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5 Key Risks of Innovation Management

5 Key Risks of Innovation Management

Technology Risk

Innovation management landscapes understand that technology risk is one of the most severe challenges to be considered by organizations. This risk is associated with the probability of certain technological solutions not performing as expected or becoming outdated. For instance, Kodak was not ready to switch to digital photography as one of the promising technologies at that time. Kodak was an innovation in the area of an analog photograph, but it could not become the “iPhone of the times” – a reference due to utilizing the cutting edge technology of digital visualization . At the same time, a digital camera entered the market to disrupt the predominance of a Kodak photo camera. As a result, technology risk made an impact on the failure of one of the top analog photo producer. The purpose of this paper is to focus on several examples of technology risks and experiences learned. Several examples of technology risks include software failures, hardware improperly utilized, security vulnerabilities, and compliance failures.

Software Failures

One of the famous examples of technology risk is the Denver airport baggage handling system. At the beginning of the century, it was an excellent idea to establish a new kind of airport, where the baggage handling system is completely automatic. However, the reality was different, and the software utilized in this system was not working as it was expected. The opening date of that airport was delayed by 16 months, the cost was also significantly over the limit and was equal to approximately $560 million .

Hardware Improperly Utilized

A good example is associated with the limitations of hardware and its utilization to support operations as a critical technology. For instance, in the smartphone industry, it was decided to meet the demand in much quicker processing by utilizing more powerful microchips. In such ways, companies spent on R&D, made more innovative components but faced serious technology risks with how these elements must be used properly within the existing device.

Security Vulnerabilities

With wide utilization of technological solutions in different parts of human relations, the threat of technology risks associated with security vulnerabilities increased. One of the famous examples is associated with the Equifax data breach impacting 147 million consumers, where the primary reason for such exposure was the failure of the concerned company to patch the vulnerability . The experience learned should be associated with the necessity of constant monitoring for security issues and swift response to the threat.

Compliance Failures

Another kind of technology risks is associated with compliance. For instance, GDPR compliance is obligatory regarding businesses in Europe, and its non-compliance can cost firms up to 4% of annual global turnover or €20 million. Technology means to minimize such risks should be associated with active compliance programs and regular auditing of those.

Organizational and Cultural Risks

Organizational and cultural risks must be navigated by companies willing to innovate. These risks often involve the resistance to change, misalignment of company values, or adverse effects of sometimes ineffective leadership. Notable real-world instances of corporate crises can help companies understand these challenges and learn to navigate them. To achieve remarkable success, companies must address these risks and develop ways to avoid them through a realization of why the examples under consideration occurred.

Resistance to Change

One of the most extensive factors influencing a company’s propensity to innovate is the resistance to change. A prime example of the negative effects of such resistance is the bankruptcy of Blockbuster. The company that was hailed as the most successful video rental chain in the world could not innovate and survive because of various kinds of resistance. According to Kiefer , the company was incapable of accepting digital streaming because of its longstanding rental store business model. Incompetence and fear to cannibalize the main source of revenue made it impossible for the Blockbuster leadership to realize the changing reality. In contrast, Netflix innovated and overtook a company that had a doomed success in the types of rental store model it introduced.

Misalignment of Values and Vision

Companies must also avoid risks related to the misalignment of the company’s values and its innovation endeavors. Volkswagen’s emissions scandal is an example of a major catastrophy that may befall a company that does not follow the concept of integrity and ethics in its innovative plans. The manufacturers located so-called defeat devices in their cars in order to ensure that engines would know when to shift to the testing mode and pass the U.S. tests. As a result, Volkswagen had to pay more than 30 billion in fines and damages . The company that was long considered to be the paragon of a great successful business had to rethink the process of the following alignments of its business and innovative strategies.

Ineffective Leadership

The innovative culture is often dependent on the effectiveness of the company’s leadership. In addition to these factors, the manw with poor vision also contributed to exceptional disturbance of their employees and layoffs. As a result, the company’s share price felled by half and appeared to employees. A famous company, The General Electric (GE), was immensely affected by the insufficient quality of its leadership. GE’s leaders failed to take into account challenges of the renewable energy market and did nothing to transform the company and sell its heavy capital and industrial products. In other words, the company was innovated by its competitors, followed by a failure of the company leaders to act and decreasing stock price.

Financial Risks in Innovation Management

When managing innovation, financial risks take a significant role. The risks include potential considerable financial loss due to misjudging market demand, cost overruns, and investment in technologies not reaching commercial success. These risks can be illustrated with detailed real-world examples.

Misjudging Market Demand

An example of misjudging the market demand is the Zune media player produced by Microsoft. Launched as an iPod competitor in 2006, Zune failed to hit a large enough part of the market to justify its investment. The product was discontinued in 2011, costing Microsoft what was estimated at hundreds of millions of dollars . To mitigate this risk, companies need to be able to perform sufficient market research on the demand and have a flexible marketing strategy to adapt.

Cost Overruns

Boston’s Big Dig can serve as an example of the dangers of cost overruns. Put in simpler terms, the initial budget for the infrastructure project in 1982 was $2.8 billion. By 2007, it has grown to $14.6 billion . Cost overruns can, in this way, lead a company to drain resources from other areas of innovation and compromise financial sustainability. To avoid this risk, companies need good project and cost management.

Failed Technology Investments

Investment in new technology is risky from a financial point of view, as there can be no guarantee the technology will be commercially viable. For example, Better Place, founded by Shai Agassi, raised over $800 million by approximately 2012 in the hopes of revolutionizing electric vehicles through the creation of a planet-wide battery swapping grid . However, as the company was not able to get enough auto companies to adopt its technology and its business model was flawed, it had to file for bankruptcy in 2013 . Companies must consider the feasibility and readiness for market adoption of technologies before making substantial investments.

Liquidity Risks

Liquidity risks include those of funds being unavailable to the company due to long-term development. These were the risks faced by Solyndra and SunEdison. The former, at the time, failed to reach a point where their long-term goals paid off, leading to bankruptcy in 2011 . The latter, however, went on a buying spree, buying up competitors and trying to innovate while not having the financial backing to do so. SunEdison declared bankruptcy in 2016. As such, companies must consider the balance between growth and long-term flourishing.

Strategic Risks

Strategic risks in innovation management are the dangers of making decisions regarding the development and implementation of new products, services, or processes that could lead to the inability of a company to achieve its goals. These risks are most common for product development, market expansion, and other choices related to adaptation to industry transformation. Analysis of such risks for familiar organizations may help in planning a strategy.

Misaligned Product Development

A vivid example of misaligned product development is Google Glass. The innovation was introduced in 2013 and became a masterpiece of technology, allowing a user to receive information immediately, such as through voice command. However, it did not align with the market’s requirements, as most people were concerned about their privacy and did not see the point of carrying and wearing this gadget. Therefore, in 2015, further development and marketing to the general public was canceled in order to reconsider the concept of using the product.

Flawed Market Expansion Strategy

Another risk example, in this case, is the poor market expansion strategy realized by Tesco in the United States to introduce its fresh food under the brand name Fresh & Easy. After six years of financial loss and incompetence in understanding the U.S. food market context, the organization announced its exit from the market in 2013 .

Inadequate Industry Trends Solutions

Risks related to inadequate solutions to industry trends are generally risky for companies that relied on their longtime popularity without addressing generally accepted and emerging demands. For instance, BlackBerry, which was one the smartphones pioneers with a physical keyboard in 2000, lost its market share to Apple’s iPhone introduction in 2007. In addition, the subsequent implementation of Android technologies on the majority of smartphones significantly decreased the market demand for BlackBerry products. The company’s stagnation in new technology adoption caused a significant decrease in sales and company productivity.

Dependence on a Single Innovation

Overreliance on a single innovation can also cause strategic risks. For example, in 2015, GoPro sales significantly decreased as the entire market size for action cameras was overestimated by the company. Moreover, a subsequent natural decrease in innovative interest by society after the initial period of excitement combined with mobile phone cameras gradually incorporating the same effect has caused slash of the GoPro’s demand. It turns out that the crucial point was missed regarding the necessity of diversifying the product for implementation.

Market Risks

Market risks associated with innovation management are the potential losses caused by the market shifting towards an unfavorable direction for a particular organization. These could be the changes in consumers’ preferences, economic slumps, or increased market competition, which can impact the company’s outcome seriously, whether it is a business start-up or a well-known brand with a long history. Following these examples and analyzing the situation on the market, ways to reduce these risks will be discussed in more detail.

Changes in Consumers Preferences

The need to expand the target audience and create a corresponding product can be a risky business when the organization chooses to stick to the old product surrounded by numerous competitors that are also willing to share a piece of the pie. A bright example of failing to account for changing consumers’ preferences is Nokia, a brand that was the virtual king of the market of mobile phones not the long time ago . However, the company was not agile enough to accommodate the consumers turning towards smartphones. In the internal competition in terms of effectiveness, Apple and Samsung left behind the previous leader of the market by entering the market of touchscreen smartphones and creating application ecosystems.

Economic Slumps

In 2008, the financial crisis took the marketing world by storm and showed that dealing with luxury product relies heavily on the state of the global economy. The total sales of Gucci had plunged 10%, and the company was not the only one on the market reporting the loss of profit . The takeaway from this situation was that companies had to create a more flexible business model bucked up enough to face whatever market conditions.

Increased Market Competitiveness

The modern leader in the box office distribution, Netflix, managed to grab its market share at the expense of such giant cable companies as Time Warner Cable or Comcast. The previous business models were no longer effective, and the overall number of subscribers started to fall rapidly, with more and more people turning to convenient, profitable alternatives such as Netflix or Amazon Prime Video.

Regulatory Risks

Lastly, the flavor vapor companies across the U.S., including Juul, faced a clear downward trend when the U.S. and some other countries started to harden the law applying strict countrywide bans against vaping products. For instance, the San Francisco government passed the law stating that “no vaping sales are allowed and it is illegal to deliver vaping products” . The only way for the companies to survive was to always be able to adapt to changed market situation.

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