risk management, manage,mment of technological innovation, kv patri 1 innovation is an uncertain...

Risk Management, Manage,mment of Technological Innovation, KV Patri

1

Innovation is an uncertain process

• The development of a new and innovative product necessarily implies that at least some steps of the process are being done for the first time. Hence the spectrum of uncertainties is larger than in traditional industries.

• There are 3 types of innovation uncertainty factors:

- Market Uncertainties

- Technological Uncertainties

- Supply Uncertainties


2

Risk Management


3

Risk Management


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Market Uncertainties

• According to Crockford (1986): “The launching of any new product involves risk that, however well the market has been researched, customers may reject it. The proportion of new products which survive to gain a significant market share is quite small. Even if it is well established, there is always the possibility that a change in needs, attitudes, taste and fashion may render it obsolete.”

• There are two kinds of high-technology products:

- Commercial

- Institutional


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Commercial High-technology Products• Products designated for a large customer base.

• Examples: general purpose servo drives, MS Word software, PCs, biotechnology products.

• Market uncertainty can be reduced by thorough preliminary market research.

• Larger risk than institutional products. But, if successful, returns can be equally high.

• Market uncertainty can be reduced by reducing the lead time for development. Give all the necessary support and resources to the R& D team. The shorter the R&D time span, the better are the chances that the findings of the market study will still be relevant and accurate.


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Institutional High-technology products• Products designated for a specific single customer or a small group of

customers.

• Examples: Servomotor for injection axis of E-IMM, communication systems, information systems, traffic control systems, military high-technology systems.

• Supplier and receiver may have different interpretations of specifications. Communicate well with customers. Representative of customer may change. Maintain continuity.

• Give all the necessary support and resources to the R& D team to minimize lead time. The shorter the delivery time, the higher is the probability that the same people who represented the customer when the system was specified will be around to take delivery.


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Three general rules for reducing market uncertainties

• Maintain stability of market: conduct a solid needs analysis.

• Avoid depending one single large project: have no more than 10% of R&D resources to one project.

• Prepare contingency plans if any project has been given more than 10% R&D resources.


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Technological uncertainties

An innovative product has always new features : new concepts and ideas, novel product architecture, incorporation of new components and materials, and/or application of new technological processes.

Study the case study “Beating Concorde” here.


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Supply Uncertainties• An innovative product usually has many innovative

components, the presence of which implies certain supply risk.

• Traditional manufacturing often employs JIT. This may not be applicable in the case of innovative projects.

• Three simple rules for R&D projects:

- Avoid relying on a single supplier.

- If you have a choice between a novel system architecture rather than a critical component to achieve competitive advantage, choose the former.

- If a supply problem arises, immediately take contingency steps.


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Productmarket

pressures

Factor marketpressures

Techno-logical

pressures

Operatingand

organizational pressures

Technicalappraisal

Topmanagement

decisionProposals Innovate

How decisions leading to technological innovations may be made

Reject,delay

Develop

Furtherstudies

Level ofcommitment

Highermanagement

values andstrategic goalsExternal

Information(inventors,literature,

competitors,etc.)

InternalInformation(R&D results,

idea fromproduction and

sales depts,etc.)

Results


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Risk Analysis• Institute a formal, internal Risk Analysis Group (RAG) for

each major project.

• Identify all major risk areas.

• After due discussion, estimate a probability of success (or failure) for each factor.

• Identify the consequences of failure. Estimate the cost of each failure.

• Multiply, failure probabilities with respective costs of failure.

• Decide.


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R&D Project AppraisalTwo methods:

1. Evaluate expected costs and benefits. Sum them up. Determine benefit-cost-ratio as a measure of return on investment.

2. Ansoff’s method: Determine Figures of Merit for (I) Profit, and (ii) Risk.

Often the method is a mirage because all the terms involved need to be estimated subjectively but consistently across all projects on hand.


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(profit)Merit of Figure

FORMULA sANSOFF'


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Where

(Risk)Merit of Figure

)( (Profit)Merit of Figure

FORMULA sANSOFF'

p

arr

d

pabt

FM

CFM

JC

SPEPMM


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(Profit)Merit of Figure

etc. staff, ,facilities extra ofcost Total

research applied ofcost Total

resources shared fromfactor Saving

costt developmen Total

fit Strategic

npenetratiomarket successful ofy Probabilit

Success ofy Probabilit

lifetimeover earnings totalEstimated

Merit Business

Merit calTechnologi

p

ar

d

p

s

b

t

M

F

C

J

C

S

P

P

E

M

M


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RISK MANAGEMENT

Risk Identification

Risk Analysis

RiskAssessment

RiskClassification

Risk Treatment/Prevention


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Risk AnalysisSimplified Delphi Method

[gen Schoon]

1. Form an Expert Group• Odd number, 1 Project Manger + 1-3 Team

Members + 1-3 Experts not belonging to the Project Team + 1 Lateral Thinker + 1 Moderator.

• Decision makers such as senior management, superiors to project team members, and steering committee members should not be part of the group.


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• The estimation of each individual risk is repeated as each milestone is reached.

• All risks are checked if they happen to be on the Critical Path of the project.

• Consecutive risks are also checked.• Consecutive risks are not to be estimated by the

expert members.• It is advisable to use an appropriate software tool.,

e.g. Monte-Carlo Analysis.• Classify the risks.


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200 400 600 800 Loss ($1000)

Pro

babi

lity

100

50

00

P1

P2

P3

P4

Risk AnalysisThe four areas are delineated by the General Manager


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2. The Group of experts checks list of risks:• Advantages of checklists: Simple but

recognizable. Easy to update.• Disadvantages of Checklists: Grows quickly to

extensive volume. Difficult to obtain an overview.• Hence, checklists must be structured.• Classification marks such as GE = general, TE =

technical, AX = auxiliary, BU = business, ST = staff, AB = ambient, SU = supplier, CT = contracts can support structuring the risk checklists.


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3. The expert group estimates and prioritizes

the risks:

• See sample on next slide.

• Estimate in terms of Consequence and Probability.

• Consequence (enterprise view):

High Medium Low

• Probability of happening:

High (>80%) Medium Low (<20%)

• Priority: 1. HH 2. HM/MH 3. MM

4. HL/LH 5. ML/LM 6. LL


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Type of Risk Likely EffectConsequence Probability

Priority

1

5

3

6

4

8

7

9

2

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

abc

x

abc abc

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

H

x

LM LMH

MH

LL

HM

ML

LL

HM

MH

LH

HL


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Risk Treatment: Alternative Methods

Elimination: Changes in the business processes.Implementation of proven technologies.Extensive investments (negative).Cost-benefit ratio versus Risk Probability.

Acceptance: No costs for risk treatment.Contingency fund needed if risk probability is high (negative).

Assurance: Assumption: Risk is assurable.Of interest only if premium to pay risk is low but the risk has a high probability and high losses.

Hand-over: Risk is “handed over” to a sub-contractor.Requires specific form of contract.Is there any benefit in passing risk to the contractor?

Decrease: Preventive actions to be taken.

risk management, manage,mment of technological innovation, kv patri 1 innovation is an uncertain...

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