Nst 21413 Industry Week Article 613b73966b246

How to Manage the Risk-Reward Balance of Innovation

Sept. 10, 2021

The heads-down nature of many resource-challenged manufacturers often makes it challenging to uncover problems related to their business, customers and emerging markets. SMMs need a better process for discovering problems, delivering great solutions for their customers and becoming irreplaceable. (Hint: If you are solving problems for customers, you are more sustainable and you can have higher margins.) But you won’t get there by focusing exclusively on your current operations. You must experiment and iterate.

Experimentation and new product development are among the keys to growth and a sustainable future. You don’t know where the market will go, which is why you experiment. And that involves risk. The risks of innovation could include wasted resources, not meeting expectations or a lack of return on investment. You will spend time and money on things, some of which will not work out. But on the flipside, benefits of innovation can include efficiencies, growth and increased competitive advantage. You can mitigate risk with a disciplined approach to new product development.

Avoid Falling Into the Trap of Fixating on Costs

If SMMs don’t overcome their fear of risk, they won’t innovate. That fear is often based on the unknown. Manufacturers work hard to reduce uncertainties in their operation. They often focus on cost, which is a known quantity. But “cheaper” is where innovation goes to die. Competing on cost makes you replaceable.

Just as there are risks of a failed innovation, there are risks associated with not innovating. You may not be adding value to your customer, and you may no longer be viewed as a partner in their future.

SMMs can reduce their risk by tying innovation initiatives to market needs and meeting unmet needs. What are your customers asking for downstream? How do they think their needs will change when they look around the next corner or two?

The Spectrum of New Product Development

There are three horizons of growth, as outlined in 2000 by McKinsey & Company. New product development (NPD) follows a similar trajectory. The three horizons are:

  • Maintaining and defending the core business: This is the “close in” horizon, taking products or services you already have and improving them and the margins. About 70 percent of NPD falls into this category. This could be a machine shop improving the quality of a product or lowering the cost of production.
  • Nurturing emerging business: This is more of a midway point of NPD, extending beyond the traditional dimensions of the business model. This often involves some type of investment (and risk), such as launching a new product or expanding into new geographies or markets. This is about 20 percent of NPD. This could be new marketing and sales strategies for new markets, or adding some type of data collection or monitoring to operations.
  • Creating a genuinely new business: This is looking beyond the business of today to the business model of the future. It’s at the disruptive end of the NPD spectrum. These ideas may be unproven and potentially unprofitable for some time. This would encompass research projects, pilot programs, or new revenue lines that require a significant investment. Obviously, the risk level is much higher. This is about 10 percent of NPD.

A Disciplined Approach Starts With Customer Focus and Readiness

Being customer-centric is a huge advantage in NPD. If you know what your customers’ pain points are, and you know what they are worried about in the near future, you are in a better position to bring them additional value. While there is no question that resiliency is part of the manufacturing model, the long-term view also is essential.

For manufacturers, each horizon should include elements related to:

  • Product
  • Process
  • Distribution channel
  • Customers

Ensure your staff is aligned on the goals and impacts for each element.

It’s also important to measure your internal readiness for experimentation. Consider:

  • Appetite
  • Timing
  • Opportunities
  • Market Changes
  • Resources
  • Leadership

Keep in mind that there is never going to be a time in which everything aligns. If perfection is the enemy of progress, fear of failure is the enemy of innovation.

4 Things to Ask Throughout Experimentation and Iteration

The iterative process for NPD involves design, prototyping and testing. And then keeping what works and refining the rest. At every iteration, ask:

  • Will you be solving an important problem?
  • Does this work actually solve the problem?
  • Do you have resources to produce and deliver this in its current iteration?
  • Will anybody buy it (and at what cost)?

Innovation is Also About Managing Risk-Reward

Innovation comes with risk, but the benefits of innovation can be significant. This is also where the disciplined approach and commitment pay off. Manufacturers that build NPD into their culture develop intrapreneurs – staff members with an entrepreneurial spirit. The MEP National Network is here to help you achieve growth through innovation and new product development. Contact your local MEP Center to get the conversation started.

About the author: Brandon Cornuke

Brandon Cornuke is vice president of strategy and vice president of startup services for MAGNET, which is part of the Ohio Manufacturing Extension Partnership and the Manufacturing Extension Partnership National Network. He is responsible for the Startup Services division – known as the Iterator – and leads the efforts to help innovators turn manufactured product ideas into growing businesses. He specializes in strategy development, business model design, and lean innovation.

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