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Managing Innovation Risk – Neither a Gambler nor a Banker be

How do you get an industrial or B2B company, especially those with highly engineered products, to take risks and be more innovative? That was one of the questions during a session with a group of manufacturing executives. Of course, they weren’t talking about taking risks for the thrill of it. What they really wanted was for their organizations to take the right risks. The ones they actually had a chance of winning.  They wanted to know how to manage innovation risk without hurting growth.

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. Here’s an approach to help you identify the right risks to take for more impact from your new product investment.

Gamblers like to roll the dice and aren’t afraid of losing big in return for the occasional big score. They often have a feel for the market they are working in and deeply understand their customers’ businesses. They go on intuition and often justify projects based on gut feel.

Gamblers have serious limitations though. The further they move away from their knowledge base, the less well their intuition serves them. 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 particular market had other problems. The gambler’s hunch was a lousy hand, and the product went nowhere because the customer payback was lousy and regulations weren’t changing fast enough to drive conversion.

Bankers, on the other hand, want every detail buttoned down to avoid any risk. They insist on an innovation process that eliminates risk and lets 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 pass up good opportunities. Eventually, this incremental approach leads to the loss of innovation leadership the company may have enjoyed and allows competitors to get out ahead of them.

So how can this concept help you manage innovation risk and improve the impact of your new products? Where on this spectrum 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)

Suggested Article:Maximize new product profits by pricing for value – a B2B perspective

Manage development risk by encouraging 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 new product risk by quickly testing the feasibility of hinge assumptions before committing development resources. If an opportunity doesn’t turn 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.

A book to help you manage innovation risk
Accelerating Your New Product Innovation

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 manage innovation risk by understanding their magnitude and eliminating 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 your constrained resources will be focused where they can deliver – on worthwhile risks. Most importantly, you’ll see those risks pay off with more impact from your innovation investment!

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