Systematic risk management for the innovative enterprise

We present systematic decision support for innovation management in this conceptual paper. At the core of our system is a dynamically evolving risk taxonomy that can be mapped to either qualitative or quantitative decision processes. In the context of a portfolio of potential and actual business offerings, we discuss how to spread, hedge, or mitigate risk, and how these activities constitute enterprise innovation management. Problem: The modern enterprise that bases its business models on innovation requires a management system that provides both encouragement for risk taking and agility at navigating disruptive changes in the ecosystem. Yesterday's innovative products and services are today's commodities. In order to maintain a high profit margin and characterization as a growth company, the enterprise must generate new ideas that lead eventually to new lines of business and new business models. Disruptive changes in an enterprise ecosystem are accompanied by a high level of technological, market, organizational, and resource uncertainties. Additional management challenges come when the innovation idea is not perfectly in line with company's current strategy, which is a frequent case when the innovation would mean a new line of business for the company. Many of these challenges could be met with the aid of a systematic support system for decision making in order to manage the innovative enterprise throughout the innovation life cycle from idea to the termination of line of business. Current understanding: While the support of operative management is well developed in the majority of enterprises, much less attention has been paid to the support of strategic management. There are tools and techniques available to support strategic decision making related to new innovation and business development, such as various kind of foresight techniques, business insight tools, SWOT and Delphi analysis etc. However, while these tools and techniques may give valuable support for decision making at some specific phases of new innovation development, systematic support for strategic decision making related to new innovation (business) development from an idea through development and offering phases until the termination of a line of business is lacking. Research question: The work is based on a large interview study done by VTT in 2005 about innovation management practices in companies and public organizations. The study identified management of future uncertainty as one of the main challenges to corporate executives. That initiated the research question of the work: How should future uncertainty be managed during the entire innovation life cycle? Design/methodology/approach: Our approach is based on constructivist methodology, focusing on different viewpoints and lived experience of organizational members and is committed to bringing up multiple voices and viewpoints. The authors have wide experience in research, development and consultancy work in the fields of technology foresight and risk management as well as in the development of new technology and services. We draw on this experience, at first, to analyse the material of the interview study followed by the specification of the research problem in a more detail, and then, to develop tools and methods for the management of the uncertainty. The paper is a part of a series of papers related to the major research question. In our previous papers we have suggested a framework model for the strategic decision support of innovation development with the focus on the front end activities of innovation process (Paasi et al. at EuroMOT 2008, Luoma et al. at ISPIM Symposium 2008). In this paper we enlarge the viewpoint to cover entire innovation life cycle and to suggest how the generic methodology of risk management could be applied in innovation management. Risk management has been frequently used in financial sector as well as in safety engineering but rarely applied in business management in general. The paper is conceptual and based on a working hypothesis "The potential and actual lines of business of an innovative enterprise can be efficiently and usefully managed by means of decision support based on a dynamic risk taxonomy". We enumerate four explicit experiments that should be performed to advance the science supporting the working hypotheses. We invite scientific society to perform and report the results of these experiments. Findings: We developed at conceptual level a framework of risk management for systematic innovation management. The framework consists of four main steps and process building blocks: 1. Taxonomy (open-ended hierarchical system) of potential risk factors that may potentially affect the organization either positively (opportunities) or negatively (threats) for the identification of risks, 2. Sets of questionnaire for expert evaluation derived from the risk factors for the qualitative or quantitative analysis of risks, 3) Evaluation and decision supported by risk profile and consequence analysis, and 4) Implementation and following accompanied by evolving the risk taxonomy. The framework of risk management for systematic innovation management is to be validated. Performing of the explicit experiments suggested in the paper will be an important part of the validation. Contribution: Some of the individual building blocks described in this paper are well known and widely used. However, our concept for their integration into a decision support system is novel. Accordingly, the main contribution of the paper could be summarized as a detailed presentation of the working hypothesis "The potential and actual lines of business of an innovative enterprise can be efficiently and usefully managed by means of decision support based on a dynamic risk taxonomy". Practical implications: If the working hypothesis will be validated (even if only partially), the framework of the risk management presented in the paper would offer a systematic way for innovative enterprises to manage uncertainties related to technology, markets, organizations and resources throughout the innovation life cycle from an idea to the termination of line of business. Before practical applications, the conceptual model presented in the paper has to be developed into a practical real working tool.