9: Innovation Risks

Use a Balanced Innovation Portfolio

In today’s rapidly transforming business world, it seems the only 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 their 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 age of the company, its competitive position in the market, and characteristics of the industry served (e.g. number of suppliers, market growth, regulatory patterns, etc). 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]

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?

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

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

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