Sunday, December 21, 2008

4 types of risks every innovator should be aware of

If innovation is so ‘cool’ then why aren’t all the businesses pouring money into it? There is a valid reason for it. Innovation is inherently risky. For example, look at following facts from BusinessWeek (Sept 11, 2008) on scenario in the US:

Since 2000, the nation's public and private sectors have poured almost $5 trillion into research and development and higher education, the key contributors to innovation. Nevertheless, employment in most technologically advanced industries has stagnated or even fallen. The number of domestic jobs in the computer and electronics sector continues to plunge while pharmaceutical and biotech companies lay off as many workers as they hire. And even the industry category that includes Google —Internet publishing and Web search portals—has added only 15,000 jobs since 2003.

Let’s listen to what the wise men say: the best way to conquer fear is to understand it deeply. Similarly, as a first step towards managing innovation risks, let’s understand them well.

What are the types of risks involved in innovation process? Prof. Stephan Thomke of Harvard Business School says in his book “Managing product and service development” there are 4 types of risks involved in every innovation: (1) Need risk: What do customers really want? How do we know? How do they know? (2) Technical risk: This relates to solutions (e.g. materials or physical changes) that have not been combined or tried before. What happens if components are reduced in size? (3) Production risk: What happens when something works in lab or in prototypes but now must scale up to much larger quantities? Can that be done – at all? (4) Commercialization risk: Is the price point right? Is it better than competition? Are we getting the message across? Are we reaching the real customers?

These risks are depicted with iPod example below. It is a thought-experiment. Actual risks associated with iPod might have been completely different.

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