Chapter 11: Innovation Risks

Reduce Risk by Creating 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 innovation portfolio. An innovation portfolio is a collection of innovation projects, ideas, and programs that the company manages to reduce potential risks associated with innovation. These projects usually span time, ranging from short-term (core), to mid-term (adjacent), to 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) and diagrammed in Figure 10.1 below, 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]

Reduce Risk by Performing Environmental Scans

Finding a creative idea is only the first step in every innovation process, understanding the business environment and forecasting both internal and external factors that may affect it is critical before releasing innovations to the market. At this point, tools like the PESTLE analysis and SWOT analysis come into action. The frequency of environmental scanning depends on the purpose of the scan. It can range from once a year to once a month. Leaders should conduct environmental scans once a year to review shifts that can and will impact business performance.^[9]

PEST Analysis

A major source of business uncertainty is change in the environment in which an organization operates. The environment is constantly changing; environmental scanning will, to the extent possible, help leaders identify changes in terms of events, issues, trends, and deviations from the norm. Environmental scanning is about understanding the world and context in which the business operates. It is a process for monitoring both the internal and external environments for clues to existing circumstances and changes that could bring about risk or opportunities. The purpose of environmental scanning is to find and retain information in order to inform decision-making at a certain point in time.

The first step in the risk management process is gaining a well-rounded understanding of the organization’s external and internal environment. Risk refers to the effect of uncertainty on objectives and outcomes at different levels of the organization. Knowing the environment and the direction of current and future shifts will help leaders identify and understand possible drivers and sources of risk that could affect the achievement of company objectives. Therefore, scanning activities should include a wide range of facts, trends, and time horizons.^[10]

A PEST analysis is one way to scan the external environment for opportunities and risks. Traditionally, the framework was referred to as a PEST analysis, which was an acronym for Political, Economic, Social, and Technological; in more recent history, the framework was extended to include Legal, Environmental, and Ethical factors. Common acronyms include PEST, PESTLE, PESTEL, SLEPT, STEPE, and STEEPLE (the extra ‘E’ stands for Ethics) and it does not matter which acronym you choose because each of them describes the macro-environmental factors that can affect the performance of an organization. Using a PEST analysis acronym, managers would include ethics under the social or political factors, legal under the economic or political factors, and environmental sustainability under the social or political factors. Therefore, PEST is all you really need. After completing a PEST analysis, organizations are in a better position to plan an effective strategy to meet their objectives and minimize risks. PEST factors are considered when assessing the impact of external factors on a company’s profitability.

Competitive Analysis

Competitive analysis (sometimes called a competitor analysis or competition analysis) is exactly what it sounds like, a structured approach to identifying and analyzing a company’s competitors. More concretely, it’s an assessment of the competition’s offerings, strategy, strengths, and weaknesses.^[12]

Competitive analysis helps leaders answer questions such as:

Which other companies are providing a solution similar to ours?
What are the ideal customer’s minimum expectations?
What are they currently not getting from our product with regard to those expectations?
What barriers do competitors in the market face?
What should we avoid introducing in our product?
What price are customers willing to pay for our product?
What value do we need to provide to make our product stand out in the market?
What trends are happening and how might they change the playing field?

How to do a Competitive Analysis:^[13]

1. Determine who your competitors are.
2. Determine what products your competitors offer.
3. Research your competitors’ sales tactics and results.
4. Take a look at your competitors’ pricing, as well as any perks they offer.
5. Ensure you’re meeting competitive shipping costs.
6. Analyze how your competitors market their products.
7. Take note of your competition’s content strategy.
8. Learn what technologies your competitors use.
9. Analyze the level of engagement on your competitors’ content.
10. Observe how they promote marketing content.
11. Look at their social media presence, strategies, and go-to platforms.
12. Perform a SWOT Analysis to learn their strengths, weaknesses, opportunities, and threats.

SWOT Analysis

A SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company’s competitive position and to develop strategic planning. SWOT analysis assesses internal and external factors, as well as current and future potential.^[14]

Every SWOT analysis will include the following four categories. Though the elements and discoveries within these categories will vary from company to company, a SWOT analysis is not complete without each of these elements:^[15]

• Strengths describe what an organization excels at and what separates it from the competition: a strong brand, a loyal customer base, a strong balance sheet, unique technology, and so on.
• Weaknesses stop an organization from performing at its optimum level. They are areas where the business needs to improve to remain competitive: a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital.
• Opportunities refer to favorable external factors that could give an organization a competitive advantage. For example, if a country cuts tariffs, a car manufacturer can export its cars into a new market, increasing sales and market share.
• Threats refer to factors that have the potential to harm an organization. For example, a drought is a threat to a wheat-producing company, as it may destroy or reduce crop yield. Other common threats include things like rising costs for materials, increasing competition, tight labor supply, and so on.

Reduce Risk by Using Metrics

Metrics are measures of quantitative assessments commonly used for assessing, comparing, and tracking performance or production. Metrics used on innovation projects are a good way to monitor return on investment. Not all metrics work for every company or every project. There are, however, certain types of metrics that every innovation team should pay attention to, including:

• Number of new ideas in the pipeline
• Number of innovation projects started
• R&D spent as a percentage of sales
• Revenue/profit/growth from new innovations
• Number of new innovations launched in a specific amount of time

The list below provides a few reasons that companies should use innovation metrics.^[16]

• 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
• Mitigate risk

There are many risks associated with innovation such as the loss of money, the loss of time, the loss of company reputation, and the loss of potential. Due to the fact that there is only a limited number of company resources, businesses cannot pursue all the innovative projects they may wish to at one time and must budget for the most promising projects. Opportunity costs are the potential benefits a business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked. Managers can make better decisions when choosing which innovation projects to pursue by understanding the potential missed opportunities when choosing one investment over another.

“Regardless of how funding is established—or the size of the budget itself—it is critical to measure how much money was spent at each stage of the process: preparation (i.e. percentage of capital budget allocated to innovation projects), development (i.e. R&D spending at each phase of development the innovation process), and results (i.e. percentage of sales from innovation projects). As with the portfolio approach to general innovation metrics, the use of financial metrics across the innovation lifecycle reduces the focus on ROI, and too much focus on ROI can cripple innovative projects in the early stages.”^[17] The chapter entitled, “Leading Innovation” discusses funding and budgeting for innovation in more detail.

Businesses can measure innovation by using the following metrics.^[18]

• Timesheet metrics
• New product or service metrics
• Financial metrics
• Training and staff competency metrics
• Management and leadership metrics

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 top 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.^[19]

• 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

Play this YouTube video “Innovation QuickWin: Innovation Metrics” to learn about the major metrics that companies need to set to monitor and track innovation success.^[20] Transcript for “Innovation Quickwin: Innovation Metrics” Video [PDF–New Tab]. Closed captioning is available on YouTube.

Reduce Risk by Reducing 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.

Below is a list of ten reasons people resist change along with some strategies management can use to overcome resistance to change.^[21]

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.

Play 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.^[22] Transcript for “Ten Reasons Why People Resist Change in the Workplace” Video [PDF–New Tab]. Closed captioning is available on YouTube.

Reduce Risk by Building the Right Team

An important component of innovation project success is building the right team.  Companies may have employees with the right skill sets or they may need to hire externally.  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 either outsourcing parts of the project development to experts in the field, for example, small companies that focus on a niche area, or hiring new employees, either on a full-time, if feasible, or part-time, or contract basis. 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 full-time company employee. Below are a few key points to remember about building the right team.^[23]

• 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.

Part of building the right team may mean collaborating with other companies (even competitors), the government, consultants, or customers on innovative projects. Forming partnerships with other organizations to create a new innovation is often a great idea since it will reduce the risks of innovating for each company because each partner shares in the risks. With that said, each collaborating organization will also share in the rewards.  An organization that may be weak in some areas may be able to offset those weaknesses by partnering with another company that is strong in those areas. For example, if the company has determined it is too expensive to purchase new technology, or too difficult to obtain patents, they might gain strengths in partnering with a company that has the technology or patent that is needed. Companies may take advantage of collaborating with the Government of Canada which provides funding and advisory support for research and development (R&D), innovation, and commercialization projects. Collaborating and listening to employees is a good way to help ensure the company is creating products and services that customers want because employees often interact with customers, solve customer problems, and gather feedback from customers and are able to bring these insights to the innovation project. The chapter entitled, “Leading Innovation” discusses in some detail several types of collaborations that leaders can pursue in order to nurture innovation.

Reduce Risk by Safeguarding Intellectual Property

In general terms, intellectual property is any product of the human intellect that the law protects from unauthorized use by others. The concept of intellectual property relates to the fact that some intangible assets, products of the human intellect, should have the same protective rights as physical property (tangible assets). 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. Although, a competitive advantage does have a time limit that runs out when legal rights expire or when competitors catch up (or surpass) with their own innovations.

The main types of intellectual property include the following.

• Patents. Legal rights that allow the inventor exclusive rights to the invention, which could be a design, process, improvement, or physical invention. Patents protect inventions from being copied or used by others without permission.
• Trademarks. Distinctive signs, symbols, or phrases that are recognizable and represent a product that legally separates it from other products. Trademarks identify the source or quality of goods or services and are often associated with a company’s brand.
• Copyrights. Legal rights that protect original works of authorship, such as books, music, films, etc. Copyrights also state that the original creator may grant anyone authorization through a licensing agreement to use the work.
• Trade secrets. Confidential information that gives a business an advantage over its competitors. A trade secret is a company’s process, recipe, formula, or practice that is not public information and provides a monetary benefit to the holder of the trade secret. KFC’s original recipe was a trade secret and only a few employees knew the recipe and were bound by confidentiality agreements to not disclose or share the recipe.^[24]

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.^[25] Transcript for “Innovation Strategy: Intellectual Property” Video [PDF–New Tab]. Closed captioning is available on YouTube.

Reduce Risk by Studying 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.^[26] 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.^[27]

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. “The most important goal of innovation is to gain a competitive advantage by increasing the speed and effectiveness with which your company learns—and acts on that learning. Innovation is about experimentation—failing early and often.”^[28]

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.

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.)