As we have stated previously, strategic innovation is about going where the organization has never gone before. As a result, it often involves managing situations not previously experienced by the management team. With such an initiative, there are varying degrees of uncertainty which translate into different levels of risk.
Risk is often the unspoken part of a major innovation initiative. It, however, needs to be at the forefront of the discussion because, if done well, risk management will guide much of the early decision making in the management of the initiative.
Every Innovation Initiative Contains Multiple Risks
A strategic initiative may involve technical risk because the underlying science has never been demonstrated at commercial scale.
The same initiative may carry market risk because customer adoption remains uncertain.
Operational risk may emerge from manufacturing or supply chain challenges. Financial risk may arise from the level of investment required before meaningful revenue appears. Regulatory approval may determine whether commercialization proceeds according to plan. Competitive responses may reshape the pathway to success. Geopolitical events may alter markets that originally appeared attractive.
Each category introduces uncertainty. Each category deserves different questions. Treating them as though they represented the same problem obscures important differences that should influence executive decision making. In addition to the variety of risks, they can vary significantly in the degree of risk involved.
Much work can go into analyzing risks, but we start simply by categorizing the different types of risks and the potential severity of risks. We generally categorize the severity into three levels – low, moderate, or high.
Low to moderate risks can be managed judiciously as they emerge. If they materialize, it can require some adjustments to be made or even a slight course correction to the initiative.
Higher level risks, however, carry greater potential levels of severity and must be managed differently. We define high-level risks as those that have the potential to cause the initiative to fail completely and be terminated.
Risk Should Guide the Conversation
An interesting shift occurs when management begins organizing discussions around categories of risk instead of general impressions.
Executive meetings become more focused. Instead of debating whether an initiative feels too risky, leadership can identify exactly which uncertainties deserve additional attention and which have already been addressed satisfactorily.
The discussion becomes more disciplined because it revolves around evidence rather than broad perceptions. The quality of strategic thinking improves because uncertainty has been organized rather than generalized and systematically reduced.
Not every risk carries the same strategic significance. Some influence timing. Others influence profitability. A small number determine whether the initiative has any realistic chance of succeeding.
It all must start with an in-depth, up-front analysis of all the risks. When properly done, the results can look something like the graphic shown below. You will note that each category of risk can have multiple unknowns, multiple risks. It is also worth noting that major risks are often made up of subsets of risks. For example, you may be pursuing a new business model and several different aspects of it could experience challenges.
Management cannot investigate everything simultaneously. Priorities must be established. That process becomes substantially easier when risks have been identified individually rather than discussed collectively.
Focusing On the Major Risks Before They Become Costly
There is a common characteristic of major projects and initiatives. In most cases, the major portions of capital are spent in the latter parts of the project. It is sometimes referred to as the asymmetric cost curve.
In addition to the fact that high-level risks are highly problematic, another characteristic is that they often don’t emerge until late in the project. If they can’t be overcome, it usually means that the initiative gets shut down well after much of the budgeted capital has been spent.
De-Risking Major Risks First
A founder of one of the oldest and most successful venture capital firms once said that the only thing they know for sure about a new venture startup plan is that the original vision will not be 100% correct. In addition to analyzing the potential for the opportunity, the second thing they look for is a founder/entrepreneur that isn’t completely locked in to their original vision and can adjust or pivot as needed to find the ultimate successful path. The same is true of corporate strategic innovation initiatives.
Rather than plunge into such an initiative with 100% confidence (over confidence) that it will be successful according to the original plan, a superior alternative is to de-risk the major risks. The key is to de-risk the high-level risks in the early stages of the initiative before major expenditures of capital and manpower.
Over the past decade, there has been an increase in discussion about the need for “experimentation” to promote innovation. A popular phrase that has arisen in recent years is “fail fast, fail often.” Unfortunately, that mostly ends up in a lot of failure and something now known as innovation fatigue. A much more fruitful approach is captured by the term Intelligent Failure, a term originated by Sim Sitkin at Duke University. Intelligent failure is about carefully designed approaches to help turn the unknowns into knowns.
The process design needs to go much deeper than just random experimentation. De-risking major risks requires a disciplined approach that carefully attacks the major risks to the initiative and methodically reduces the major risks through intelligent failure. It utilizes a number of potential different actions to reduce the unknowns behind the risks. Examples of the kinds of tools that can be used for this are shown in the figure below.
Many of these methods tend to overlap and, sometimes, the terms are used interchangeably. The bottom line is that all are designed to turn unknowns into knowns.
More about this process will be explained in the next blog post.
