In today’s societies where science and technology are becoming more and more important, risk is seen as inevitable. At the same time risk has negative connotations and creates anxieties. It must be managed in order to achieve desired goals and for companies to survive. But how can you do that? Read more in this article that gives you some clues to innovation risk management to achieve sustainable innovation.
Innovation is not just about creating value: it is a continuous, adaptive process necessary for organizational survival. Were the ecosystem stable and not competitive, there would be no need for organizations to innovate. Thus, the description ‘sustainable innovation’ is somewhat tautological. Innovation is intrinsically about sustaining the development of firms. However, companies may innovate in such a way that their development can be endangered.
What is sustainable innovation?
The concept of sustainable innovation is based on the vision of the company’s senior management. It is not based simply on financial indicators, which more accurately explain the past than anticipate the future. The vision is about nurturing for the future. It must be supported by a process that enables the company to exploit opportunities in the ecosystem. This describes sustainable innovation, which is about engineering the future. It implies allocating appropriate resources and adapting organizations effectively. It builds on the intelligence the company has about its external environment, on the company’s history, its achievements, capabilities and failures.
The innovation process is designed to support this vision. This involves overcoming the barriers between key innovation actors within the company and the rest of its organization. This means also that creativity is finely tuned to value creation.
Sustainable innovation and risk management
Because a shared vision and a structured process are required to create the conditions for effective innovation, it is necessary to consider the management and mitigation of risk in the process.
Innovators will try to avoid certain situations:
- innovation work that is not supported by the whole company;
- an innovation that is too early for the market;
- an innovation that is counter to societal ethical values;
- a concept whose value is not recognized by the market;
- an innovation that is not economically viable;
- ownership of intellectual property rights blocking an innovation.
In today’s societies where science and technology are becoming more and more important, risk is seen as inevitable. Most of the time, it is rooted in human activities. Risk has negative connotations and creates anxieties. It must be managed in order to achieve desired goals and for companies to survive. It feeds irrational attitudes and positions, which interfere with the mechanisms designed to ensure sustainable development. Risk that is not managed is detrimental to entrepreneurship and innovation. Risk taking fuels innovation. The main risk to a firm is not to innovate or, more precisely, not to manage innovation risk effectively. Managing the tension between risk taking and innovation is a powerful process that results in competitive advantage.
Lack of risk management can be disastrous
It is crucial that companies determine the degree of risk that is consistent with the company’s organization, resources and capabilities. If innovation risk is not managed, the consequences may go beyond a very negative impact on the firm and extend to the ecosystem. There are some examples of this in the financial sphere. For example, there are the highly leveraged trade innovations that the French financial expert, Fabrice Tourre, created for Goldman Sachs, and other innovative financial monsters have proved disastrous for the world’s economies. In these circumstances, sustainable innovation becomes very meaningful.
The success of an innovation depends on a number of factors. First and most importantly, there are the values and beliefs of the social group at which the innovation is aimed. Innovation can sometimes lead to these values and beliefs being transgressed, particularly in the case of disruptive innovation. Innovation should not endanger the development of the human ecosystem: if there is a risk of this, then the innovation should not be put on the market, which would save valuable capital and resources.
Regulation and laws act as human ecosystem health gatekeepers: in other words, innovations must comply with the existing regulations and laws as well as being in line with available funding and resources and competent management. Finally, management processes and support systems must be well structured.
Managing different kinds of risks
We focus on one part of the innovation risk management process, which is dedicated to identifying the nature of the risk.
Difficulty to access key raw materials: if a company is developing an innovation that requires a scarce raw material making procurement difficult, it will be seriously affected by any interruptions to supply.
Society structure and values: people are important: some will benefit from the innovation, others will be responsible for its design and development. The producers and consumers of an innovation may be the same people.
Operational excellence: this is part of the innovation toolbox. It should be used as leverage for maximum value creation.
Transfer of innovation capabilities: if the results of the race for innovation are positive in the short term their impact in the long term may be difficult to assess. Some developed countries have been weakened by the relocation of industrial activity to emerging economies and it is not known whether they will recover from this transfer of wealth. The same problems may apply to innovation activities. As theorized in the 1960s by Raymond Vernon from the Harvard Business School, companies competing in the global marketplace can achieve sustainable competitive advantage related in part to intellectual property rights and R&D dynamism. Generally speaking, transferring innovation capabilities from one country to another without any controls, may put the transferring country’s future at risk.
Environmental impact: an example here is genetically modified organisms (GMO). They were originally seen as a wonderful technical feat. But some companies tried to reap short term profit and ignore the need for detailed risk mitigation planning. They skimped on studies related to biodiversity and its impoverishment, and ignored the impact of seed purchases on millions of traditional farmers. The result is a temporary ban on GMO in Europe, which is slowing their diffusion.
Ability to forecast changes in the ecosystem: accurate forecasting is beneficial for innovation. For example, forecasts about global warming are spurring cleantech innovation and several business opportunities have emerged in response to a call for carbon footprint management. The companies involved have optimized their production processes and achieved competitive advantage.
Organizational agility: it is crucial for companies to be flexible. The stronger and more aggressive the competition, the more flexibility is required to take the actions needed to meet this competition. This requires continuous rethinking of ways of doing business and calls for efficient decision-making.
Collaborative innovation network: innovation success comes mostly from collaboration involving networks and individual partners. This is especially true for small and medium sized firms whose resources are limited. Relying on an efficient collaborative innovation network reduces both risk and investment, and speeds up the innovation process. At the same time, it is necessary to ensure that all partners receive appropriate shares of the innovation value outcome. It is also important to attract and select the right innovation partners who must be loyal, reliable and trustworthy.
Efficiency in decision making: this is particularly critical in very hierarchical organizations where the decision making may be extended, reducing the reactivity required by changes in the business environment.
These are some of the issues we consider important when innovating, but no doubt there are others.
Mitigating innovation risk is about creating a process framed around three dimensions:
- Dangers : to clearly identify the dangers, risks and barriers involved in the innovation adventure.
- Action : designing an appropriate strategy.
- Opportunities : exploiting knowledge to achieve competitive advantage over competitors less able to ride the risk wave.
Risk waves can be the source of competitive advantage for innovative surfers able to deal with the above dimensions.
By Jean François Lacoste-Bourgeacq
About the author
Jean-François Lacoste-Bourgeacq, PhD, is the CEO of Qiventiv Systems, a company specializing in boosting sustainable innovation. Jean-François has 25 years of business experience in innovation management and deployment. He has published a number of scientific papers as well as two books on “Agile Innovation” and innovation risk intelligence. (AFNOR editions, 2007, 2009.). Jean François is part of the experts committee working at the European level on innovation management guidelines. He also teaches food innovation at EPITA college. For more information, please visit www.qiventiv.com.