THERIGHTWAYTO ALLOCATE,ANDTHE SURPRISING RELATIONSHIPWITH RETURNS

Nagji and Tuff then did a study to see whether paying attention to your innovation portfolio has performance effects. What they found was that, indeed, it does. They correlated the allocation of resources across the elements of the portfolio with share price. The data revealed a pattern: Companies that allocated 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%. As they note, “our subsequent conversations with buy-side analysts revealed that this allocation is attractive to capital markets because of what it implies about the balance between short-term predictable growth and longer-term bets.” That all seems sensible.