Risk is typically viewed as a negative outcome in response to an action taken.  In business and innovation, we must take risks to increase revenues and develop new products.  However, with new product development, we try to manage risks via step-wise investment accompanied by increased technical knowledge.

In innovation, risk appears in four categories:  customer, financial, technical, and people.  Of course, these categories overlap.  Yet taken as a whole, they represent a strategic approach to product management.  In this post, we’ll look at customer and financial risks and next week we’ll touch on technical and people risks.

Customer Risk

Generally, we’d like to think of our customers as real human beings with thoughts and feelings, opinions, and wants and needs.  However, on a macro-scale, customers are simply different market segments.  We recognize customer risks by understanding these different segments and whether/how we will address their specific needs.

For instance, most markets include several different price-point customer segments.  My local supermarket sells a no-name 6-quart slow cooker for $29.99.  I can buy a Hamilton Beach™ or Crock-Pot™ brand slow cooker at a department store for $69.99.  A high-end programmable model with added browning feature is available at a specialty kitchen store costing $329.99.  If you are designing and developing kitchen appliances, the customer segment is a strategic risk element.

Customer risk is also evident in how closely the NPD team interacts with consumers and end-users.  Using lead customer panels and focus groups on a routine basis can increase familiarity with your end-users and decrease risk.  Relying on market data or serving a wholesale customer distances the product development team from the end-user and introduces risk to requirements development.  Therefore, addressing strategic customer risk is one of the first elements that must be identified in designing an innovation system.

Financial Risk

Financial risks in innovation are broad and multi-faceted.  As indicated, deciding which market to serve is mostly a customer risk but also impacts financial risks.  A high-volume, low-margin business may return the same gross revenue and net profit as a low-volume, high-margin business.  On the other hand, a growing industry with little competition offers a very different financial outlook than a mature industry with many advanced competitors.

In addition to broad industry financial risks, product development teams must examine the health of the company’s finances.  Highly leveraged start-ups face different financial risks than do established brands with known technologies.  Some questions to address with financial risk include the following.

• What does the firm’s balance sheet look like?
• Is the industry experiencing growth or decline?
• Are our revenues growing or falling flat?
• What is our investment risk tolerance?

Customer and Financial Risk in Product Development

While there are four primary risks in strategic innovation, understanding customer and financial risks creates a foundation to begin building an innovation project management process.  For instance, if you know your customers well and can easily predict and validate new product feature sets, your new product development system will lean toward risk-aversion.  At the opposite end of the spectrum, if you are developing new technologies with strong financial backing, then a more Agile approach may be appropriate.  In this situation, iterating to fully identify scope and scale of design addresses risk with speed and flexibility.  In most cases however hybrid waterfall-Agile processes for new product development serve to be most effective and efficient. 

Learn More

Not sure where to start?  Check out the YouTube series of the author reading The Innovation PROCESS  Book where we discuss each of these four risks within the context of four common project management systems.

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