DDBA 8511 Week 4 Innovation Portfolio Analysis Example

Thirteen Percent Exploration and a Review Habit That Will Cut It: A Portfolio Analysis of a Commercial Lighting Maker's Fourteen Development Projects, Judged on Balance Rather Than Rank

Student Name

Walden University

DDBA 8511: Seminar in Innovation Management

Instructor Name

Month Day, Year

Thirteen Percent Exploration and a Review Habit That Will Cut It: A Portfolio Analysis of a Commercial Lighting Maker's Fourteen Development Projects, Judged on Balance Rather Than Rank

Why Not a Ranking

Bright Arc Lighting, a composite maker of LED fixtures for warehouses, schools and parking structures in Ohio, has 14 development projects funded for the coming year, with a combined budget of $6.8 million. The new chief executive asked for an analysis of the portfolio. The obvious response would be to rank the projects by expected return and cut the bottom few. A ranking would answer which projects are best. It would not answer whether the set as a whole leaves the company able to do anything new, which is the question March (1991) placed at the center of organizational learning: firms that put too much into refining what they already do improve in the short run and risk being left behind, while firms that put too much into searching for new possibilities never collect on any of them. This analysis classifies the projects on that dimension and judges the balance.

Classifying the Projects

I classified each project as exploitation, which refines existing products, processes or customers, or exploration, which pursues new technologies, products or markets the company does not serve. Classifications were made from each project's charter and checked with its lead.

Eleven projects refine what Bright Arc already sells: higher efficiency for its warehouse high-bays, a cheaper housing for school fixtures, a refreshed parking garage line. Three explore: grow lights for indoor farms, fixtures with sensors that report occupancy to building systems and ultraviolet fixtures for disinfecting air in schools and clinics.

Table 1

Projects by Type and Budget

Classification from project charters, confirmed with project leads; budgets from the fiscal 2027 plan.

Is the Balance Right?

No share is right in general. But Bright Arc's situation argues for more exploration than 13 percent. Its core market, LED retrofits of older warehouse and school lighting, is maturing: the company's own sales data show that about 60 percent of its customers' facilities have already converted. Prices for standard fixtures have fallen about 8 percent a year for three years. A company whose main market is shrinking and commoditizing needs a larger stake in what comes next. Tushman and O'Reilly (1996) argued that firms facing such shifts must manage incremental and discontinuous change at the same time, and that firms excellent at the first often fail at the second.

The Review Habit That Will Cut Exploration

Even the 13 percent may not survive. Bright Arc reviews every project quarterly against a single test: is it on track to its revenue forecast? Exploitation projects can meet that test, because their forecasts rest on known customers. Exploration projects cannot, because their early quarters produce prototypes, pilots and learning rather than revenue. The networked sensor project, for example, has no paying customer yet by design; it is running two pilots. In the first quarter in which exploratory projects look worse on the revenue test, which is every quarter for the next year, the review habit will push money toward the eleven that look better. Benner and Tushman (2003) found that process management practices designed to improve efficiency tend to shift attention and resources toward exploitation and away from exploration over time. Bright Arc's quarterly review is such a practice.

What Would Protect Exploration

Two changes would let the exploratory share survive. First, review exploratory projects against learning milestones, such as pilot results, customer interviews and cost per unit at small volume, rather than revenue. Second, protect the exploratory budget as a fixed pool for at least two years, so that one weak quarter does not move money to refresh projects. The chief executive might also consider raising the exploratory share toward 20 percent, funded by trimming the two exploitation projects with the smallest expected gains.

What the Chief Executive Asked and What This Answers

The chief executive asked for a portfolio analysis expecting a ranking. This analysis gives something different: a judgment that the portfolio leans too far toward refinement for a company whose core market is maturing, and a diagnosis of the habit that will make the lean worse. A ranking could still be produced within each category, and the two lowest-value refinement projects are identified in the recommendation, but cutting them only makes sense once the balance question is answered.

Limits

The classification involves judgment: the cheaper school housing could be seen as exploring a lower-cost segment. And the analysis does not assess whether the three exploratory projects are the right ones, only whether the portfolio leaves room for any.

References

Benner, M. J., & Tushman, M. L. (2003). Exploitation, exploration, and process management: The productivity dilemma revisited. Academy of Management Review, 28(2), 238-256. https://doi.org/10.5465/amr.2003.9416096

March, J. G. (1991). Exploration and exploitation in organizational learning. Organization Science, 2(1), 71-87. https://doi.org/10.1287/orsc.2.1.71

Tushman, M. L., & O'Reilly, C. A. (1996). Ambidextrous organizations: Managing evolutionary and revolutionary change. California Management Review, 38(4), 8-30. https://doi.org/10.2307/41165852