Trying to be innovative means putting yourself out there, committing hard-to-replace resources to a task with an uncertain outcome. That's why many firms that seek product innovation also try to manage the risks of that innovation.
Innovators often first encounter daunting risks when they attempt to get a new product manufactured.
“You're taking a risk if you're going to scale a product and the smallest run they can do is 500,000 units," says Barb Stuckey, president and chief innovation officer of Mattson, a Foster City, California-based product developer for the food and beverage industry.
—Barb Stuckey, president and chief innovation officer, Mattson
Innovative businesses also risk losing the trust of important partners, such as distributors, if things go south.
“You have to have a distribution partner and convince that partner to take on your product," Stuckey says. “If it fails, you have to go back to them with your next innovation and convince them it's going to be a success."
Managing Product Innovation Risks...
A host of other dangers can await innovators. A product innovation may not attract enough customers. It may fail requirements for quality or delivery. Profit margins may be too slim or cash flow unsustainable. Too many opportunities may be lost when other projects are not given support.
That's why successful innovators learn how to manage these risks. Some businesses try to avoid developing products that no one wants to purchase by including customer-facing employers such as marketers and salespeople along with engineers on a design team.
“Don't just put innovation onto the shoulders of your engineers and innovators," says Jacob Babcock, CEO of NuCurrent, a Chicago developer of wireless power solutions.
Testing before rolling out a product is another fundamental risk-control technique of product innovation.
“We highly advocate doing some sort of consumer testing, even if it's just with friends and family and existing customers," Stuckey says.
Innovators may also want to consider initially rolling out a new product in a limited market.
“You may find out it's a terrible idea, but at least you haven't spent as much money as you would rolling it out in the whole system," Stuckey says.
...By Going Small
The more radical the product innovation, the less certain the outcome. So rather than seeking big jumps past the status quo, risk managers may want to start with small, incremental innovations.
“Then you can take bigger and bigger bets, because you have had some success and you know the process of getting a new product to market," Stuckey says.
Seeking smaller innovations lets a business support many innovation projects rather than putting all its resources behind one or two. Babcock says this is similar to the way investors put money into a diversified portfolio of assets.
“You need a portfolio for innovation," he says. “Some will overperform, some will underperform. Overall, you should see positive gains."
E-commerce provides a way to start small and see if demand is there before committing significant resources to a product innovation.
“You can make very small sample sizes and sell them out of your garage with e-commerce," Stuckey says. “It's a brilliant way to find out if people will pay real money for real products."
Pop-up retail concepts based in mobile trucks and trailers give innovators low-budget options to try product innovations in real-world market conditions. If something works, they can commit to brick-and-mortar locations.
“It's a great way for restaurant operators to get into the business," Stuckey says.
Businesses can also limit risk by creating joint ventures to split costs with a partner or using licensing to get others to take on some of the burden in exchange for royalties.
Expert advice from consultants or other product development specialists can help reduce missteps. And for the right product, government grants may bear some development costs, too.
The Risk of Not Innovating
Perhaps the biggest risk of innovation is failing to be innovative at all for fear of failing.
“There are risks like spending time and money on programs that might not be commercializable or return value," Babcock says. “But I feel like not innovating because you're scared of making some of those mistakes is a 10 times bigger risk."
“We think the bigger risk is to not innovate and allow competitors to come in and one-up your product offering," Stuckey agrees. "We see innovation as a necessary part of daily business."
In her view, innovators who don't fail often probably aren't trying hard enough to be innovative.
Big, innovative technology firms have become some of history's most valuable businesses based on stock market capitalization in a relatively short time. With that in mind, managing product innovation risk is an increasingly important skill now and in the future.
“I'd have a hard time making a case that innovation would become less important over time," Babcock says. “It will only get more important."
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