Chapter 9: Innovation Risks

Chapter 9 Learning Outcomes

After reading this chapter, you should be able to do the following:

    1. Describe how a company can create a balanced innovation portfolio to help reduce risk.
    2. Explain how using metrics for innovation will help reduce risk.
    3. Discuss ways to deal with resistance to change.
    4. Explain what is meant by “Get the Right Team” for an innovation project.
    5. List ways in which a company can safeguard its intellectual property in order to reduce risk.
    6. Explain why innovation project failure is acceptable.

Use a Balanced Innovation Portfolio

In today’s rapidly transforming business world, it seems the only thing that is constant is change. Companies that cannot keep up with the pace of change and adapt to disruptive innovation often find themselves struggling. There are quite a few companies that failed to innovate and were either forced to declare bankruptcy, merge with another organization, or fell from the top of the Fortune 500 companies rankings– 88% of the Fortune 500 firms that existed in 1955 are gone.[1]

Every new ground-breaking product and service, in the end, will become obsolete, commoditized, and outcompeted by new and better solutions, products, and companies.[2] This may be best epitomized by Kodak, Blockbuster, Polaroid, Pan Am, Sears, Compaq, Nokia, Yahoo, and Blackberry.[3] To secure healthy revenue streams and long-term survival, organizations need to have a balanced portfolio of innovation projects covering horizons of time short-term (core), mid-term (adjacent), and long-term (transformational) initiatives.

A well-balanced innovation portfolio has a mix of high-risk game-changers and low-risk incremental innovations. Portfolio balancing is a technique used by the world’s best innovators to analyze the long- and short-term risks of innovation projects in the company’s pipeline. No organization can afford to risk its business on one big idea. Likewise, developing a bunch of small, incremental projects won’t deliver a big win either.[4]

The Innovation Ambition Matrix, as featured in the Harvard Business Review (May 2012), is a classic model that helps companies decide how to fund different growth initiatives. Few organizations think about the best level of innovation to target, and even fewer manage to achieve it. According to  Nagji and Tuff,  the best approach to innovation is to think in terms of managing an integrated, balanced ’portfolio’ of innovation initiatives which are divided into three types: Core, Adjacent, and Transformational.[5]

  • Core Innovation – These include initiatives that are incremental such as enhancements to core offerings (e.g., line extension, refreshing, or improving the performance of an existing product). This is an area of automatic renewal or sustaining innovations that help the company stay current and competitive. These are fairly safe initiatives where risk is concerned.
  • Adjacent Innovation – These expand the existing organization by leveraging what is already going very well (part core innovation) into adjacent new places or collaborative ventures. Adjacent innovation usually involves slightly larger risks and additional maintenance.
  • Transformative Innovation – These initiatives represent those viewed as breakthroughs, radical, or disruptive innovations and are creations of entirely new offerings or initiatives, and usually involve even higher risk to accomplish.[6]

A general rule that many companies follow is to have 70% of the investments in core innovations, 20% in adjacent innovations, and only 10% in transformative innovations. In terms of value creation potential, however, the ratios are inverted:  core innovation efforts typically contribute 10% of the long-term cumulative return on innovation investment, adjacent initiatives contribute 20%, and transformational projects yield a huge 70%.  The right balance of innovation investment will vary from company to company according to particular factors like the age of the company, its competitive position in the market, and characteristics of the industry served (e.g. number of suppliers, market growth, and regulatory patterns). Most companies tend to be heavily oriented toward just core innovation and while this is understandable in terms of avoiding the greater risks and uncertainties associated with adjacent and transformational initiatives, the result will be a steady, long-term decline in business and attractiveness to customers if a company never tries some adjacent or transformational projects.[7]

For many companies, innovation is a sprawling collection of initiatives, energetic but uncoordinated, and managed with fluctuating strategies. For steady, above-average returns, firms need a balanced innovation portfolio and the ability to approach it as an integrated whole. The ideal balance will differ from industry to industry and company to company, but one thing is constant: Companies must execute at all three levels of ambition and manage total innovation deliberately and closely. In particular, they must develop the unique capacities needed for transformational innovation. This means finding the talent required for breakthrough efforts and ensuring enough separation from the core business; creating an appropriate (and often very different) funding structure; departing from a pipeline management approach, and using noneconomic and internal metrics to assess early efforts.[8]

Innovation Ambition Matrix showing core, adjacent and transformational innovations
Innovation Ambition Matrix, Nagji, B. & Tuff, G., Harvard Business Review

Innovate Using Metrics

There are many risks associated with innovation such as the loss of money, the loss of time, the loss of company reputation/image, and the loss of potential. The loss of potential means that if a company invests money, time, and other resources into developing a new innovation that fails in the marketplace, those resources allocated to that failed innovation could have been allocated to other areas of the company or a different innovation project; therefore, there is a loss of potential on what could have been done with those resources.  Not every innovative idea can be brought to fruition due to the limited resources needed to make it so, therefore, companies must select the best ideas to pursue and mitigate risks as best they can. Using metrics to compare and track performance and progress on innovation projects is a good way to monitor return on investment.

Why Use Metrics for Innovation?

Measure progress and success image showing a magnifying glass sitting on a paper chart
Measure progress and success

The list below provides a few reasons that companies should use innovation metrics.[9]

  • Provide strategic direction by signaling shifts in priorities
  • Guide resource (re)allocations
  • Assess the effectiveness of innovation spending
  • Hold managers accountable and link incentives to reach targets
  • Diagnose and improve innovation performance

Input Metrics

Input metrics measure how well the company is gauging input and effort into the innovation project. These metrics measure things like the number of ideas generated by each employee, time spent by senior management on innovation activities, and the percent of capital allocated to innovation projects.

Development Metrics

Development metrics gauge the company’s progress, process, and pipeline of innovations. These metrics measure things like the amount of R&D spend on each phase of development, the number of projects in the pipeline, and time spent on each phase of idea management.

Output Metrics

Output metrics measure the end or results of the company’s efforts. These metrics measure things like the number of products launched on an annual basis, the number of patents awarded, and the percentage of revenue from new offerings.

Metrics offer guideposts for improvements and progress, they calibrate the company’s efforts and show a clear path for remedy. Companies can determine from metrics what is working and what is not working and how to modify the project from start to finish.

Common Flaws With Measurements

The list below provides a few common flaws with using measurements.[10]

  • Encouraging incremental innovation over disruptive innovation
  • Having too few metrics, or too many
  • Measuring what is available versus what is needed
  • Placing too much emphasis on output measures over process effectiveness

Watch this YouTube video “Innovation QuickWin: Innovation Metrics” to learn about the major metrics that companies need to set to monitor and track innovation success.[11] Transcript for “Innovation Quickwin: Innovation Metrics” Video [PDF–New Tab]. Closed captioning is available on YouTube.

Reduce Resistance to change

Innovation creates change, whether that is a new process or technology being implemented in the workplace or a new radical product being developed that creates change within the organization.  There will always be employees and other stakeholders that are resistant to change and this may hinder or put up roadblocks for the innovation project to succeed.

Ten reasons people resist change include the following:[12]

  1. Loss of Job Security or Control. They fear they may lose their jobs, or not have input into how their job is done. Management communication and employee training may help reduce their resistance.
  2. Shock and Fear of the Unknown.  People will usually move forward if they feel the risk of standing still outweighs the risk of moving forward. The change should be communicated early and the need for change should be convincing–the less employees know about the change and how it will affect them, the more fearful they will become.
  3. Lack of Confidence. They fear they will not be able to learn new systems/processes or perform to their best ability. Management should help employees build their competencies to increase their confidence.
  4. Poor Timing.  Too much change all at once can cause employee resistance. People should feel the benefits of previous change efforts to help them buy-in to the next change.
  5. Lack of Rewards. Employees will resist change when they do not see anything in it for them in terms of rewards. Management needs to explain the tangible short-term and long-term benefits to employees.
  6. Office Politics. Some employees resist change to prove to management that the decision is wrong or that the person leading the change is not capable of this initiative. Others may resist change because they may lose power in the organizational structure. When teams are united and working toward a new initiative, employees will accept the decisions of the leaders.
  7. Loss of Support System. Employees get comfortable with who they work with, their team, their managers and have built a predictable support system. It is human nature to avoid the unfamiliar, but on the other hand, most people enjoy adventures.  Management should communicate how the new support system will work.
  8. Former Change Experience. If employees have experienced poor change management in the past, they tend to resist new change even more. Management should talk about previous change initiatives and highlight their benefits.
  9. Lack of Trust and Support. Change does not happen well in an atmosphere of mistrust.  Communication must be and actions must be trustworthy in order for employees to build faith in the intentions of management/leaders.
  10. Peer Pressure. Organizational stakeholders will resist change to protect the interest of a group. People are willing to change if the promise of the future is better than the realities of the present.

Watch this YouTube video “Ten Reasons Why People Resist Change in the Workplace” to learn more about why employees resist change and how companies can reduce this resistance.[13] Transcript for “Ten Reasons Why People Resist Change in the Workplace” Video [PDF–New Tab]. Closed captioning is available on YouTube.

Get the Right Talent

Innovation Project Team

An important component of innovation project success is building the right team.  Companies must select, hire, collaborate with, and outsource the right talent (people), some key points to remember are listed below.[14]

  • Innovating for short-term versus long-term initiatives (ten years in the future) demands very different skills
  • Innovation teams should be staffed with people that represent different stakeholders and interests in the organization
  • Innovation teams should have one or a few influential “champions” with the ability to convince other members of the organizations to get on-board
  • It is vital to bring in highly talented outsiders that will look at innovation projects without the lens of the organization to get a fresh perspective

When the right talent for an innovation project is not available within the company, training to advance internal candidates may be an option.  If training is not available, too costly, or will take too long, then companies might consider outsourcing parts of the project development to experts in the field, for example, small companies that focus on a niche area.  Another option would be for the company to hire the talent they need, but if this is a one-time need or a need that occurs seldom, hiring a full-time employee may be too costly, therefore, not feasible.  It may be feasible though to hire a contract worker who can work on-site for the time frame needed with no long-term expectations of becoming a company employee.

It may be that the company could benefit from an innovation management contractor.  These companies guide the innovation project, train internal managers, help manage the project, and bring their expertise and experience to the company for a fee and a determined length of time.

Collaborate with Government

The Government of Canada is encouraging greater partnerships among Canadian businesses, universities, and colleges to drive innovation and encourage the adoption of new processes and technologies that help Canadian businesses prepare to compete and win in the global marketplace.[15] Businesses can get a list of financing programs, expertise, facilities, and more to support their innovation projects at the Government of Canada Innovation Funding and Support website.

Collaborate with Customers, Consultants, and Competitors

Collaboration with customers, consultants, competitors, and employees may be something that will help the company meet its innovation goals. These projects are often referred to as co-creation projects and sometimes referred to as open innovation projects. Some well-known innovation consulting firms include IDEO, Innosight, frog, Board of Innovation, and there are many others. The expertise of each firm may vary as well as the services they offer, but companies can hire a consulting firm that specializes in innovation to help guide and support them through their innovation initiatives.

Open innovation is a business management model for innovation that promotes collaboration with people and organizations outside the company. In this sense, open innovation challenges are a true cultural break from the company silo mentality and the secrecy traditionally associated with the corporate R&D culture. This innovation model becomes viable when the company acknowledges that there are many bright professionals and greater knowledge outside the organization. It is at this very moment that the opportunity to attract those external individuals and/or companies becomes more real. Companies implement open innovation practices in different ways, such as alliances between companies, research chairs in universities, crowdsourcing competitions, and innovation ecosystems.[16]

Below is an example of how Starbucks collaborated with Spotify to offer customers of both businesses an innovative music ecosystem. 

Example Company-to-Company Collaboration

Co-branding Campaign: First-of-Its-Kind Music Ecosystem

Starbucks scaled up a premium coffee shop experience into a massive global brand, using music to create an ambiance around its coffee. Spotify, a music streaming platform, has powered almost 25 billion hours of listening around the world. Starbucks and Spotify forged an innovative co-branding partnership to build a “music ecosystem”, offering artists greater access to Starbucks consumers and giving Starbuck access to Spotify’s expansive discography. Through the initiative, Starbucks employees get a Spotify premium subscription, with which they can curate playlists (that patrons can access through the Starbucks Mobile App) to play throughout the day in the shop. This music ecosystem is designed to expand the coffeehouse environment that Starbucks is known for while giving artists greater exposure to Starbucks customers. The “musical-ecosystem” partnership is mutually beneficial, an opportunity for the companies to reach the other’s audience without sacrificing their brand.[17]

Below is an example of how IKEA co-creates with customers. 

Example Company-to-Customer Collaboration

Co-Create IKEA

In early 2018, Swedish furniture and home goods retailer IKEA launched ‘Co-Create IKEA’, a digital platform encouraging customers and fans to develop new products.

IKEA’s co-creation platform focuses on four specific areas:

  • Asking customers for product idea suggestions
  • Running IKEA Bootcamps to work with entrepreneurs
  • Collaborating with university students on product solutions
  • Connecting with innovation labs around the world

If a suggestion for furniture or product design is successful, IKEA may license the technology or agree to invest in future products. For designers and technically talented fans, this creates a strong incentive: to gain exposure through the world’s largest furniture retailer. This approach has led to many thousands of customer suggestions. Participants are also eligible for cash rewards if their ideas work and are selected. Even more helpfully, IKEA provides resources like test labs and prototype shops to help customers develop and fine-tune their suggestions. For IKEA, co-creation helps put crowd wisdom to work in product innovation, allowing the company to harness useful design insights. This creates real market advantages for the company and contributes to a community of dedicated customers.[18]

Safeguard Intellectual Property

In general terms, intellectual property is any product of the human intellect that the law protects from unauthorized use by others. For some innovations, a company may require a patent or copyright to protect its intellectual property from competitors and help the company keep its competitive advantage, for a while at least.

This video explains the primary methods of protecting intellectual property (patents, copyrights, trademarks, trade secrets), including the qualifications for using them, and when an organization might opt to not protect its IP.[19] Transcript for “Innovation Strategy: Intellectual Property” Video [PDF–New Tab]. Closed captioning is available on YouTube.

Study Innovation Failures

No one likes to fail and most of us try very hard not to fail, but failure is about learning, and it is absolutely necessary to learn in order to succeed at innovation. For every innovation leader out there like Google, Microsoft, or Amazon, there are hundreds of competitors that never quite make it out of the gate. For growing startups looking to establish themselves, it’s always helpful to try and understand why this happens, although, innovation failure is not something that only happens to small companies; even market leaders like Coca-Cola, Samsung, and Nintendo can still have plenty of bad days. Just check out the sad history of the Nintendo Virtual Boy.[20] Despite the negative energy it comes with, failure has its positive side. Experiencing failure can teach you lessons that you wouldn’t have learned otherwise. Actually, some of the most successful people in the world were only able to attain success because of the lessons they learned from their previous failures.[21]

To reduce the chance of failure companies should study their own past failures as well as those of their competitors.  Learn from failure. What worked? What did not? Failure is not something to be afraid of or viewed negatively within the company–it is a learning curve from trial and error. Businesses that reflect on past failures often discover that the failures of the past brought them to the successes they now enjoy.

Here are a few tips for teams to learn from innovation project failures:

  1. Know it is OK to fail because a new route is created from failure
  2. Realize experience is the best teacher because the team learns what works and what doesn’t
  3. Allow the team the freedom to fail because if they are too cautious they will not take risks
  4. Failure helps the team gain new knowledge in their work and resets their focus
  5. Let the fear of failure help motivate the team to succeed, failure leads to mastery
  6. Welcome failure because the faster the team fails, the faster they will succeed
  7. Failure makes people stronger, making them better prepared to tackle the next challenge
  8. Keep records of your company’s and competitors’ failures and successes to refer back upon “lessons learned” when working on future innovation projects

Key Takeaways

  1. Companies that cannot keep up with the pace of change and adapt to disruptive innovation often find themselves struggling. There are quite a few companies, that failed to innovate and were either forced to declare bankruptcy, merge with another organization, or fell from the top Fortune 500 companies rankings– 88% of the Fortune 500 firms that existed in 1955 are gone.
  2. The innovation ambition matrix, as featured in the Harvard Business Review (May 2012), is a classic model that helps companies decide how to fund different growth initiatives. Few organizations think about the best level of innovation to target, and even fewer manage to achieve it. According to  Nagji and Tuff,  the best approach to innovation is to think in terms of managing an integrated, balanced ’portfolio’ of innovation initiatives which are divided into three types: Core, Adjacent, and Transformational. A well-balanced innovation portfolio has a mix of high-risk game-changers and low-risk incremental innovations. 
  3. Using metrics to compare and track performance and progress on innovation projects is a good way to monitor return on investment.
  4. Innovation creates change, whether that is a new process or technology being implemented in the workplace or a new radical product being developed that creates change within the organization.  There will always be employees and other stakeholders that are resistant to change and this may hinder or put up roadblocks for the innovation project to succeed.
  5. Ten reasons people resist change include loss of job security or control, shock and fear of the unknown, lack of confidence, poor timing, lack of rewards, office politics, loss of support system, former change experience, lack of trust and support, and peer pressure.
  6. An important component of innovation project success is to build the right team. Companies must select, hire, collaborate with, and outsource the right talent (people).
  7. For some innovations, a company may require a patent or copyright to protect its intellectual property from competitors and help the company keep its competitive advantage, for a while at least.
  8. No one likes to fail and most of us try very hard not to fail, but failure is about learning, and it is absolutely necessary to learn in order to succeed at innovation.

End-of-Chapter Exercises

  1. Types of Innovation. Search the Internet for information on the differences between radical, breakthrough, and disruptive innovation. Are there differences or are the three terms used interchangeably? Discuss your findings with your class and/or professor.
  2. Matrix Comparison. Overlay the Innovation Ambition Matrix on the Ansoff Matrix.  A good example of this can be found in “Achieve a More Balanced Portfolio in 2019” by Lisa Bodell. What do you discover?  Does it make sense?  Discuss your observations with your class and/or professor.
  3. Metrics. Search the Internet to find an example/story/article about how innovation metrics were used to guide a company throughout an innovation initiative. Share your findings with your class and/or professor.
  4. Company Collaboration. Search the Internet for information on a recent company-to-company collaboration on an innovation project. What was the result? Were there issues that you read about? Was there a cross-company project team?  Share your findings with your class and/or professor.
  5. Customer Collaboration. Search the Internet for information on a recent company-to-customer collaboration on an innovation project. Which customers participated? What was the company hoping to gain by including customers? What was the result? Share your findings with your class and/or professor.
  6. Frugal Innovation. Search the Internet to look for examples of frugal innovation.  Which companies are doing this?  Why?  Is this a way to reduce the risk of innovation?  What is the return on investment for these types of innovations? Do many companies venture into frugal innovation development? Why or why not? Do you feel this is something most companies should be doing? Why or why not? Discuss your findings with your class and/or professor.
  7. Government Support. Visit the Government of Canada Innovation and Support website.  Review the types of support the Government of Canada offers businesses. Do you think these supports will help entrepreneurs, small businesses, or large corporations most?  Why? Share your findings with your class and/or professor.
  8. Government Initiatives. Visit the Government of Canada Innovation, Science, and Economic Development Canada website. Review the current list of projects and initiatives the Government of Canada is working on. Which ones interest you the most? Why? Share your findings with your class and/or professor.
  9. Intellectual Property. Search the Internet to see if Coca-Cola has a patent on its Coke formula. You might also search for other companies that have patents or other intellectual property protection on their products, processes, or business models.  Share your findings with your class and/or professor.
  10. Innovation Failure. Search the Internet for information on companies that have failed at innovation.  What was the failure?  Why did they fail? What did they learn from the failure? Share your findings with your class and/or professor.

 

Self-Check Exercise – Flashcards – Risk Level

 

Additional Resources

  1. 50 Examples of Corporations That Failed to Innovate
  2. Innovation Metrics and KPIs
  3. Customer Co-Creation: 12 Companies Doing it Right
  4. 21 Successful Co-Branding Partnerships
  5. 10 Famous Success Stories That Will Inspire You to Carry On
  6. The 50 Greatest Breakthroughs Since The Wheel

References

(Note: This list of sources used is NOT in APA citation style instead the auto-footnote and media citation features of Pressbooks were  utilized to cite references throughout the chapter and generate a list at the end of the chapter.)

Media Attributions

  1. Goh, F. (n.d.). 10 companies that failed to innovate, resulting in business failure. https://www.collectivecampus.io/blog/10-companies-that-were-too-slow-to-respond-to-change ↵
  2. Anderson, M. (n.d.). https://www.mikeandersson.com/blog/the-importance-of-keeping-a-balanced-innovation-portfolio/ ↵
  3. Aaslaid, K. (2019, July 2). 50 examples of corporations that failed to innovate. https://www.valuer.ai/blog/50-examples-of-corporations-that-failed-to-innovate-and-missed-their-chance ↵
  4. Bodell, L. (2018, December 28). Achieve a more balanced innovation portfolio in 2019. https://www.forbes.com/sites/lisabodell/2018/12/28/achieve-a-more-balanced-innovation-portfolio-in-2019/?sh=4814103070cb ↵
  5. Nagji, B. & Tuff, G. (2012, May). Managing your innovation portfolio. Harvard Business Review. https://hbr.org/2012/05/managing-your-innovation-portfolio ↵
  6. Sharp, T. (2015, September 2). Core innovation, adjacent innovation, and transformative innovation. https://choralnet.org/2015/09/core-innovation-adjacent-innovation-and-transformative-innovation/ ↵
  7. MBA Knowledge Base. (n.d.). The innovation ambition matrix. https://www.mbaknol.com/strategic-management/the-innovation-ambition-matrix/ ↵
  8. Nagji, B. & Tuff, G. (2012, May). Managing your innovation portfolio. Harvard Business Review. https://hbr.org/2012/05/managing-your-innovation-portfolio ↵
  9. Mack Institute. (n.d.). Choosing innovation metrics for success in the digital era. https://mackinstitute.wharton.upenn.edu/2020/innovation-metrics-for-success-digital-era/ ↵
  10. Mack Institute. (n.d.). Choosing innovation metrics for success in the digital era. https://mackinstitute.wharton.upenn.edu/2020/innovation-metrics-for-success-digital-era/ ↵
  11. FutureThink. (2015, November 5). Innovation quickwin: Innovation metrics. [Video]. YouTube. https://www.youtube.com/watch?v=EewsYXAZopQ&t=17s ↵
  12. Crash Course MBA. (2020, July 2). 7 strategies for overcoming resistance to change. [Video]. YouTube. https://www.youtube.com/watch?v=8JHafy_Cj7I ↵
  13. Crash Course MBA. (2020, July 2). 7 strategies for overcoming resistance to change. [Video]. YouTube. https://www.youtube.com/watch?v=8JHafy_Cj7I ↵
  14. Anderson, M. (n.d.). The importance of keeping a balanced portfolio. https://www.mikeandersson.com/blog/the-importance-of-keeping-a-balanced-innovation-portfolio/ ↵
  15. Government of Canada. (n.d.). Seizing Canada's moment: Moving forward in science, technology, and innovation 2014. https://www.competitionbureau.gc.ca/eic/site/113.nsf/eng/h_07657.html ↵
  16. ennomotive. (n.d.). Open innovation: Accelerating your innovation results. https://www.ennomotive.com/open-innovation ↵
  17. Bernazzani, S. (n.d.). 21 examples of successful co-branding partnerships (and why they're so effective). Hubspot. https://blog.hubspot.com/marketing/best-cobranding-partnerships ↵
  18. Braineet. (n.d.). Customer co-creation examples: 12 companies doing it right. https://www.braineet.com/blog/co-creation-examples ↵
  19. Schilling, M. (2021, August 7). Innovation strategy: Intellectual property. https://www.youtube.com/watch?v=d6F4Hma6ijg ↵
  20. Braineet. (n.d.). 35 famous innovation failures - and what you can learn from them. https://www.braineet.com/blog/innovation-failures ↵
  21. Andal, E. (2021, June 4). 10 famous failures to success stories that will inspire you to carry on. https://www.lifehack.org/articles/communication/10-famous-failures-that-will-inspire-you-success.html ↵
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