magazine

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3 kinds of
innovation

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HBR research backs it up
Bansi Nagji and Geoff Tuff
publish “Managing Your
Innovation Portfolio” in HBR in
2012
looks at industrial, tech & CPG

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finding no. 1
Companies that allocated about 70% of their innovation activity to
core initiatives, 20% to adjacent ones, and 10% to
transformational ones outperformed their peers, typically realizing
a P/E premium of 10% to 20%.
Managing Your Innovation Portfolio
Harvard Business Review
https://hbr.org/2012/05/managing-your-innovation-portfolio

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finding no. 2
The return ratio is roughly the inverse: Core innovation efforts
typically contribute 10% of the long-term, cumulative return on
innovation investment; adjacent initiatives contribute 20%; and
transformational efforts contribute 70%.
Managing Your Innovation Portfolio
Harvard Business Review
https://hbr.org/2012/05/managing-your-innovation-portfolio

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Is There a Golden Ratio?
Analysis reveals that this allocation of resources
correlates with meaningfully higher share price
performance.
How Innovation Pays the Bills
Among high performers that invest in all three
levels of innovation, HBR reports the distribution of
total returns is inverse the allocation of resources.
Source:ManagingYourInnovationPortfolio-HBR

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why do investments in transformational innovation have
higher returns long term?
• Compete in existing market
space
• Beat the competition
• Exploit existing demand
• Make the value/cost trade-off
• Crowded space lowers profits
and growth as products
become commodities
• Create uncontested market
space
• Make the competition
irrelevant
• Create and capture new
demand
• Break the value/cost trade-off
• Growth is profitable and rapid
core market realities transformational possibilities

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13.5 13.4
10.6 10.4
10 9.9
9.1
8.2 8
7.5
7.2 7
6.7 6.6 6.4 6.3 6.3 6.2 6.1 5.9
2014 R&D Spend ($Bn)
2014 PWC Global Innovation 1000 Study
innovation is a big business…
top 20 R&D spenders invested $165.3 billion in 2014

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Top 20 Spenders
9%
21 - 1000 Spenders
27%
1001-2000 Spenders
3%
Everyone Else
61%
$165.3 B
$481.7 B
$48.5 B
$1,083.7 B
The top 1,000 R&D
spenders have 40%
share of innovation
spend.
The next 1,000
companies have just
3% share of spend.
…companies invest on average 3.5% of revenue…
top 1,000 R&D spenders invested $657 billion in 2014

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4.5
8
6.6
13.4
0.2
1.7
4.8
10.4
6.2
2
Apple Google Amazon Samsung Tesla Motors 3M General Electric Microsoft IBM Procter &
Gamble
Top 10 Most Innovative Companies ($Bn)
2014 PWC Global Innovation 1000 Study
1 2 3 4 5 6 7 8 9 10
…but money can’t buy love.
only 5 top spenders were ranked most innovative…the top 10
most innovative spent 43% less then the top 10 spenders

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pioneer-migrator-settler map
create a balanced portfolio; pioneers will be imitated
Settlers are businesses offering me-too value; migrators are businesses with value improvements over competitors'; and pioneers are
businesses that offer unprecedented value—blue ocean offerings.

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@thinkerings
pioneer-migrator-settler map
create a balanced portfolio; pioneers will be imitated
Settlers are businesses offering me-too value; migrators are businesses with value improvements over competitors'; and pioneers are
businesses that offer unprecedented value—blue ocean offerings.

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succeeding with 70/20/10
• Talent
• Core, adjacent and transformational innovation require different skillsets
• Integration
• Core innovation might do well to be with the main business where transformational innovation teams
need distance from the core business
• Funding
• Core and adjacent innovation costs are incremental whereas transformational innovation may
require significant, sustained investment
• Pipeline management
• The criteria for moving projects through the innovation process must differ. Transformational
innovation is hard to manage in the linear, stage-gate model used for core and adjacent innovation
because it’s difficult to know what the right approach is for a market that does not yet exist.
• Metrics
• The metrics used to measure success for core and adjacent innovations may make transformational
innovations look like failures too soon. Metrics need to match the types of innovation they’re
supposed to measure.
organize and manage the innovation system

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wrap up
• Companies that invest 70% of resources on core innovations, 20%
on adjacent innovations and 10% on transformational innovations
typically outperform peers and have a higher P/E
• Companies spend $1 trillion annually on innovation
• Innovating thoughtfully saves cost and amplifies impact
• Many existing industries are crowded and commoditized
• Transformational innovation eliminates competitors by identifying
entirely new markets where no competitors exist
• Successful product managers will build a balanced portfolio across
core, adjacent and transformational opportunities and ensure their
organizations are tuned to the innovation system

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sources & resources
• Identify Blue Oceans by Mapping Your Product Portfolio
• https://hbr.org/2015/02/identify-blue-oceans-by-mapping-your-product-
portfolio
• PWC 2015 Global Innovation Study
• http://www.strategyand.pwc.com/innovation1000
• Managing Your Innovation Portfolio
• https://hbr.org/2012/05/managing-your-innovation-portfolio