value insights

Risk and the innovation dilemma- Valutrics

Innovation is effectively a management process aiming to bring together
creative thought, technical/process development and commercial exploit-
ation. Organisations need the right climate to promote innovation.

Inevitably, conflict between innovation and operational efficiency will
occur. All organizations need to develop new ideas and translate such
ideas into new products, if they are to remain competitive. Equally, organ-
izations require stable and efficient day-to-day operations in order to
accomplish basic tasks effectively. Indeed, many views of management,
and management techniques, tend to focus on eliminating waste, reducing
cost and optimising the use of assets.

So, should management focus resources on generating innovation or
ensuring optimal efficiency? This is a dilemma, to which there is no easy
answer. The answer may be a hybrid solution attempting to balance innov-
ation with operational effectiveness. A key maxim is that innovation
should be fostered, but never allowed to disrupt activities. Clearly, the
nature of the industry and/or product life cycle is important. So called
‘sunrise’ industries which are research and design lead (e.g. telecommuni-
cation, biotechnology, etc.) will have a different innovation profile from
more mature industries, or service sector industries. Such industries tend
to be affected more by process and customer service-based innovations.
Innovation and operational effectiveness cannot be seen as mutually
exclusive. They are inter-linked, with one supporting the other. Given
these factors, innovation should lead to operational effectiveness – however
this is defined. Remember, innovation is invention plus commercial
exploitation, and there is little point in pursuing innovations that do not
lead to operational effectiveness. The question is not should we innovate,
but rather how we support and resource the process, given other often
more immediate demands.
Assuming organizations have the right factors in place (as outlined in
section Managing innovation) it can be argued that innovation will even-
tually pay for itself several times over. However, in order to stimulate the
process, forward looking organizations allocate funds to such activities.
A number of methods are commonly used for this purpose:
● Gap analysis is used to establish the difference between desired and
projected future revenue requirements. Management then examines
how much of the ‘gap’ can be closed by innovation. This provides an
‘innovation target’. Resources can then be allocated to the NPD areas
and innovations most likely to close this gap.
● An alternative is to allocate a percentage of sales revenue to an ‘innov-
ation fund’ and request internal bids for this money. These bids are then
evaluated and screened, with funding being given to the strongest.
● Additionally, we can seek collaborative ventures, partnerships and
external funding (e.g. government grants, venture capital, etc.).
Organizations, and individuals, need to balance the risk associated in
innovation with the potential return. Higher-risk projects invariably need
to demonstrate greater potential returns. This helps to understand the concept of
risk and uncertainty in innovative projects. Pearson identifies two key
variables. Firstly, uncertainty about the endpoint – what is the project is
likely to result in? Secondly, uncertainty about process or approach – how
will the endpoint will be achieved.  High degrees of uncertainty relating to             market reaction tend to exist when organizations are dealing with: (i) Innovative new
technologies, with the potential to create markets or (ii) Diversifying away
from core customers/markets in order to find new applications/markets
for our existing products.  This gives us four possible situations with varying degrees of uncertainty and helps management convert ideas and concepts into workable solutions.


1. Quadrant 1 Exploratory research: Here there is much uncertainty.
Innovation needs to be nurtured overtime and immediate commercial gain cannot be expected. Typically, this involves state-of-the-art technical research and development of new technologies. Risk relates to two factors: (i) The work may be resource intense and divert resources away from more commercial activities and (ii) No actual exploitable benefits may be generated. While activities in this area may require to be shielded from commercial pressure, this cannot be done indefinitely. Such activities require to be evaluated and either further developed or dropped. This requires a clear focus in terms of likely commercial outcomes and overall strategic goals. Given the right management structures risks can be kept to acceptable levels.

2. Quadrant 2 Developmental activity: This situation sees clear marketing goals and a well-defined market reaction, but uncertainty as to how such outcomes can be achieved. Many NPD projects fall into this category. For example, marketing has defined a specific need, but there is a debate as to the means of satisfying such needs. Given the high degrees of uncertainty over how to achieve outcomes plus a requirement to commit (often substantial) resources, risk factors can be high.

3.  Quadrant 3 Market development: The method and technologies are proven and well understood and uncertainty of outcome relates to applying such methods to new opportunities. The process of market development aims to find new applications and target new markets or market segments. As businesses move away from core markets, uncertainty will increase. Innovation revolves around the creative use of market information, creative segmentation and positioning.

4. Quadrant 4 Market penetration:  The uncertainty pertaining to outcomes and method is low, and there appears to be an immediate opportunity. The organization needs to align its assets and competencies in order to capitalize on this. The problem is often one of speed of response. Here, innovation relates to flexibility, recognizing opportunity and adaptation of product offering.

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