Last week, we started a two-part series on risk and new product development (NPD). We described, in some detail, uncertainties in the customer and financial realms. In this post, we discuss the risk categories of technology and people. Let’s first quickly recap customer and financial risks to innovation.
Customer and Financial Risks in New Product Development
Customer risks center around knowing and understanding customer needs. Successful innovators clearly identify their desired market segment (e.g., value, mid-market, luxury) and strategically design features that appeal to those customers. Second, successful firms match their NPD processes to the interactions with end-users. Typically, customer risk is reduced when you know your customer better and have direct, frequent interfaces with consumers.
Likewise, financial risks for innovation are introduced based on the overall strength and maturity of the industry as well as the internal financial depth of the firm. For example, a client company of mine was losing revenue quarter-over-quarter in an aging industry with loads of competition. As their financial risk increased, they needed to adjust the NPD processes to add cost-efficiency as a strategic goal. Other firms might take a similar opportunity to invest in new technologies. However, customer and financial risk are linked with technical and people risks to determine the innovation strategy and corresponding NPD process.
Technical Risk in NPD
As indicated, product development risk spans technical capability. Firms that outsource (license-in) technology may have lower innovation costs yet may miss longer-term design opportunities. In contrast, companies with large in-house R&D centers must carefully balance technical risk with the other elements of NPD uncertainty.
For instance, owning and developing proprietary IP may be a strategic objective of a firm. Tied with close customer interactions, the financial risk of technological development allows longer-term NPD projects to advance. Understanding that R&D requires different employee skill sets as well as a different approach to markets and competitors, can lead to technical advantages. On the other hand, a company that seeks quick-hit, low-quality, high-volume sales will not necessarily benefit from in-house R&D.
As discussed above, staffing in-house R&D requires different people capabilities than outsourcing product design and engineering. Today, many companies use cheap overseas labor as stand-in development resources. By purchasing fully finished goods and re-labeling for local sales, these firms save direct R&D costs. However, in this situation, people skills must concentrate on supply chain and logistics, while R&D for “pure” technical development takes a back seat.
Nonetheless all NPD teams must be collaborative and cross-functional. Whether R&D is in-house or not, the NPD team must understand the capacity of the technology to create the necessary product features. Trust is vitally important among team members and leadership regardless of NPD process sophistication. I have seen too many companies fail in their innovation efforts due to financial risk-aversity manifested in lack of team trust and subsequent lack of technical and marketing investment.
Some questions you might ask as you compose NPD teams to handle innovation risks include the following.
- What skills does the team need and which ones need further development?
- Do team members have the capacity to take on radical innovation work?
- Are our salaries and benefits competitive within our industry?
- Do our teams interact with customers in a collaborative and cross-functional way?
Four Risk Elements in Product Development
New product development is inherently uncertain. Yet, addressing four key elements of risk by strategically designing your NPD process can both manage and mitigate investment uncertainties. By understanding market segments, a firm addresses customer risk. Identifying industry maturity and competition as well as internal strengths and weaknesses addresses financial risk.
Technical risk is tied to financial and customer risk. Proprietary design and development require financial investment for in-house R&D based on close, frequent customer interactions. Product development can occur successfully with external technology development, but a firm must be very clear on those objectives and boundaries. Adding strength in supply chain logistics and HR will benefit an outsourced strategic innovation approach.
Finally, the capabilities and skill sets of employees and partners intersect all other categories of strategic NPD risk. People serve as bridges of communication to customers and the NPD teams must be both collaborative and cross-functional. You’ll want to increase the number of creative types on your team if you’re seeking radical innovation. And, you’ll want to increase the number of analytical types if your NPD projects involve incremental tweaks to keep up with the competition. Matching and adapting your people resources to the strategic NPD process is critical to success.
Not sure where to start? Join me every Tuesday for six weeks, starting 24 January 2023 for a deep dive on Designing a Hybrid Product Development Process. We will cover basic NPD processes and give you tools to implement the best of WAGILE Product Development and Lean NPD. Save $50 if you register by 30 November 2022. Register here.
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