RISK & INNOVATION MANAGEMENT

One of the major challenges of IM is dealing with the uncertainty and unpredictability of market success of new products. Highly innovative projects have the highest projected return, as well as the highest risk of failure. An innovation portfolio that is diversified among projects of varying levels of innovativeness enables the effective management of innovation-related risks. Innovation is relative and includes, in ascending level of innovativeness: cost reduction, incremental improvements to existing products, major revisions, line or brand extensions, next generation or platform projects, new-to-the-firm products, and new-to-the-world products.There is a trend in the knowledge economy to have a portfolio with fewer less-innovative proj -ects and more medium- to high-innovative projects.17 Regardless, the innovation portfolio mix should be diversified according to a number of parameters (e.g., long term versus short term, high risk versus low risk, and low projected versus high projected return). The use of these parameters with the innovation strategy serves to maintain a balanced innovation portfolio with planned sequential market launches, varying levels of innovativeness and projected returns, and risks. A balanced portfolio should include considerable incremental innovations to leverage existing product platforms with low costs and certain returns, as well as radical innovation proj ects to dis­cover new breakthroughs. How do you strike this balance? Follow the guidance of the organiza­tion's innovation strategy.Traditionally, organizations used financial methods (e.g., the net present value [NPV]18) as the criterion to select projects in the portfolio, preferring those projects that have the highest net present value. Recent research,19 however, shows a decline in the use of the financial method in favor of strategic methods, which evaluate a prospective project according to its strategic fit. This is particularly important in cases of breakthrough innovation projects, in which future financial performance is very uncertain to provide an accurate NPV. The survey found that 36 percent of the best and 56 percent of the worst use financial methods as compared to 39 percent of the best and 10 percent of the worst using the strategic approach.20 Similarly, the Product Development Management Association (PDMA) reported an increasing reliance on strategic planning as a step of innovation management, where 75.9 percent of the best adopt specific strategies to set the innovation portfolio of the entire organization. In addition, the best firms also include a strategic alignment step as one of the screens in their NPD process.

Hewlett-Packard (HP), one of the most innovative companies, with two-thirds of its $40 bil­lion revenue coming from products introduced in the past two years, uses the strategic bucketing method for NPD strategic planning and portfolio management. HP classifies projects into "evo­lutionary or derivative—sustaining, incremental, enhancing; platform—next generation, highly leveraged, and revolutionary; or breakthrough—new core product, process or business."22 To manage the NPD/innovation portfolio across the enterprise, HP created cross-functional councils consisting of upper management. The Councils start by setting the strategic directions in which the innovation activity will be directed. The Council then creates strategic buckets accordingly and allocates both financial and human resources between the buckets and between projects within each bucket. Once the Council finalizes portfolio selection, the portfolio is handed to selection committees who oversee project management at the operational level. In this way, top management works together with project managers to articulate the innovation/NPD strategies for the whole organization.Balancing between incremental/evolutionary and radical/revolutionary innovation projects is essential for IM as it allows the leveraging of existing product platforms with low cost and cer­tain return while investing in the discovery of new breakthroughs to develop and grow business, hence keeping a balance between short- and long-term goals, and keeping a healthy bottom line while not exhausting the ability to move forward. In addition to deciding on innovation strategies and the innovation portfolio, top management should lead the changes required at the operational level to the structure, culture, and processes of the organization.

the future of risk management in the financial services industry

Risk management has grown increasingly complex over the years,
prompting organizations to increase the size, magnitude and reach
of their risk management functions. However, an increase in risk
management activities does not always correlate to more effective
risk management. Recent events have revealed this vulnerability
and provided a much needed “wake-up call.” Many organizations
had committed significant resources and investment in risk
management but had not worked to connect their processes.
Kingdoms or silos were developed, but the levels of interaction,
shared reporting, data exchange and coordination was minimal.
While there has been a maturing of risk management, there is still
considerable opportunity for improvement. Organizations need to
constantly challenge their approach to risk management. This is
especially true now, when risk functions are being asked to do
more with the same — or limited additional — resources. More than
ever, organizations need to rethink their approach to risk
management in order to balance risk, cost and value. Our research
shows the most commonly identified areas for improvement are:
• Improving the risk assessment approach to better anticipate,
identify and understand risks
• Aligning risk management focus with business objectives to
drive greater value and focus on the risks most likely to affect
the business
• Enhancing coordination of risk and control groups to achieve
greater efficiencies and eliminate redundancies, duplication and
gaps among risk activities
Organizations that improve their risk management activities will
not only provide better protection for their businesses, but also
improve their business performance, improve their decision making
and, ultimately, increase their competitive advantage.