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How to reduce innovation risk?
Learn how an innovation framework can help you identify and eliminate bad ideas early, while mitigating business risk.
Co-author Øyvind Lillerødvann, Business Developer for Data-driven Innovation at Kantega, and Anders Eivind Bråten, CEO and process owner.
This article is part of a series where we share experiences from a learning project on innovation accounting and innovation systems. To learn more about the background for the learning project and the problem statement we recommend reading these articles first:
- Creating a framework for innovation
- Establishing the need for an innovation system in Kantega SSO
- The Innovation Thesis: Setting a direction for innovation
The probability that an idea will generate value is low, and research shows that less than a third of startups succeed in generating a positive return, for various reasons. This is something we must keep in mind when developing new and innovative products in established businesses. In most cases, our perceived good ideas fail to become viable business models.
So, how can you identify and weed out bad ideas early enough to steer efforts towards more promising initiatives?
In our learning project, we are testing how an innovation framework can help us with this. The innovation framework provides support for leading innovation by adapting it to the business. There are several different innovation frameworks, and they all have three simple phases or steps in common: creating ideas, testing ideas, and scaling ideas.
Continuous risk assessment
The innovation framework enables us to identify the different types of risks to address at various stages of the innovation life cycle, and to improve our evaluation of ideas.
In the initial stages, we must understand the fundamental needs. Is the product or service we're offering addressing a genuine problem or need of the customer or user? If not, the new product or service will never be adopted, regardless of the quality of the technical solution. Identifying this early on can save significant resources and money. Therefore, the critical question is, "Should we make it?"
If we identify a real problem, it is also wise to test at earliest opportunity whether the product we envision solves the problem in a good way for the user or customer, whether it is technically possible to make it, and whether there is a willingness to pay for it.
To keep the process running in an efficient way is essential to facilitate rapid learning and create the necessary space and time to design and do experiments. An innovation framework helps shape this process, and provides a clear image of how to incorporate new knowledge and cope with changes as the product matures.
So, why can't we just create a plan? When new initiatives must be described as business plans with projections of returns far into the future, one must argue that an idea will succeed before starting, and management must choose to believe that the idea will succeed.
We know that few ideas will lead to profitable products. A business plan created too early (before the growth phase) carries considerable risk, while giving the impression that what we are doing is predictable. This risk involves spending a significant amount of money before the product is launched, with no guarantee that the product will be adopted or successful. It is important to acknowledge that we make many assumptions. Some of these assumptions have higher risk than others. To mitigate these risks, we need to continuously test the assumptions related to our business model. This way, the management can make informed decisions about the way forward.
Update the risk assessment
It may seem odd that we need to test all these assumptions, but it is crucial to acknowledge that there is a lot of uncertainty in the preliminary stages of product development. Even if we have some knowledge, it is essential to recognize that it's quite risky if something we think is true turns out to be incorrect.
Our basic idea is therefore to dedicate the time to needed test the biggest assumptions, which often correlates with big risks. Early in the lifecycle, we emphasize exploration and hypothesis testing to determine the value of an idea for the customer. As we progress, the emphasis shifts more towards testing how we can generate growth and profit, such as by expanding our customer base.
While it's crucial to conduct market analysis before commencing a project, it's also challenging to have absolute certainty about the market until the product is in the hands of the customers. As such, we cannot always rely on our initial findings. The assessment of risks fluctuates throughout the process.
Just like you can't be certain about the weather on a hike until you actually start walking, product development also requires a degree of adaptability. It's important to be ready to adjust plans and pivot if needed.
The innovation framework in KSSO
We could have simply adopted an established innovation framework, such as Lean Product Lifecycle, but through experience we have learned that an innovation system must be tailored to the organization, and implemented in an agile manner. As with any other solution, it is wise to first consider the needs, to understand the context in which the solution should fit.
UX designer, Anette, is eager to eliminating bad ideas early on. What's the point of having the world's best user experience on a product that isn't used? She is also concerned about how innovation work can be structured more effectively at a higher level.
CEO, Anders, needs to simplify and streamline innovation work, and wants to ensure that decisions are made at the right time to optimize the throughput of new ideas.
The goal of the framework is not to change the way KSSO works with innovation, but to continuously improve it.
To develop our innovation framework, we first reviewed the current idea development process and its challenges. Through working sessions, we identified when decisions should be made and what factors they should be based on. We created a sketch of the innovation framework, which will be refined iteratively in collaboration with the team and the board.
The sketch above uses different structure and terminology from what we have used previously. We have adopted these terms to align with our innovation processes. We prioritized clarifying the earliest stages of the innovation lifecycle, with plans to add later stages such as scaling and management in the future.
The ongoing filtering of ideas
The sketch highlights what we emphasize and need to learn in each phase, including the important practice of discarding bad ideas. We concentrate our resources on the most viable ideas that progress further along in the lifecycle. The framework serves as a safety net to identify and mitigate risks and test assumptions. As ideas advance through the lifecycle, the net becomes increasingly fine-tuned to ensure only the strongest ideas move forward.
In KSSO, we consider both needs, technical risk, and market risk when evaluating and validating opportunities. This is done by a product trio (consisting of a design lead, tech lead, and product manager). As mentioned earlier, it's especially important to focus on needs when determining if we're solving a real problem.
We also evaluate market potential and technical obstacles in the initial stages of the innovation process, which may require making certain assumptions. For instance, market potential cannot be fully confirmed until we start selling the product, but this shouldn't deter us from discarding ideas with limited potential. Additionally, it's crucial to test the market assumptions later in the innovation cycle. Are the weather conditions as anticipated or more challenging than expected?
Different management styles in various phases
Another important purpose of the framework is to help in determining how innovation work should be led, depending on which phase the ideas are in.
For example, exploration and validation of value ("problem-solution fit") require different frameworks and resources than when focusing on exploring the market ("product-market fit"). When we reach that point, it is natural to investigate how to reach out to customers, how to price products, and how to create margins that the company can live off. This means that other people than those who have conducted exploration and experimentation early on will contribute to the process at the later stages, as it requires a different experience and expertise.
The value of outlining the lifecycle
The framework outlined above is anchored in our board, and the product team is connected to the process so they can understand and contribute improvement suggestions.
The product trio believe that outlining the lifecycle through the framework will have a positive impact in several ways, including:
- Having a clear understanding of different types of risks in various phases.
- Having a clear understanding of how to validate ideas in various phases.
- Facilitating more informed decisions.
- Developing a common mental model for all involved.
- Facilitating the team working towards the same goal.
- Making communication easier and better.
The innovation practice affects the quality of decisions
Once the framework has been tested in practice, we will assess it. At the same time, the innovation framework is just one of several elements in the innovation system.
As we move forward with the learning project, we continue to work on our innovation practice and innovation portfolio in KSSO. With the innovation framework and portfolio in place, we are close to establish innovation accounting. We hope this will enable us to make better decisions on investments, how we lead and make decisions throughout the innovation process and measure the value of innovation.
The way we work with hypothesis testing, and the quality of this work, obviously affect the quality of the decisions we make. The way we work is also framed as a separate element in the innovation system: innovation practice, which we will discuss in more detail in the next article.