Managing Unknown Unknowns in Innovation

The external environment of emerging and technology-based industries will tend to be more uncertain as the world moves further into the twenty-first century. Any changes in an innovation firm’s external environment that are driven by the forces of technology, economics, and other influences impede the ability of strategic managers to make strategic decisions to keep the firm in pace with the external environment. Despite these uncertainties, the companies which have clearly understood the sources of competitive advantage and combined the required resources and capabilities to exploit innovation, have emerged successfully.

The scope of risk management lies somewhere on the continuum between total uncertainty (unknown unknowns) and total certainty (knowns). Lack of knowledge of future events is called uncertainty, and uncertainty can be both favorable and unfavorable. The probability of the outcomes if they are favorable is called opportunity, and unfavorable is called risk. The aim of risk management is to increase the probability and impact of favorable events and to reduce the probability and impact of unfavorable events.

Innovation Uncertainty

In light of high uncertainty still, more and more technology-based companies (like the prospectors) desire to take risks to create a competitive advantage through innovation. Hence, managing uncertainty becomes the fundamental characteristic of managing the innovation process. There are two primary sources of uncertainty: (1) Market uncertainty and (2) Technology uncertainty. This article discusses uncertainty in innovation from the strategic viewpoint and not uncertainty involving projects.

Market uncertainty

Market uncertainties arise when firms find difficulties in forecasting the demand for their products and are basically related to the market size and growth rates for new products. Forecasting the demand for new products is difficult because most of the forecasting techniques rely on past data and performance, which is not a guarantee for predicting future results. For example, in the past, when Xerox first introduced a plain paper copier, Apple introduced its personal computer, and Sony its Walkman, none of these companies had an idea of the size of the potential market and growth rates of these products.

Technological uncertainty

Technological uncertainty can arise from many sources, such as technology obsolescence, disruptive technologies, architectural innovation, technological evolution, and technical standards and dominant designs. Any form of technological change in the external environment of the industry creates technological uncertainty that generally poses a threat to established firms and offers opportunities for start-ups.

Managing Uncertainty in Innovation

Forecasting the demand for technology-based products and forecasting the impact of disruptive technologies on firms is extremely difficult. For example, Nokia ignored the growing consumer demand for smartphones, and also underestimated the future of smartphones- a disruptive technology product. Therefore, to be successful and manage innovation risks and opportunities, firms must stay in tune with their societal and industry environments and limit their exposure to risk by avoiding large-scale resource commitments. Unfortunately, the risks cannot be completely eliminated from the uncertainties. However, by using the following mitigation strategies, a firm can drastically reduce the overall impact of risks on innovation:

Managing Innovation Strategically

Companies can have difficulty in developing and marketing products if they do not have the knowledge and experience in managing innovation strategically. For example, DuPont, a well-established company during the 1980s, failed to manage chemical and related research strategically. Nokia’s constant decline from 2008 to 2012, which lost 90% of its market value in four years, can be attributed to its strategy lacking consistency in its external environment: it ignored the growing consumer demand for smartphones. To manage innovation uncertainty, firms must constantly monitor their external environment to detect major changes and make strategic decisions to be in pace with it.

Managing Technological uncertainty through Dual Planning systems

Technological innovation is closely linked to organizational change because the commercialization of innovation involves considerable organizational change. Any form of technological change in the external environment of the industry creates technological uncertainty. Integrating a dual planning system (strategic management) into your innovation process can drastically increase the chances of innovation success and minimize the negative impact of risks.

Managing Uncertainty through Strategic Portfolio Management

Strategic portfolio management, as part of a strategic management system, can help to minimize innovation uncertainty and guide the new product development effort. Strategic portfolio management has three basic strategic elements: (1) strategic arenas (or areas)—these are the areas (markets, technologies, and product types) on which the company chooses to strategically focus its limited innovation resources (2) strategic buckets—which is about optimum resource allocation, and (3) strategic portfolio roadmaps: initiatives or plans that depict timelines and milestones. The strategic arenas and strategic buckets play a key role in removing some uncertainties from the strategic planning component of the innovation process. By selecting attractive arenas and optimizing the allocation of scarce resources can enhance strategic success, minimize risk, and increase ROI.

• Selecting Attractive Strategic Arena

As I described above that the market and technological uncertainties are a threat to companies, but they can also offer new opportunities. Choosing high opportunity and high-value strategic arenas where rates of return are higher can support the corporate strategy (attractiveness) provided that the company is capable of exploiting these opportunities. Additionally, selecting high opportunity strategic arenas that fit with the company’s core and distinctive competencies can also support the business strategy, because the company’s product innovation efforts that are based on design and technology strengths can roll out lower cost and highly differentiated products that can command profitable returns. Therefore, using strategic portfolio management to manage innovation can certainly help the firm in choosing attractive markets for higher returns that will increase the probability and impact of favorable events.

• Optimum Resource Allocation through Strategic Buckets

To make the innovation strategy action-oriented the firm starts allocating its scarce resources by splitting them into strategic “buckets” or “envelopes of resources,” based on some important dimensions of strategy such as strategic arenas, business areas, strategic goals, and markets and segments. In this bucket approach investments or resources are divided or spread across many areas or “buckets,” and then combined to form a portfolio of investments with the purpose of optimizing the return. This approach to spreading investment resources is based on the financial principle of diversification. The riskiness risks connected with a single bucket can be minimized by forming a portfolio. Diversification can also reduce the impact of peaks and valleys of the innovation uncertainty outcomes.

Options Strategies

The purpose of real options is also to create enterprise value, just as the purpose of strategy is. Therefore, strategy, real options, and enterprise value are closely connected. In turbulent times, real options such as growth and flexible options can guide the strategy-making process and become important sources to create value. Failure to consider option value can misguide your innovation strategy.

Growth Options

Growth options involve making small initial investments in new technologies and market opportunities without entirely committing the firm’s scarce resources to them. The most important growth options include strategic alliances and platform-based strategies.

Strategic Alliances

In this type of alliance or partnership, two or more firms pool their limited resources or investments to collectively achieve strategically important goals and objectives for mutual benefits. These limited investments offer options for creating new innovation strategies. Strategic alliances can offer many benefits, including competitive advantages to the participants and can also reduce financial and political risks. For example, Shell has made initial investments in joint ventures and other forms of alliances to finance several renewable energy technology businesses, including wind power, biofuel, and solar power.

Platform-based Strategies

A firm can make investments in core products or technology platforms to develop a wide range of innovative products. This reduces financial risk and increases competitive advantage. Examples of core technology platform-based strategies include 3M’s nanotechnology, Google’s Internet search engine, and Qualcomm’s CDMA wireless technology.

Fast-follower strategy

Fast followers are also called late movers. They imitate the technology know-how of others and wait to introduce their products until the market of the first mover’s products is well established. The most successful follower strategy is to grow the niche market created by the pioneer into mass-market by lowering the product cost and improving quality. The major advantage of using a fast follower strategy is that the marketing and technological uncertainties are low because the pioneer has already mitigated the innovation uncertainties. Apple followed a fast follower strategy when it developed and marketed the MP3 player and enjoyed the advantages that come by being a late mover.

References and Further Reading

1. R. Max Wideman, Project, and Program Risk Management (Pennsylvania: Project Management Institute Inc., 1992)), Chapters 1 and 7.
2. Paul Trott, Innovation Management and New Product Development (United Kingdom: Pearson Education Ltd., 2017), Chapter 4.
3. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice-Hall, 2000), Chapters 3, 5 and 11.
4. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 1, 2, 8, 9 and 16.
5. Robert G. Cooper and Scott J. Edgett, “Product Innovation and Technology Strategy (USA: Product Development Institute Inc., 2009), Chapters 1, 4, 5 and 6.
6.  Ashok N., “Managing Innovation through Dual Planning Systems,” A&N Strategy Consulting (June 1, 2017).