Balance risk and return
Like any smart investor, you optimize for return on future bets when you balance your risk.
This means spreading your investments across a portfolio of possibilities. Balanced portfolios spread risk and reward across three horizons.
Established companies logically place most bets in the well-understood market they serve today with the technologies they’ve already mastered.
Consider the familiar example of Apple’s explorations and ultimate expansion from the iMac computer core business to the iPlatform. A software solution, iTunes first arrived as a consumer application to digitize your music library, only later morphing to an early consumer cloud application for purchasing music and then all media formats, including novel mashups like podcasts that created a new medium and a new media sub-economy.
This laid the foundation for the iPod families and iPhones to follow, pushing out into a mobile market with partner-driven experimentation. The App Store represents a significant break for Apple, from Steve Jobs’ traditional fortress mentality around the controlled hard/software experience.
Mix it up. Balance your growth investments to match your growth plans. Need more growth sooner? Make sure you and your board have the fortitude to carry a higher risk portfolio mix.
Litter the lower left corner of this matrix with low-risk/low-return incremental enhancements to your current offerings, brand extensions and obvious introductions among the status quo.
The mix of risks means you’ll have a logical bias toward the known – the lower left quadrant of this matrix. That makes sense. Today’s revenues fund the future. Only extreme duress forces companies to abandon today’s customers to find new ones, as start-ups sometimes must do. (For a case study on extreme cajones, David Hersh was tormented by exactly that kind of do-or-die decision as CEO of Jive Software.)
A simple (and simplistic mix might look like 70-75% of your invested dollars and resources in this first horizon, with 20-25% expanding with structured experiments on the second horizon.
At the same time, you should always invest some resource in exploring far frontiers. Consider investing 5-10% of your capital to discover the big bets that show up sooner than you might expect. Or prefer.
Choice attracts. Chaos repels.
The world changes. Nature extinguishes dinosaurs for their lack of adaptability. You need options in a changing landscape. Don’t let your analysts, brand teams or growth pressures tempt you to produce meaningless variety, squabbling for share in the known quadrant. Play for the ever-shifting end game.
Of course this assumes you’re playing a long game. We’ve all seen executive decisions to optimize for “my tenure”, and politician’s who irresponsibly “kick the bucket down the road” for the next administration to sort out. A short game looks great in the short term. But narrow focus on the present ends in tears and tar pits.
Of course you need to prepare for the hard work to ensure your new extensions and varieties address real needs, or you dilute your brands and atrophy margins. The principles of design apply here. More unknowns arise as you push into adjacent audiences or technologies. And you should always explore a few big bets in undiscovered territories.
To extend your current platforms and expand into adjacent markets and offerings, you’ll need deep research into changing user behaviors and unmet needs. This type of ethnographic field research differs fundamentally from market research. Do not confuse deep empathy – the insights that come from walking miles in your prospective customers shoes – with focus groups and other tools of the marketer’s tradecraft. Different intent, different tools, and different skills.
To push into the far unknown means you’ll need analytics into the early indicators that spot trends that matter. Of course there are obvious ones that can’t be ignored – your world is getting older, more global, more digital. Assets increasingly polarizing, accruing wealth to the privileged few, with growing anxiety among the huddled masses.
Ray Kurzweil has demonstrated that Moore’s Law applies well beyond computing power, to chart all curves of human progress, from velocity to lifespan. Draw curves not lines when you push onto the far horizon. But that’s another post.
Finally, discover and build platform innovations. Platforms are the basis to allow you to pursue all three horizons within a single theory of value. You get compounding returns, because all your discoveries accrue back to the platform, making each constituent innovation more valuable over time.
Establish your platform as the foundation at the core of a new portfolio.
Then place your own bets and encourage partners to do the same to expand into adjacent opportunities, and explore breakthrough possibilities.
Roger Mader 