Synopsis
Session 5: Managing Risk in Innovation
Presented by
Main Speaker – Mr. Adrian D. PereraPanelist – Mr. Krishan Balendra
Panelist – Ms. Deepthie Wickramasuriya
Synopsis – Session 5: Managing Risk in Innovation
In today’s highly competitive environment, innovation has become inevitable to create valueand spur growth. However, additional value may not be able to create through innovationalways or may not be commercially viable. Therefore, the risk of failure is an inherent aspectof innovation. The success of innovation depends on the design skills of its engineers, uponthe effectiveness with which it can mobilize, apply, and develop its distinctive knowledge ascircumstances change. Identifying, analysing and managing these risks (market, technology,environment, and organisation related risks) will lead to effective decision making in variousinnovation projects. How best organisations manage innovation will be dependent on howbest they manage the associated risks. The focus of this session will be the role ofprofessionals in innovation process and particularly in managing risk aspect.
Presentation
on
Managing Risks in InnovationBy - Adrian Perera
MBA (Sri. J), FCCA, FCMA(UK), FCMA, FCPM, AIB
Chief Executive Officer
RAM Ratings (Lanka) Ltd
“Only the Paranoid Survive”
“Only the paranoid survive,
Sooner or later something fundamental In the world will change”
WANG Computers
Success breeds success but it also builds arrogance.
Blackberry
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RISK MANAGEMENT ISN'T THE ANTITHESIS OF INNOVATION;
IT'S THE ESSENCE.
Premium Price Tools undercut by price
Competition
Leased Tool sets
Premium Products
Risk Management and innovation are not opposites, but successful innovative companies
core competency is risk management
Risk management should not be the break on innovation but the accelerator
INNOVATION IN SRI LANKA
Global Innovation Index Sri Lanka 98 out of 142
Malaysia 32
Doing Business Index 81 up from 96
R&D has declined as percentage of GDP from 0.4% to 0.11%
Not bad but room for improvement
R&D AND INNOVATION
R&D Involves Investment in new discoveries, improving capacity.
Willingness to forego current profits for future unknown profits.
Successful R&D can lead to new innovative products but no guarantee
Innovation may not require funding and very focused on key objective.
• "At work for a better life, a better world for all."
• Objective is not protecting disabled people but finding employment for them
• Manufactures very high quality medical equipment
• 99% of employees disabled
SLINTEC
• Established in 2008
• Opened the nano Technology and Science Park in 2013 Oct 21st
• Partners,• Brandix, Dialog, Hayles, LoadStar, MAS, LANKEM, National
Science Foundation
• NASA has over 200+ Sri Lankan Scientists
CHALLENGE
No Venture Capital industry
Herd Mentality
VC managed by Bankers and Finance people
Too much focused on numbers
Few engineers & Scientist on Board
THE BEST WAY TO PREVENT SURPRISE IS TO CREATE ONE
DARPA
US Solution
Sputnik 1 & 2 in 1957
Explorer 1 in 1958
Ambitious Goals
• Improved water purification technology to reduce logistic burden.
• 10% of casualties due to transport of water
• Light weight water purifier.
Temporary project teams
• High performing contract project teams.
• Partner with Small firms
Independence
• Stealth was not requested by Air Force or Navy
KEY TO DARPA’S SUCCESS
Motto “creating and Preventing Strategic Surprises”
Expanding Basic Science and Solving Society’s Problems
PURE BASICRESEARCHBOHR
USE-INSPIREDBASIC RESEARCHPASTEUR
PURE APPLIED RESEARCHEDISON
UNNAMED
QUEST FORFUNDEMENTALUNDERSTANDING?
PRACTICAL USE?
NO YES
NO
YES
The late political scientist Donald E Stokes distinguished four categories of research and highlighted how basic science can be employed to create practical applications.
Bohr’s Quadrant. Work here is curiosity-driven basic research, which seeks foundational knowledge without consideration of practical use. This quadrant is named for the early-20th-century atomic physicist Niels Bohr.
Edison’s Quadrant. This Category is pure applied research, aimed at finding a solution to a practical problem, and has no interest in explaining or understanding the phenomena of a scientific field. It’s named for the inventor Thomas Edison.
Pasteur’s Quadrant. Research here expands basic scientific knowledge in order to meet pressing societal needs. This quadrant is named for Louis Pasteur,
a founder of the field of microbiology, who invented ways to prevent disease and food spoilage.
Stokes didn’t bother to give the fourth quadrant a label; both the science and the use here tend to be uninteresting.
SOURCE DONALD E. STOKES, PASTEUR’S QUADRANT: BASIC SCIENCE AND TECHNOLOGICAL INNOVATION, BROOKINGS INSTITUTION PRESS, 1997
MODEL USED BY DARPA
Basic Research –
• Blue Sky research,
• Fail due to step motherly treatment
• Takes a very long time to give commercial results
• Eg: Nuclear Energy
Pure Applied Research
• Takes around 3-10 years
• Light Bulb
User Inspired Research
• To address societal issues
• Corporates should pay more attention to Pastures quadrant whilst allocating resources to others.
• This gives a balance portfolio
LINEAR MODEL
Observation
Conceptualization of
problem or need
Conceptualize
solution
Technical definition
Experimentation
Prototype Perfection PatentingCommercialization
LONG TERM VISION
• Identification –Learn from Toyota (started as a Textile firm)
– Cost competitive Model Reduce cost by 30% within 3 years
– Partner with Small firms
• To improve Productivity –
– Robo Technology started in 1970 by 2020 in all areas such as “Partner Robots”.1st Installation in 1980.
– Smart Mobility
- Can we have a 20 year plan?
PROJECT IDENTIFICATION
Project Identification and Prioritizing
Panasonic has a 300 year plan
Future generation kept informed.
(5,000 years)
1953 started the R&D Center for new product development and basic research.
GET THE BEST
Select the right project champion
Do not have them in the permanent payroll
Commitment and focus from the very top.
Play to win and do not play not to lose.
Minimize number crunchers
Attractive remuneration package
Retention is the key
CONCEPTUALIZATION
• Clear definition and expected out come.
• New thinking to the same game,
– When a company finds its easy to make a buck and hard not to make a buck it losses the disciple to face hard time.US auto mobile industry. There were 1,800 manufactures now only a few survive
• Large - Low fuel consumption
Small & Fuel efficient
• Futuristic outlook
– May not come from the same industry people
• Garments to Technology
US Cars
Japanese Cars
TECHNICAL DEFINITION
Spot on with the definition
• Kodak Failed to define the Photographic Industry
• Success was its enemy
Small teams
Harley Davidson Perfume
Clairol – Yoghurt Shampoo
Proto Typing
Second largest consumer of finance & time
Have a risk governance framework
Stakeholders have come to the pinnacle in their patient curve
Resist to deliver a throw away product,
– Requirement Risks
• Smokeless Cigarettes, RJ Reynolds spent USD 325 Million a failure product could have been a life saver
– Technical Risks
– Technological risks
– Market risk
– Schedule Risks
MITIGATING THE RISKS
Allocate Additional Resources
Have several prototypes and levels of testing
Obtain feed back
• Apple Newton failed but paved the way for IPAD
Be ready to change course
New Coke Vs.
Old Coke
PERFECTION
Final Phase
Re-look at the competitive landscape
Vs. HD Lost
What is the new value proposition
McDonald Arch Deluxe (failure) at $2 compared to the usual price of $0.99
Solo or Join with another can give more value
Leasing companies and vehicle importers +
Pricing
Packaging
Product life span –
Perfection can also be your enemy
Commercialization
Patent the product – Basmati Rice US holds the patent.
o Patented in 1997
o Special forces team will be leaving taking away the knowledge
o Finance & marketing play a major role
o What is Finance professionals role?
RISK MANAGEMENT IN INNOVATIONCFO’s ROLE
•Risk Management helps to keep the feet on the ground with a clear focus that no business model is perfect and needs refinement.
•Should not be a break on innovation but an accelerator.
•Real discipline in risk management means more funding for R&D.
RISK MANAGEMENT IN INNOVATION CFO’s ROLE
FUTURE RISKS IF THERE IS NOINNOVATION
Risk Event Type(H/M/T/S)
Impact(Rs.)
Likelihood[%]
Severity(Risk Score)
[H,M,L]
1.
2.
3.
4.
5.
Types:H – Human ResourceM – MarketingT – TechnicalS- Strategy
Risk:H – HighM – MediumL – Low
PROBABILITY IMPACT ANALYSIS
CAN ORGANIZATION GET THE UPSIDE RISK?
Yes if Innovation and Risk management are married properly
INNOVATION CAN BERISK TAKING
Most successful companies in any economy got there by seeking out and exploiting risks and not by avoiding risk.
Across time on average risk taking has paid off,risks exist when imporatant innovations are not under taken
At the same time there is a large number of firms got destroyed due to risk taking
Risk taking is not gambling or going with the herd
No risk no innovation but some innovations will never be commcialisedand may never progress and waste resources minimizing this is CFO’s role
CFO’S ROLE
Develop futuristic vision GHD is a global engineering ,environmental and consulting firm, there vision
Have a system to get innovative ideas but ensure there are no leakages of ideas
Have a innovation selecting model for risks identified
Democratic and transparent decision making for selecting the innovation
KEY ISSUES CFO’S WILL FACE
Strategic Alignment– Aligned
– Not Aligned
• Shoyeido is a 300 year old incenses company innovations have been in full alignment to the company objective of “life with a fragrance”. Annual turnover is as at 2010 was around 3 Billion yen
Sustainability, Innovation and corporate strategy aligned
Toyota adopts sustainable innovation through vehicle recycling, efficient fuel usage, etc..
STAKEHOLDER COLLABORATION
Very important not to release a product with high maintenance.
Internal Stake holders • breakdown department silos and knowledge
sharing• Improving linkages to draw up diverse knowledge
External stakeholder go beyond traditional boundaries,
P&G Connect & Develop website focuses on getting solutions to issues and challenges it faces
BMW’s virtual innovation agency request ideas and successful ideas are paid Euro 500-60,000
Identifying enablers and barriers
− Scale
− Industry of operation and regulatory environment
− Organization culture and leadership
− Assets and capabilities to deliver
− Risk tolerance
Approach
− Top down and bottom up
− KPI’s
− Implement a innovation risk management framework
Analysis of innovation risk Cash flow impact if innovation is not taken
Cash flow impact if innovation is done
Get actively involved in market research (Leave the comfort Zone)
Similar to companies having a portfolio of investments develop a portfolio of innovations in different stages .(pastures Model)
Look at innovations through acquisition
Change the mind set “failing is bad”
Edward Deming's advice to Japanese was reduce reliance on numbers the logic being not future focused.
RAM Ratings (Lanka) LtdNo 11 Melbourne Avenue
Colombo [email protected]
Tel: 2553089Fax: 2553090
Thank you
Session (Number)
SESSION TITLE
Synopsis – Session 5: Managing Risk in
InnovationMain Speaker
Mr. Adrian D. Perera initiated his speech by describing the current situation of the Country, andaccording to his view Sri Lanka is still in the growing stage helped in part by the tourism industry. Astourism has become a focus of Sri Lanka the hotel industry will obviously reap the benefit, andfurther to the growing trend in the hotel industry increased foreign investment is being provided tothis particular industry. However, with the increase in foreign investment in this space, localcompanies may face mounting challenges in order to compete as perception, both locally andglobally, is that foreign hotels carry with them higher quality than local hotels.
Globally, there is an agreed-upon belief that industries which are successful breed successfulparticipants, however, with this success one must cautious to ensure that with this successarrogance is curtailed. When examining the case of Blackberry, there were initially an innovativecompany that captured their particular market, however they grew complacent and stoppedinnovating.
Session (Number)
SESSION TITLE
Synopsis – Session 5: Managing Risk in
Innovation (Contd.)Mr. Adrian D. Perera compared a normal tea cup used by hotels in Sri Lanka against a cup thatStarbucks/Coffee Bean & Tea, where tea served in a normal tea cup with cost the consumer LKR. 300and the same tea served in a Starbucks/Coffee Bean & Tea cup would cost the consumer LKR 2,000. Mr.Adrian D. Perera feels that this is due to a perceived value that the consumer would have towards aproduct offered by Starbucks/Coffee Bean & Tea as opposed to the same tea offered by a local hotel. SriLankan producers of tea should recognize this factor, and as the second largest tea exporter in the worldwe as a country should identify this factor and work to innovate our culture to this mindset.
Research and complex planning are not always required for innovation to be a success, simplepsychological changes in the minds of our leadership and people can lead to innovation. In examiningthis point Mr. Adrian D. Perera provided a recent example in the pastry industry, recently aninternational company came into the local market with the perceived goal of being the leading providerof short-eats and cakes, this international company identified a local short-eat in high demand (fish bun)and provided the same item (with a slight change in ingredients) and sold that item for a significantlyhigher price. While certain consumers were able to, in essence, get the same item for significantlycheaper at a local shop they elected to buy this product for this international provider because thisprovider utilized shops with better ambience. As Sri Lankans we need to look at this example and seehow we can change our current business practices to evolve when faced with international competition.
Session (Number)
SESSION TITLE Mr. Adrian D. Perera emphasized that “… risk management isn’t the antithesis of innovation, it is theessence.” Risk management and innovation are not opposites, but can be an innovative company’score competency. Further, risk management need not slow down innovation but be the driving forcefor innovation. CFOs and financial personnel should be flexible when it comes to assessing potentialproducts/services for innovation and look at the potential lasting impact of an innovation instead ofthe one year forecast. Having this mindset will allow local companies to strive to find solution to thechallenges faced in the environment that the companies are operating in.
According to Global Innovation Index, Sri Lanka is 98 out of 142. In stating this it important to notethat Sri Lanka is not ‘bad’, however there are significant areas for improvement. CFOs should look atinvesting in R&D and be more ready to take risks if the potential long-term reward is worth it.Currently in the local context there are several challenges that need to be addressed beforeinnovation can be fostered. The main issues are the dearth of venture capitalist (banks and financecompanies are the source of capital) and focus on short-term performance. While reviewingprojected cash flows and using financial analysis such as ROE is okay this is resulting in a barrier toresearch and development. In assessing the potential returns of a project one must utilizeengineering and other technical people along with accountants. When examining severalinternational companies there are many success stories for how innovation has drastically increasedthe growth rate of those companies (for example, Toyota).
Synopsis – Session 5: Managing Risk in
Innovation (Contd.)
Session (Number)
SESSION TITLE Companies in Sri Lanka should carefully choose project champions for innovation projects and theseproject champions should not be compensated based on a fixed salary but should be driven by aperformance based salary – further, these project champions should be recruited from outside thecompany on a temporary basis.
Activities aimed at prototyping should be encouraged however, the finance team should assist byproviding a risk governance framework for the project to be developed in. Otherwise costs mayspiral out of country and the project will be tabled as a loss. In order to meet increasing prototypingefforts additional resources should be allocated to mitigate risks. Further, in examining thecompetitive landscape we should not operate in silos but work in collaboration with othercompanies (even competitors) in establishing products that benefit the market as a whole.
Mr. Adrian D. Perera concluded his speech by underscoring the key message: without risk there is noinnovation.
Synopsis – Session 5: Managing Risk in
Innovation (Contd.)
Session (Number)
SESSION TITLE Panelist – Mr. Krishan Balendra
Mr. Krishan Balendra provided insight on how his company, John Keels, managed risk while strivingfor innovation. He highlighted that the key risks affecting his career were centered around this thedevelopment of building projects, these were: Funding for the projects; Construction/Raising of theproject; and the Actual operations of the Project.
Panelist – Ms. Deepthie Wickramasuriya
Risk management and innovation should not work in opposition to each other. The core competencyof successful innovative companies is risk management; however, risk management that supportsinnovation is new to Sri Lanka.
We should not hope for innovation to naturally occur, innovation can only occur when theorganization fosters an environment where there are opportunities for innovation. Risk should bemanaged in a way to maximize opportunities to provide the organization with value.
Synopsis – Session 5: Managing Risk in
Innovation (Contd.)
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