Risky Business

Managing the potential risks and rewards of major innovations

The management of risk and reward in relation to new ideas is an important issue that needs to be explored carefully by Insight teams. A very useful article on the subject, called ‘Is it real? Can we win? Is it worth doing?’ by George S Day appeared in the Harvard Business Review in December 2007 (Reprint R0712J).
 
In this issue of 5MI, we’ll give a brief overview of the feature and we’ll explore one of the two main tools he’s developed - we’ll look at details of the second tool in next month’s issue.
 
Little changes, big changes
George Day makes the point that small changes to a company’s offerings often constitute some 90% of its development portfolio. However, to deliver a competitive advantage, large innovations are needed – in the shape of new offerings. These can be risky but they’re necessary if a business wants to succeed.
 
He recommends that companies should increase the proportion of major innovations they introduce whilst carefully managing the associated risks. He suggests two tools that can be used in tandem to achieve this - a ‘risk matrix’ and a ‘real-win-worth it’ (RWW) screen. This month, we’ll focus on the former.
 
The risk matrix is a little like an Ansoff Matrix (you can find out more about this on www.businessballs.com or via Wikipedia). However, a key difference is that the risks are far higher going into a new market than they are when developing a new product for an existing market.
 
New markets, new solutions
Day uses a unique scoring system and assessment of risk to evaluate the likely success or failure of a project. Each innovation is positioned according to two main parameters: the relative familiarity of the target market to the company and the relative familiarity of the new product or technology.
 
To provide figures for each of these parameters, he has developed a series of statements, with the response being measured on a sliding scale from 1 to 5. The scores are the totalled to determine the relative risk value of the proposed innovation. A range of potential propositions can be marked on the matrix. Each one is identified by a spot whose size represents the estimated revenue that it could generate. The diagram below shows how highest risk is associated with new markets rather than new products.
 
 
Used carefully, the risk matrix can be a really useful tool for looking more closely at innovation issues and for thinking ‘outside the box’.
 
Next month, we’ll take a look at the screening tool suggested by Day. This is designed to enable you to evaluate the feasibility of a project.