The Relationship between Risk and Innovation

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The Relationship between risk and innovation

Introduction

Innovation cannot be without uncertainty and risk. Creating and offering something new is called innovation.  Because innovation involves development of new product, service of modification to existing one so it cannot predicted whether it will be received with appreciation or not. Current essay is aimed at determining the sources of risk in innovation projects and risk management strategies. As diver opinions and theories exist about the nature of risk it is difficult to reach an agreement about a risk management strategy. Innovation projects themselves are risky so it is a big problem to proactively manage risks involved in these projects. Current essay explores the relationship between innovation and risk followed by presenting strategies for managing innovation.

Defining Innovation

Creating and offering something new is called innovation.  Because innovation involves development of new product, service of modification to existing one so it cannot predicted whether it will be received with appreciation or not? For example a shoe company produces a shoe for women with innovative design in order to attract more consumers. Here there are two possibilities; the innovation may be a great success as majority of the women like this and it becomes part of new trend in fashion which everyone would like to follows; second possibility is that it may not attract customers and may be unable to recover its production cost so the innovation will cause financial loss to the shoe company.

According to Mokyr, (2002) innovation is the key source of economic growth as well as of new opportunities of employment because it offers a possibility to realize environmental benefits

(Foxona et al., 2005). In the global business environment the key argument presented in the favor of innovation is that due to globalization business activities are being carried out in a cheap way by benefiting from low-wage salaries, innovation is the key to compete and survive. (Storey and Salaman, 2005)

Oxford Dictionary of Economics defined innovation as the “the economic application of a new idea”. Innovation in product involves either creating new product or making changes to existing one (Black, 1997). As described by Afuah (2003) innovation means employing new knowledge in order to provide customers with new product or service they require. In other words it can be referred to as invention + commercialization. Van de Ven (1986) also described innovation as a “new idea which may be a recombination of old ideas, a plan that challenges the present order, a formula, or an exclusive method which is perceived as new by the involved individuals” (p.34)

It is evident from previous research studies that innovation has become a critical factor for social, economic and business development. Some of these researchers (B ean & Radford, 2001; Storey, 2004a, 2004b; Tushman, 1977; Van de Ven, et al., 1999) are of the view that innovation is the key component for wealth creation.  This has been also considered as key underlying theme to create value in production process (e.g. Womack & Jones, 2003a, 2003b; Womack, Jones & Roos, 1990). Drucker (1985) recommended that “innovation is the specific tool o f entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service” (p. 19).

Differences exist about the nature of organizational innovation, its development and implementation among researchers. For example Wolfe (1994) noted, “despite the broad interests and a vast amount o f literature, understanding o f innovative behavior in organizations remains relatively undeveloped” (p. 405).

Defining Risk

Risk is essential part of any innovation. The companies who speedily produce new and innovative products they take risk. The word risk has many meanings yet its definition is changing because it is interlinked with innovation as well as a rapidly globalizing world (Green and Serbein, 1983). Now companies are have to innovate in order survive within greater uncertainty. Thus the risks these companies are taking are intensifying (Taplin, 2005). Ansell and Wharton (1992) defined from the perspective of business innovation stating that it imply “a measurement of the chance of an outcome, the size of the outcome or a combination of both” (p.22). Similarly, Edwards and Bowen, (2005) defined risk as “the combination of the frequency or probability of occurrence and the consequence of a specified hazardous event” (p.34).

In innovation project risk can by any factor that affects its performance and if the resulting effect is significant and uncertain, risk arises (Chapman and Ward, 1997).

Risk management is the process using which managers try to understand the nature of uncertain future events and make plan to alleviate them (Taplin, 2005). Keeping in mind the notion that risk is the key feature of innovation, risk management needs to facilitate innovation it (Taplin, 2005). By adopting a methodical risk management approach an organization can improve its ability to manage risk at all stages of an innovation project. The key purpose of risk management approach is improving project performance through methodical identification, assessment and management of project-related risk (Chapman and Ward, 1997). A systematic risk management approach encourages a controlled, consistent and flexible decision making process inside the organization (Edwards and Bowen, 2005). Edwards and Bowen (2005) described risk management as a combination of following processes;

• To establish proper contexts
• To recognize the innovation project risk that will be faced by stakeholder organization
• To assess the recognized risk
• To develop appropriate responses to the identified risks
• To control and monitor the risks during project lifecycle
• To allow capturing of risk after completion of project

Chapman and Ward (1997) described that risk management processes can be explained in their relevance of different phases of a project. These processes are divided into many ways; some define tasks to be completed while others are related to outputs. The researcher presented that nine-phase RMP which is a detailed risk management approach. This structure is a depiction of a alternative approach for risk management. Other risk management processes have been described by Smith and Merritt (2002) which is a five step risk management plan.

• Identification of parameters by defining and focusing on each
• Analysis of probabilities and priorities
• Providing solution
• Supervising and learning

Because innovation is referred to something new so it always involves risk. Some researchers have tried to explore the impact of innovation on industry and found that continuous innovation lead to restructuring industrial processes by reinforcing the existing ones. [73]. Thus it is necessary for change and progress as well as to compete in the changing business environment. Here it is important to note that whether innovation is radical or incremental. In case it is radical it holds a radical impact and the risk involved is also significant. Incremental innovations only impact business firms while radical innovations impact industry.

Management of Risk in innovation project

Keizer et al. (1991) tried to develop a genuine method for diagnosing and controlling risk in innovation projects and named it the Risk Diagnosing Methodology (RDM). This method facilitates a firm in comprehensively.............