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Innovation Risk – Neither a gambler nor a banker be

gambleHow can you get your organization to take more risks and be more innovative? That was one of the questions during a talk I recently gave for a group of manufacturing CEO’s. Of course, the CEO’s weren’t talking about taking risks for the thrill of it. They know that anything new and innovative can be risky, but avoiding those risks severely limits you from achieving the growth you are seeking – especially in this economy. There are two ends of the spectrum when it comes to innovation risk and return: gamblers and bankers. Neither have it right – So this article covers an alternative approach that will help you identify the right risks to take for more impact from your new product investment.

Managing innovation risk neither a gambler nor a banker beGamblers like to roll the dice and aren’t afraid of losing big in return for the occasionally big score. They often have a feel for the market they are working in and deeply understand their customers’ businesses. They have good intuition and often justify projects based on their gut feel. In “Blink,” Malcolm Gladwell talks about the ability of certain art experts to look just briefly at a work of art and to know intuitively whether it’s a forgery. Gamblers can just “Blink” on a project in their area and know if it will be a winner or not.

Gamblers have serious limitations though. The further they move away from their knowledge base, the less well their intuition serves them. Gladwell’s art expert would struggle to identify forged currency. Likewise, I’ve seen gamblers struggle to take their businesses into adjacent markets because their knowledge just isn’t as transferable as they think it is. I worked with a client where the CEO had just this issue. As a gambler, he had taken his company into a new area with the marketing pitched at being “green based on his hunch about the market. Unfortunately, customers in this new area could have cared less. The gambler’s hunch was a lousy hand, and the product went nowhere. He eventually had the marketing reworked to emphasize fast payback and economic benefits – the customer’s real problem.

Bankers, on the other hand, want every detail buttoned down to avoid any risks. They insist on an innovation process that eliminates risk and let’s them make decisions solely by the numbers. They are much more comfortable with minor tweaks and line extensions. As a result, bankers might have a high percentage of success but they pass up many good opportunities. Eventually, this incremental approach leads to the loss of any innovation leadership the company may have enjoyed and allows competitors to get out ahead of them.

So how can this concept help you improve the impact of your innovation? Where on the spectrum of risk should you try to place your company? The answer isn’t just to be somewhere in-between the two but to avoid the limiting behaviors of each. Let’s talk about how you can avoid the banker’s folly of passing on good opportunities, while at the same time eliminating the unnecessary and avoidable risks of the gambler.

Anything new can feel risky for the people inside your organization. So what can leaders like yourself do to make your companies more comfortable entering new or uncharted territory? People don’t resist change naturally, but they do naturally resist change that they believe puts their security at risk. Ask them to follow you into new territory, where they don’t know whether quicksand or other dangers might be lurking, and they will be understandably hesitant.

Start by making sure your team has the tools it needs to navigate uncharted waters. Before the expedition, your team needs to know how to survey the new territory using customer visits, conduct value based opportunity assessments, and create cross-functional project plans. You must assess before you invest and answering these questions up-front can dramatically reduce unnecessary risk:

  • What unmet or unarticulated need is your new product addressing? What problem is it solving?
  • What clear benefit does it offer the customer? – What job does it make easier or eliminate?
  • How does it create value by helping them increase cash flow from sales, reduce working capital, or reduce operating expense?
  • What is unique vs. competitive products and alternative solutions?
  • Does it create a new dimension for competition – e.g. convenience?
  • What obstacles do you face in getting it to market?
  • What are the hinge assumptions for technical, commercial, and manufacturing success? (Hinge assumptions are the critical assumptions upon which new product success hinges)

Encourage your team to start with small steps first. Feasibility usually requires only a fraction of the resources of development making it the ideal first step. You can dramatically reduce unnecessary risk by quickly testing the feasibility of hinge assumptions before committing development resources. If an opportunity doesn’t turns out to be feasible, don’t shoot the messenger. After all, they’ve saved you from the mistake of investing in a project with a high likelihood of failure. You need to reward the team’s willingness to take the risk in the first place and encourage them to pull the plug as soon as they find out that a project isn’t feasible. Feasibility testing is all about learning to test, passing or failing early and fast, and then either moving forward or moving on to another opportunity.

If you want to grow, you have to learn to live with risk, but if you want the best returns, you also have to avoid the risks you can foresee. Successful innovators give their organizations the confidence to take the risks necessary to grow because they understand their magnitude and eliminate the unnecessary ones. They do this by:

  1. Investing only in new products with clear benefits that solve unmet needs
  2. Rapidly assessing new product opportunities to understand the assumptions upon which success hinges
  3. Evaluating the feasibility of hinge assumptions before beginning intensive development work

Take these steps up-front, and you’ll be able to focus your constrained resources on worthwhile risks. Most importantly, you’ll see those risks pay off with more impact from your innovation investment!

{ 1 comment… add one }
  • Michael A. Dalton July 23, 2010, 10:17 pm

    Thanks John – the debate of art vs. science has played out in areas as far ranging as manufacturing to selling and of course innovation.

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