Reacting to the now, preparing for the next
Current global turbulence puts CTOs and innovation teams under pressure. But it also creates rare windows to reshape innovation strategy and prove its value. Those who actively rebalance their portfolios across technologies, markets, and capabilities will protect long-term bets while creating short-term wins and a stronger competitive edge. As this Viewpoint explains, resilient portfolios aren’t built in calm — they are forged in crisis.
The current business and geopolitical environment is complex and challenging. Typified by uncertainty, factors such as market turmoil, rising US protectionism, a slowdown in the Chinese economy, growing geopolitical rivalry, falling consumer confidence, and ongoing conflicts weigh heavily on business performance.
The innovation function is equally affected, with CTOs and R&D teams impacted both positively and negatively by:
These factors and more have put additional pressure on the already-difficult CTO role, which involves marshaling resources that are not necessarily within their control, demonstrating value to the business, and setting a stable long-term direction. The temptation is to refocus efforts (or pivot), sharpen areas of work, cut budgets, and aim to ride out the storm. However, a wait-and-see approach ignores the critical role that innovation can play in meeting current challenges and delivering future competitive advantage.
What is needed is a pragmatic approach that uses turmoil to reaffirm the value of innovation, proves its worth to the wider business, makes no-regret decisions, and adapts strategy as required. As the adage goes: “Never waste a good crisis.”
Given today’s volatility, sticking to current innovation strategies is not a solution. Neither is constantly reacting to every market or geopolitical change, particularly given the long-term nature of many innovation strategies and projects. Instead, CTOs need to focus on revisiting their project portfolio and available resources (in-house and in the wider ecosystem of partners), securing the right capabilities, and demonstrating rapid value.
Luckily, there are some Nobel Prize–winning concepts that can guide value creation under conditions of volatility and uncertainty. Creating value through options definition and analysis is one of these (see sidebar “Understanding options”).
Understanding options
In finance, an option is a contract that allows an individual or organization to make an investment at a future time to create value. This approach is also applied outside finance, including in industries such as property development and filmmaking. In the context of innovation, an option can be created through an investment that is made now and provides the opportunity tomake an additional future investment to unlock value if conditions change. This might mean dipping a toe into a new scientific field (e.g., commissioning a project at an allied university with the ability to hire the project’s doctoral students on completion of studies) or a direct investment in a technology or product where the stake can be increased if the inherent value increases.
The Black-Scholes model[1] makes it clear that options can create value when:
Note:
[1] Codeveloped by economist Fischer Black, who worked at Arthur D. Little, MIT Sloan, and Goldman Sachs; the work resulted in a Nobel Prize in 1997 for his colleagues, Myron Scholes and Robert Merton, two years after Black’s death.
Innovation portfolio resilience is the use of optionality and scenario planning to define what the future portfolio of innovation projects should look like, under any scenario, no matter how bad things get. Resilience starts by ensuring the portfolio focuses on the five attributes shown in Figure 1.
CTOs should begin by analyzing their innovation project portfolio, looking at both productivity (see sidebar “Drive rapid improvements in R&D productivity) and how aligned projects are with business strategy and needs. This analysis should ensure there is optionality in the breadth of projects through a proactive, innovation-hedging approach.
Drive rapid improvements in R&D productivity
Given pressures on budgets, CTOs need to demonstrate their focus on increasing team productivity while delivering on their wider objectives. That means actively canceling zombie projects that are unlikely to ever deliver results in future scenarios (rather than letting them limp on indefinitely) and ensuring teams are not only harnessing the right technologies but also smartly using available resources to optimize their activities. Alternatively, merge teams working on similar themes to force collaboration and bring new thinking to accelerate delivery.
Applying AI can increase innovation productivity by up to 40% by driving more effective decision-making and speeding up iteration. One key use case for AI is portfolio analysis: cutting through the noise of critical but messy and unstructured data sets in internal project documents and knowledge bases, competitor activities, wider industry trends, and geopolitical actions. A complementary Viewpoint, “Innovation Productivity Reloaded” explains how a people-centric approach maximizes AI value by answering three questions:
Given uncertainty over how requirements and opportunities will develop, CTOs need to increase the option value of their portfolios. That means securing core activities while hedging for the future by making a wide enough range of innovation investments to cover potential requirements. Does the portfolio spread risk around technology, markets, talent, and geographies, avoiding too narrow a future focus? Achieving optionality may require an increased focus on external collaboration (i.e., leveraging the R&D external ecosystem of partners), such as cost-effectively funding promising areas and start-ups through corporate venture capital (or incubators) or by divesting projects/redeploying staff.
It is also important to conduct a rapid, practical reassessment of the actual scope and targets of projects versus their original intent. In volatile times, fragmented coordination (especially in dispersed multiproduct organizations) and shifting corporate goals create significant misalignment risk, leading to overspending and reduced innovation productivity.
Optionality extends to how innovation project portfolios, and even individual projects, are assessed. Calculations have traditionally been based on the net present value (NPV) of innovations in the pipeline, but moving away from this and including optionality in assessments is a more strategic way to measure future value and contribution to the business. This is already common practice in the pharmaceutical industry.
Furthermore, integrating optionality into value assessment has the benefit of changing the development mindset by making it explicit that not all options need to be exercised (indeed, they cannot be) and that value is created by exercising and not exercising options created through R&D (rather than a linear development process in which value is created only when a project is pushed to market). This supports a more natural approach to terminating projects.
Scenario-based planning exercises should be at the heart of future portfolio assessments that drive important discussions on the inherent portfolio risks and identify no-regret decisions that will be valid whatever the future brings. Scenario planning has been applied successfully by global businesses such as Shell[1] to challenges with high levels of outcome uncertainty and the potential for major costs, such as a shift toward circularity, net zero, and sustainability. This is described in detail in the Prism article “Navigating the Sustainability Journey.” For the purposes of innovation portfolio resilience, we extend the methodology to include innovation risk hedging as follows:
Figure 2 shows an innovation portfolio where the highest value projects are all sensitive to one challenging scenario, a clear issue for the business if that scenario comes to pass.
As shown in Figure 3, the introduction of new, high-impact projects can diversify risk in the long term, while short-term hedges can be initiated for oppositely aligned scenarios.
Imagine the R&D portfolio of a consumer power tools business. In the short term, iterative projects focus on improvements to the manufacturing of cutting surfaces and electric motor performance. Long-term, high-value bets are being placed on new battery technologies (moving beyond lithium-ion technologies). An assessment shows that the long-term product portfolio is exposed to geopolitical risks, particularly around access to metal elements (including cobalt) needed to produce current and new battery formats.
Even if the innovation portfolio appears to be risk-diversified (with various batteries being trialed at different partners), they may all be susceptible to the same scenario, with strong implications for the overall picture.
In such a case, optionality can include looking for completely different technologies or system-level approaches to the problem. A pivot back to developing wired tools rather than battery-powered ones might be implemented as a quick technology hedge, perhaps with a proprietary “quick release” mechanism for power leads to increase innovation value. New long-term innovation projects could begin with a different strategic risk profile, such as programs in new plasma vapor deposition coatings for tool surfaces. In terms of collaboration, given that the same battery-supply challenges affect electric vehicle manufacturers, they could be a valuable source of ecosystem innovation. These strategic moves ensure there is a pipeline of breakthrough innovation opportunities that are not susceptible to the same underlying geopolitical risk.
Innovation capabilities span both talent and resources. CTOs must assess whether their innovation teams have the right mix of future-ready skills, determine if new talent should be recruited or existing staff reskilled, and evaluate how to better leverage the external ecosystem to build comprehensive capability sets. As uncertainty drives (and arises from) technological change, businesses must ensure they are recruiting strategically to shift the makeup of the team while balancing internal with external expertise. The turmoil created by geopolitical change can also provide opportunities to onboard talent that either consciously chooses not to relocate to particular countries (e.g., the US) or is prevented by new visa restrictions.
Begin by assessing R&D team capabilities, as this lets senior leaders map current areas of internal strength against future importance and acts as a prompt to rebalance capability sets for future growth (whether accessed internally or externally). Create a mapping of the external R&D ecosystem skills and capabilities, particularly with established supply chain partners that align with organizational strategy.
Analyzing where resources are situated is vital. Does your R&D footprint cover the right countries and regions? Capability must be seen through the same lenses as the innovation project portfolio (i.e., planned for on a scenario basis with risks appropriately hedged). For example, in places where political, economic, consumer, or other p
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