Why “Increasing Risk Tolerance” as a Growth Strategy is a Bad Idea
“Without sustaining the practice of innovation, no company can excel – or survive.” – A. G. Lafley and Ram Charan, “The Game Changer”
Many leaders recognize the importance of innovation but find it difficult. Too often, it seems like a random haphazard event that wastes time and money and creates a lot of frustration. Hence, it’s not surprising that most people think that innovation is inherently risky and messy.
This creates a serious problem for many organizations because the new product team makes recommendations for innovation that keep getting shot down by the executive team or board as “too risky.” How do you get out of this trap?
One new approach I’ve seen advocated recently is for executive leadership teams and boards to “increase their tolerance for risk.”
This is a terrible idea. It’s like asking patients to increase their tolerance for pain instead of taking effective measures to reduce their pain.
Most companies don’t know it, but they can can take effective measures to reduce innovation risk. In fact, Innovation is not inherently risky; how organizations are executing it is.
The key to winning at innovation is to recognize that it entails two key risks:
- Market risk, i.e., the risk that people won’t buy what you make
- Solution risk, i.e., the risk that you won’t be able to make what people want
Most new products fail because people don’t want to buy what companies make. In other words, companies are notoriously poor at reducing market risk at the front end of innovation. They don’t know how to discover their target customers’ unmet needs in an actionable format for innovation. Some experts say this accounts for 90% of all new product failures.
Yet market risk can be dramatically reduced once we understand what kind of information to obtain from customers, how to get it, and how to use it. It’s the confusion about this today that is causing high failure rates.
While the risk-reward tradeoff that states that “a potential return rises with an increase in risk” is valid when you’re managing a stock portfolio, you are not bound to this when overseeing a new product or innovation initiative.
Jobs-to-Be-Done gives companies the ability to obtain unique customer insights that predict what customers will want in the future even before any product or service concept has been conceived.
That’s because the jobs that customers consider to be both important and poorly satisfied today will probably remain important and poorly satisfied tomorrow until you or your competitors address them better. “Jobs” are remarkably stable over time; it’s product and service solutions that continuously change and improve.
When you get the right information and know how to analyze it, all you have to do is figure out how to help your customers get their job(s) done better according to their own criteria which you will have. This is when creativity and success rates soar!
Further, it’s a lot easier for an executive team or board to approve funding for an innovation initiative when the innovation team can show that:
- The opportunity they’re addressing has been identified and validated by the target market with statistical validity
- Is well-defined and actionable
- Is attractive to pursue for new value creation given the firm’s relative advantages
- The idea they have generated to address the opportunity has been rated by customers to significantly improve satisfaction
This changes the risk profile of innovation. The executive team and board won’t need to increase their risk tolerance because you will have reduced risk.
There will always be some risk associated with innovation, but you can dramatically reduce it and increase success rates at the same time. You don’t have to accept the status quo.
Perhaps increasing risk tolerance has some merit after a firm reduces its market risk. But until then, it’s a bad idea.
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