How Risk Impacts New Product Development

The only way to avoid risk in new product development is to never develop any new products. For most companies, that is not an option since new products are, or should be, an important growth driver.  Understanding, managing and mitigating risk, therefore, is inherent in innovation. 

A fundamental question is how risk impacts your decision making processes. A recent Accenture study suggests companies are becoming more risk averse in new product development decisions (1). According to the study, 46% of the executives said their company had become more risk averse when considering new ideas. That may be why 64% are more focused on product line extensions rather than big ideas.

The “knowledge funnel” (2) shown in Figure 1 illustrates why companies naturally become more risk averse over time. Every organization begins as a start-up, wrestling with “mysteries”. This can relate to either a product, process or business model. Ultimately, every company must turn that knowledge into an “algorithm”. In a manufacturing firm, the “algorithm” would be the drawings and manufacturing procedures. This allows knowledge to be monetized. Moving across the stages is considered exploration or the search for new knowledge, and working within a stage is exploitation.

Figure 1

Many organizations, however, become stuck at the bottom of the funnel in their desire to maximize efficiency and avoid risk. This can lead to a focus on incremental projects, rather than higher-risk, higher-reward projects. If over the long run a company only exploits existing knowledge rather than creating new knowledge, they will stagnate and be displaced by a competitor.

A small to mid-sized enterprise (SME) faces special challenges. Many SME organizations are family owned. Research has shown that family participation in management tends to make the firm more risk-averse in considering the range of choices for new product development (3).

For family owned firms, therefore, it is crucial that the owner(s) understand the bias in how they approach decision making. If every project is a low-risk, incremental improvement of an existing product, there may never be the opportunity to change the company’s financial trajectory and develop new sources of revenue.

But how do you understand, manage and mitigate risk in new product development or in creating new business models? There are three primary categories of risk to consider as illustrated in Figure 2. Technical and schedule risk while normally addressed individually are inherent in the overall business risk, particularly as it relates to market and financial success. A key question is whether you are simply ignoring these risks, hoping for the best, or do you attempt to fully understand, manage and/or mitigate risk?

A useful place to start is the risk matrix shown in Figure 3. On the bottom of the matrix are sources of uncertainty. Task variation is present in every project. For example, you might estimate 2 weeks to receive a part from a vendor, but it may actually take 1 week or 3 weeks. The overall schedule, therefore, includes a collection of individual task uncertainties.

Figure 3

Foreseeable uncertainty are events we can anticipate. A useful tool for assessing this risk is Failure Mode and Effects Analysis (FMEA). Unforeseeable uncertainty, or “unknown unknowns” are described by the phrase: “we don’t know what we don’t know”, and are extremely difficult to manage if they dominate the project.

On the left axis of the matrix is system complexity. If you have a project with many “parts” that interact, then you have a complex system. Again, this can relate to a product or a new business model.

Understanding where an individual project lies in this matrix has important implications, particularly in choosing an appropriate project management tool (4). If the project is in the lower left two quadrants, standard tools like Gantt charts, Critical Chain and Risk Lists are appropriate. If you are in the upper right quadrants, the lean methodologies are better suited.

Finally, managing and mitigating risk depends on being able to measure it. There are both qualitative and quantitative tools. Qualitative tools are normally constructed by brainstorming possible risks, then scaling them on two factors: the probability they will occur (P) and the impact on the project or long term success of the new product (I). Multiplying P X I provides a useful number to prioritize risk mitigation efforts. Quantitative risk assessment tools, such as NPDRiskAssessor® are also available and are a powerful way to understand overall business risk (5).

In summary, if you are developing new products, understanding, managing and mitigating risk is a fact of life. Rather than ignoring risk and hoping for the best, or allowing a risk-averse culture to drive your decisions on new products, there are powerful tools that can help address business, technical and schedule risk inherent in innovation (6).

Notes:

  1. Accenture Study: Innovation Efforts Falling Short Despite Increased Investment. May 2013.
  2. Roger L. Martin, The Design of Business: Why Design Thinking is the Next Competitive Advantage. (Boston: Harvard Business School Publishing, 2009)
  3. Matzler, Kurt et.al. 2015. The Impact of Family Ownership, Management, and Governance on Innovation. Journal of Product Innovation Management 32(3):349-360
  4. See this article: “How Project Risk Impacts Project Management in New Product Development (NPD)”
  5. See this article: “Quantifying Project Risk in New Product Development (NPD)”
  6. Want to learn more? See “Your Innovation Coach”.

About the Author

Jeff Groh is President of New Product Visions located in Flat Rock, NC. New Product Visions helps companies drive revenue and earnings growth by improving their innovation management practices. We focus on processes, organization, management engagement and culture. Services include consulting, Innovation Coach™ Workshops, Your Innovation Coach online consulting service and software enablers. Mr. Groh spent 30+ years in industry in a variety of management roles in sales, manufacturing and new product development prior to starting New Product Visions. For additional information or to join our mailing list, contact us. Available for select speaking engagements.

Specialties: NPD consultants, new product development consulting, developing new products, new product development seminars, small business consulting, new product development expert, product development process, new product development strategies, integrating NPD for mergers & acquisitions, organizing for innovation, management role in NPD, project risk analysis, innovation management

 

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