– Thoughts on Strategy and Management

Risks of innovations

OliverA couple of weeks ago I discussed four major benefit criteria of innovation in this post. Now it is time to look on the other side of innovation. Yes, there are not only benefits; in the case that your organization starts to focus on innovation you should have in mind to face some disadvantages. You can also refer them as risks when entering an unknown field (of business). I won’t argue that you should not use innovation. But it will helpful to anticipate and to understand these risks in order to prepare yourself.

Innovations always involve particular risks for the organization. A company that searches for new ways, processes and types of organization is confronted frequently with the risk to land in a dead end. Another disadvantages of a “we are innovators”-approach is the need to review strategy more often; hence structural adaptations which are linked to strategy can take place more often, too. An organization has to consider further five typical disadvantages:

  • It is possible that a new business model (in order to add value) does not create a competitive advantage (e.g. due to bad timing). Eventually the new business model has to be abandoned after the testing phase.
  • An economically strong follower copies the innovation and turns it into the industry standard. Therefore the innovation become the “standard solution” for every company within the industry and loses its innovation status. This will destroy the competitive advantage for the innovator. (Note: It is also possible that a competitor has another innovation and transfers it to the industry standard. Example for this is the format war between Blu-ray and HD-DVD, that was won by Sony)
  • A follower is able to learn more quickly (e.g. to fix starting errors) and to achieve the readiness for marketing quicker than the innovator.
  • The innovator overestimates his innovation power and his organizational capabilities (e.g. change management, financial resources) to bring an innovation to the market place.
  • Misinterpretation of the market. The new product is excellent in terms of technical specifications. Despite these features no customer is willing to pay for them, since their costs are higher than their expected benefits (e.g. over engineered product). Another option is that customers have a minor different behavior then expected (e.g. do not accept your pricing policy, are less loyal).

All these risks represent the thread of a loss of resources for the innovator. In addition half-baked products can cause reputation damages.

In the next couple of weeks we will present a paper that summarizes different aspects of innovations and their links to strategic planning. Within this paper we will highlight three case studies, one of them represents a good examples for innovation risks and the way how the organization did address these risks. Keep in touch with Eddielogic.com!

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