9 ways to reduce risk by embracing innovation

Can you recall the first time you were told to “think outside the box”? The phrase, which originated with management consultants in the 1960s, has since become a cliché. But what it is meant to entice — innovation — will never grow tired.

Innovation can sometimes be perceived as the job of someone else — scientists, risk-seeking businesspeople, youthful tech start-up founders. And those associations can complicate our understanding of innovation, so much so that we cling to our old ways. We don’t want to make waves. We’re uncomfortable with ambiguity. We can’t justify fixing something that is not visibly broken.

And while innovation may sometimes seem risky, ignoring it could prove fatal. Competitors are pursuing new ways to create and capture market value and make your business irrelevant. They are differentiating themselves and trying to disrupt the market through new business models, new products, or new services.

Eighty-seven per cent of Fortune 500 companies from 1955 no longer exist today as a result of bankruptcy or M&A activity. The same could be true 60 years hence. But what about the 13% that still exist? They are making tomorrow, rather than being subjected to it.

Take IBM, for example. The company once known by its longhand name, International Business Machines, used to make everything from cash registers to computers. Now IBM specialises in software and services.

Reinvention is a constant for those who make tomorrow. To not innovate is to increase risk. And, at its root, innovation is all about creating value by reducing risk and exploiting opportunity.

Fortunately, there are some tenets you can follow to reduce risk by innovating:

1. Focus on areas of strategic importance

The emergent and adaptive nature of innovation must be balanced with existing priorities. Innovations that do not directly apply to the mission and vision of a business often fail due to lack of market support and alignment. Effective innovations are focused, specific, and strategically important. Innovations that do not solve a problem or do not address a customer’s need often fail because of lack of relevance. Innovations that try to be everything to everyone often fail due to lack of specificity.

Nook electronic tablets produced by US bookseller Barnes & Noble struggled to sell in the face of competition from similar products made by companies that specialise in technology. Nook failed in part because it was too great a leap for a brick-and-mortar retail outlet to start making and selling electronic tablets. While there was market demand for e-readers, the Nook tried to be more than an e-reader and lacked support from third-party developers. It was beaten by Apple’s iPad and Amazon’s Kindle because those products were far better aligned with market needs and their parent companies’ mission and capabilities.

Consider where your business is going, its mission, its vision, and its strategic priorities. What problems do your customers have? What jobs do they need to get done? What are the growth priorities of your business? What does your business want to be known for? Focus your innovations on these answers.

2. Practise purposeful abandonment

Not all products and services should continue to be offered or supported despite their profitability. It may be more profitable to abandon offerings that have low growth and low market share, in favour of more attractive opportunities. The freed-up resources can then be used to fund new initiatives that may yield higher returns.

Abandon customers, products, markets, and channels that provide marginal or negative growth. Move your resources to areas of higher value and productivity. Put your best people and resources on the biggest opportunities for growth instead of ones that maintain or defend stagnant markets.

To purposefully abandon, ask these questions of every product and service your business offers:

• Is the return on investment positive and growing year over year?
• Does this offering advance the strategic goals of the business?
• Does this offering help achieve the vision and mission of our business?
• Is the market growing? If yes, can we grow our share?
• If we did not have this offering, would we go into this offering, this market, this channel, this business model today?

If the answer is not “yes” to all of the above, consider abandoning the offering and moving the resources to new, higher-potential opportunities. Do it before your competition forces it upon you (see “Redesigning Decision-Making: Pentland Brands,” page 46).

3. Foster learning

Learning is closely linked to innovation and creativity. As knowledge is acquired, the brain makes new connections, associates disparate concepts, and can produce novel ideas and insights. This leads to questioning and more knowledge. The value of learning through questioning cannot be understated.

Research by Paul L. Harris, a professor at the Harvard Graduate School of Education, suggests the average child asks about 40,000 questions between ages two and five. Their minds are open to all possibilities with few, if any, assumptions about the world. As an adult, maintain childlike mental attributes of curiosity and questioning to boost learning. Read books and articles from unrelated disciplines, attend conferences, take online courses in unfamiliar subjects, and encourage colleagues to further their own learning.

4. Don’t rely on your customers

Your customers have a job to be done. They don’t always have the best idea of how to address it. They need you for that. Asking them how to solve their problem won’t get you far. Understand your customers’ needs and pain points, but mostly ignore their ideas for solutions.

Consider Henry Ford, founder of Ford Motor Co. and builder of the first mass-produced, petrol-powered car. His customers wanted to get from one place to another more quickly. He thought that if he had asked his customers what they wanted, they would have said, “a faster horse”. Use design thinking and observation, and adapt ideas and insights from other industries and technologies to conjure up novel ways to solve your customers’ jobs to be done.

5. Compete up-market on performance

Innovative products and services that displace competition and change customer behaviour often target non-mainstream needs to compete up-market. To drive innovation, build something that performs better for non-mainstream customers. Small markets are often underserved, and they are more likely to demand fewer features and less performance to meet a non-mainstream need. This enables you to grow into the mainstream or change it entirely. The evidence in Michael Raynor’s book The Three Rules: How Exceptional Companies Think supports this tenet so well that one of his rules is “better before cheaper” (see “Following the Rules to Sustained Profitability,” CGMA Magazine, Issue 1, 2014, page 20).

For example, excavators in the early 1900s were operated through a series of pulleys and cables. Hydraulic excavators were developed half a century later but were used primarily for small jobs by non-mainstream customers. Over the next two decades, manufacturers of hydraulic excavators moved closer to the mainstream market by maturing the technology and competing on performance. By the 1960s, hydraulic excavators had matured enough to satisfy mainstream market needs. Once the performance was equalised, competition shifted to reliability, then to convenience, then to cost.

6. Constantly communicate and connect

Frequently engage with your industry’s thought leaders, current customers, and aspirational customers. Create a dialogue of idea sharing. It will enrich your perspective and keep you attuned to emerging trends. As knowledge is acquired, it should be shared with your colleagues and business partners.

Connect with non-experts whose minds may be free of conventional associations. They can help you ask more poignant questions and freshen your perspective. Host internal lunch-and-learn sessions, chat over coffee with colleagues, attend conferences, and connect with non-experts in other industries for a fresh perspective.

7. Iterate and fail quickly

Traditional project planning calls for meticulous scoping, documenting, resource allocating, and launching. This process is slow, and failure can be costly. A better approach for innovation is to take small, quick, iterative steps to test the market and the performance of your offering. This can result in inexpensive failure at low levels of investment with increased learning.

The minimum viable product (MVP) concept, made popular by Eric Ries’s book The Lean Startup, is a great framework for iterating quickly. MVP is a recursive process to build just enough of an offering to test, measure its performance in the market, capture the learning, and repeat. The agile methodology in software development is similar. Classic examples of this approach can be seen with many virtual products such as Google’s Gmail, which has evolved from a basic, yet differentiated, online email system with iterative steps.

Thomas Watson, the founder of IBM, is believed to have said that the fastest way to success is to double your failure rate. So embrace failure through quick, iterative tests, and apply the learning to the next iteration.

8. Choose the right metrics

An old management adage says that what gets measured is what gets done. Choosing the right metrics is essential to maintaining focus and measuring success.

Balance your metrics between leading and lagging indicators. Ensure each metric is clear, actionable, and simple. Avoid vanity metrics, which measure the illusion of progress such as the number of page views or likes on Facebook. Consider what job your customer is hiring you to do. Focus on outcomes and impacts. Determine what specifically can be measured to gauge progress. Limit yourself to three to seven meaningful metrics.

9. Look for unexpected successes

The market will occasionally surprise you. Pay close attention to unexpected successes. Why did a particular offering sell more units than expected? Why did we get a higher market share than expected? Why did a market segment that we didn’t think of buy a particular offering? Where could it lead us? Digging deeper into these questions may reveal opportunities for growth. Perhaps the offering is used in ways you did not envisage, perhaps it touches a sensitive nerve for customers that you didn’t consider, or maybe a different type of customer finds it valuable.

Peter Drucker, in his book Innovation and Entrepreneurship, uses the US department store chain Macy’s as an example: When Macy’s began selling appliances, it saw a rapid and unexpected increase in sales and profit. Macy’s was embarrassed that nearly three-fifths of its revenue was from appliance sales instead of fashion apparel. Instead of capitalising on this unexpected success, Macy’s tried to restrict appliance sales. Bloomingdale’s, a Macy’s competitor, saw this as an opportunity and built a new market with its housewares department.

As you identify unexpected successes, consider how to exploit them for growth. Where could they lead you? Look at unexpected successes to reveal opportunities to enter new markets or serve existing customers in new ways.

Mark S. Brooks is a senior manager of innovation at the AICPA, where he is focused on member value, growth of the profession, thought leadership, culture change, and strategic innovation.