Risk and the innovation dilemma - Marketing Strategy

Inevitably, conflict between innovation and operational efficiency will occur. All organizations need to develop new ideas and translate such ideas into new products if they are to remain competitive. Equally, organizations require stable and efficient day-to-day operations in order to accomplish basic tasks effectively. Indeed, many views of management and management techniques, tend to focus on eliminating waste, reducing cost and optimizing the use of assets. Figure below illustrates the principle.

Generating innovation

Generating innovation

So, should management focus resources on generating innovation or ensuring optimum efficiency? This is a dilemma, to which there is no easy answer. The answer may be a hybrid solution, attempting to balance innovation with operational effectiveness. A key maxim is that innovation should be fostered, but never allowed to disrupt activities. Clearly, the nature of the industry and/or product life cycle is important. So-called‘sunrise’ industries which are research and design led (telecommunications,biotechnology, etc.) will have a different innovation profile from more mature industries, or service sector industries. Such industries tend to be affected more by process and customer service based innovations.

Innovation and operational effectiveness cannot be seen as mutually exclusive. They are interlinked, with one supporting the other. Given these factors, innovation should lead to operational effectiveness –however this is defined. Remember, innovation is invention plus commercial exploitation, and there is little point in pursuing innovations that do not lead to operational effectiveness. The question is not should we innovate, but rather how we support and resource the process, given other often more immediate demands.

Assuming organizations have the right factors in place (as outlined in the previous section) it can be argued that innovation will eventually pay for itself several times over. However, in order to stimulate the process, forward-looking organizations allocate funds to such activities. An umber of methods are commonly used for this purpose. Gap analysis is used to establish the difference between desired and projected future revenue requirements. Management then examines how much of the ‘gap’ can be closed by innovation. This provides an ‘innovation target’. Resources can then be allocated to the new product development areas and innovations most likely to close this gap.

The innovation dilemma

The innovation dilemma

An alternative is to allocate a percentage of sales revenue to an ‘innovation fund’ and request internal bids for this money. These bids are then evaluated and screened, with funding being given to the strongest. Additionally, we can seek collaborative ventures, partnerships and external funding (e.g. government grants, venture capital). Organizations, and individuals, need to balance the risk associated in innovation with the potential return. Higher risk projects invariably need to demonstrate greater potential returns.

Pearson developed the concept of an uncertainty map (Henry and Walker, 1991) which helps in the understanding of the concept of risk and uncertainty in innovative projects. Pearson identifies two key variables. Firstly, uncertainty about the endpoint –what is the project likely to result in? Secondly, uncertainty about process or approach – how will the endpoint be achieved? The model is adapted (see Figure) to reflect the importance marketers attach to market reaction and product development issues. High degrees of uncertainty relating to market reaction tend to exist when organizations are dealing with:

  1. innovative new technologies, with the potential to create markets,
  2. or
  3. diversifying away from core customers or markets in order to find new applications or markets for existing products. In terms of product development it is important to consider development issues and the infrastructure required to deliver the product (distribution, after-sales support, etc.).

Marketing uncertainty map.

Marketing uncertainty map.

The model gives four possible situations with varying degrees of uncertainty and helps management convert ideas and concepts into workable solutions:

  • Quadrant 1: Exploratory research. Here there is much uncertainty. Innovation needs to be nurtured over time and immediate commercial gain cannot be expected. Typically, this involves state-of-the-art technical research and development of new technologies. Risk relates to two factors:
    1. the work may be resource intense and divert resources away from more commercial activities, and
    2. no actual exploitable benefits may be generated. While activities in this area may require to be shielded from commercial pressure, this cannot be done indefinitely. Such activities require to be evaluated and either developed further or dropped. This requires a clear focus in terms of likely commercial outcomes and overall strategic goals. Given the right management structures risks can be kept to acceptable levels.
  • Quadrant 2: Developmental activity. This situation sees clear marketing goals and a well-defined market reaction, but uncertainty as to how such outcomes can be achieved. Many NPD projects fall into this category. For example, marketing has defined a specific need, but there Lisa debate as to the means of satisfying such a need. Given the high degree of uncertainty over how to achieve outcomes plus a requirement to commit (often substantial) resources, risk factors can be high.
  • Quadrant 3 :Market development. The method and technologies are proven and well understood and uncertainty of outcome relates to applying such methods to new opportunities. The process of market development aims to find new applications and target new markets or market segments. As businesses move away from core markets, uncertainty will increase. Innovation revolves around the creative use of market information, creative segmentation and positioning.
  • Quadrant 4 : Market penetration. The uncertainty pertaining to outcomes and method is low, and there appears to be an immediate opportunity. The organization needs to align its assets and competencies in order to capitalize on this. The problem is often one of speed of response. Here, innovation relates to flexibility, recognizing opportunity and adaptation of product offering.

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