External Risks of Innovation Projects

The fact that innovation is a risky business is well-known. But what are those risks? After the identification and the assessment of the internal and hidden risks of innovation projects Altin Kadareja now delves deeper into an exploration of the external risks of innovation projects, those risks that the company can/does not fully control, mostly related to factors external to the company, meaning coming mainly from its environment.

The successful development of innovations is a critical factor in the survival and growth of companies (Schmidt et al. 2009). Consequently, scholars as well as practitioners have an interest in development strategies and the way they affect the success or failure of innovations (Henard and Szymanski 2001). The persistently high rate of innovation failures (Stevens and Burley 2003), forces companies to continually search for the most effective ways to develop such innovations (Astebro and Michela 2005). As a result, the study of factors that affect the success of product development (Cooper and Kleinschmidt 1996) has been expanded in recent times with studies about the impact of each factor on performance, both direct and indirect (Carbonell and Rodriguez 2006; Voss et al. 2008).

In order to identify such factors, a definition of a successful innovation project must be outlined. As presented in the previous article, such innovation project should:

  • be finished within the pre-established time limits (time);
  • deliver the outcomes and benefits required by the organization, its partners and other stakeholders (performance);
  • stay within financial budgets (costs).

As a result, every success parameter could be risked by factors external to the project like: financial and economic risks, demand and market competitiveness risk, trademark or regulation risks, etc. Following these macro venues of innovation project’s risks, I have constructed a list of potential external risk sources that could negatively influence the outcome and performance of the innovation projects:

  • Economic – The risk of excessive perceived economic risks.
  • Demand – The risk of facing an uncertain demand for innovative goods or services.
  • Market – The risk of a dominated market by established businesses.
  • Innovation costs – The risk of incurring high direct innovation costs.
  • Information – The risk facing lack of information.
  • Finance – The risk of a changing finance costs during the innovation project.
  • Brand name – The risk of influencing the outcome of the innovation project by a unenthusiastic brand name reputation.
  • Extraordinary situations – The risk of experiencing extraordinary situations.
  • Competitive pressure – The risk facing a higher than expected competitive pressure.
  • Trademark or copyright problems – The risk arising from trademark or copyright problems.
  • EU and national regulations – The risks faced from the need to meet EU regulations and national Government regulations.

External risks of innovation projects

In the following paragraph, the analysis of the external risks of innovation projects has been projected, using the same methodology explained in the previous article.

Table 5, has summarized the results of such analysis on external barriers to innovation projects.

Click to enlarge

The innovation costs risk is revealed to be the second biggest external barrier to successful innovation projects.

“Demand risk” along with “Innovation costs risk” lead the risks’ list. In fact, being new and innovative, a product, service, method could very easily be not accepted by the targeted final users (Cierpicki, Wright and Sharp, 2000; Griffin, 1997) and face an uncertain demand. The innovation costs risk is revealed to be the second biggest external barrier to successful innovation projects. This could be evidenced even in large-scale projects like (1) the construction of the Opera House in Sydney, exceeded 94.8M Australian dollars of the planned budget, (2) the Airbus A380 – 1.77 billion over budget; and (3) the London Millennium Bridge had £8M over the initial budget.

At the bottom of the list indicating the lowest barriers to successful innovation projects, the surveyed firms have ranked the need to meet the EU and local (national government) regulations.

As a matter of fact, this area usually is not subject to dynamic changes and could, therefore, be well-predicted by the firms exercising the right mitigation activities

In conclusion, the dominating external risks of innovation projects have been:

  1. “Demand Risk – Uncertain demand for innovative goods or services”;
  2. “Innovation Cost Risk – Direct innovation costs too high”;
  3. “Market Risk – Market dominated by established businesses”.

By Altin Kadareja

More articles in this series:


Part 1: What drives a Successful Innovation Eco-System

Part 2: Internal and Hidden Risks of Innovation Projects

Part 3: External Risks of Innovation Projects

Part 4: Risks of Incremental, Differential, Radical, and Breakthrough Innovation Project

Part 5: Cooperation and IP Risks of Innovation Projects

About the author


Altin Kadareja, MSc, passionate about innovation management has experimented several risk management techniques in innovation projects in Italian banks. Holds a Master of Science degree in Economics and Management of Innovation and Technology from Bocconi University, Milan. Former organizational change consultant focusing on business process re-engineering. An amateur entrepreneur, already founded a start-up and an economic think tank.

 

References

Astebro, T. and Michela, J.L. (2005), “Predictors of the survival of innovations”, Journal of Product Innovation Management, Vol. 22, No. 4, pp. 322-35.

Carbonell, P. and Rodriguez, A.I. (2006), “The impact of market characteristics and innovation speed on perceptions of positional advantage and new product performance”, International Journal of Research in Marketing, Vol. 23, No. 1, pp. 1-12.

Cierpicki, S., Malcolm W. and Byron, S. (2000), “Managers’ Knowledge of Marketing Principles: The Case of New Product Development,” Journal of Empirical Generalizations in Marketing Science, Vol. 5, pp. 771-790.

Cooper, R.G. and Kleinschmidt, E.J. (1996), “Winning businesses in product development: The critical success factors”, Research Technology Management, Vol. 39, No. 4, pp. 18-29.

Davey, K. (2000). Preventing project cost escalation. Engineering Management Journal, 10(4), 174–181.

Griffin, A. (1997), “PDMA Research on New Product Development Practices: Updating Trends and Benchmarking Best Practices”, Journal of Product Innovation Management, Vol. 14, pp. 429-458.

Henard, D.H. and Szymanski, D.M. (2001), “Why some new products are more successful than others?”, Journal of Marketing Research, Vol. 38, No. 3, pp.362-75.

Raftery, J (1994), Risk analysis in project management, E & FN Spon, an imprint of Chapman & Hall.

Schmidt, J.B., Sarangee, K.R., and Montoya, M.M. (2009), “Exploring new product development project review practices”, Journal of Product Innovation Management, Vol. 26, No. 5, pp. 520-35.

Voss, G.B., Sirdeshmukh, D., and Voss, Z.G. (2008), “The effects of slack resources and environmental threat on product exploration and exploitation”, Academy of Management Journal, Vol. 51, No. 1, pp. 147-64.

 

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