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Innovations, unlike the myth, are often practical activities conducted through well-organised projects. Sometimes a single project is involved but in most cases the project is part of a portfolio of projects adding new dimension to the management of risk. For individual projects the paper aims to offer some practical tools that may prevent or mitigate risks in particular at the earlier stages of design. A typical risk assessment matrix is a popular approach in this context. With portfolios of projects selection and prioritisation are emphasised. With shared projects, the higher level of complexity seems to require the help of additional tools such as quality assurance and heightened awareness.
These projects are a testing ground for the ability of participants to balance their conflicting desire to compete and cooperate. Two case studies are presented one for shared projects and the other for a single project.
Key words: innovation, risk, portfolio, shared projects, ERM, FEMA
Biographical notes: Hosein Piranfar (PhD, MSc, BSc) is a Senior Lecturer in
Operations Management, and programme leader of MSc Risk Management,
Business School, University of East London. Prior to UEL, he worked as a
researcher on Complexity and Organisational Learning in Kingston Business
school. His research interests and publications are in Foreign Direct
Investment, Risk Analysis, Operations Management and Organisational
Lewis Comstock (MSc Risk Mgt) is the Quality Assurance Manager for Nittan (UK) Ltd.
He is responsible for all aspects of quality management, including the
implementation of BS EN ISO 9000, liaison with the Loss Prevention
Certification Board (LPCB, London) and other certification bodies such as VdS
(Germany) BOSEC (Belgium), and EU in general. Lewis is an Associate of the
Institute of Quality Assurance (AIQA). Lewis has published two articles with Piranfar.
.[I have cut the following case study from the above long article HP]
2.1. Managing risk in single projects
It is understandable that innovation projects are confined to isolation wards. Some even point at secrecy: “Each innovation project has its own specific attributes which are generally kept secret by a firm to ensure the ‘appropriability’ of the returns from innovation activities”, so much so that the acquirers may have to use publicly available information sources like patent data to assess the quality of a firm’s innovation activities (Heeley et al., 2007; Grimpe and Hussinger, 2008).
Companies with single projects often try to pass on risks to their subcontractors or suppliers, or resort to some other ARTs (Alternative Risk Transfer) including insurance. Nonetheless, considering the anxieties about appropriability or imitation-proof-ability, they also tackle the risks themselves (retention or self-insurance). Excluding the risk management plan, the following are the frequently applied medicine to single projects:
Risk Identification: In this stage, managers identify and name the risks.
Risk Quantification. As fig.1 shows this comprises the probability of risk occurring and its impact normally graded from 1 to 5. The matrix establishes the priority for action.
Risk Response. There are four options here: Avoid the risk. Do something to remove it. Use another supplier for example. Transfer the risk, for instance make someone else responsible. Perhaps a Vendor can be made responsible for a particularly risky part of the project. Mitigate the risk. Take actions to lessen the impact or chance of the risk occurring. Accept or retain the risk (often when it is small).
Risk Control. This is continuous monitoring that may include changing the status of a risk from say, medium to critical.
Fig.1. Probability and impact of risk on the project
1 2 3 4
Single project risk management, however, is rarely the case. Managing risks in portfolios of projects or linking project risks to organisational operations and strategies have added new dimensions to project risks. New solutions stem from studies that look at companies who deal with several projects often managed for others or from a more complex web of relationships and strategies. A principal outcome of these developments in terms of the above scheme of single project risk management is the addition of context to the four steps.
2.2. Evolution: the case of a single project risk
2.2.1. Example from a Manufacturer
An example is taken for the smoke detector manufacturer, Nittan, a Japanese company with a manufacturing facility in England. A new product range, called the “Evolution series” was launched in 2003, to be built on the latest manufacturing technologies, and using microprocessor-based electronics to offer better communication with the control panel (usually located in a remote part of the building) and better sensing technologies.
Early on in the history of the Evolution series, a need had been identified by the hotel industry for a smoke detector which could differentiate between smoke and steam. This was necessary because showers and living spaces are usually adjacent in hotels, and the smoke detectors are placed in the living / sleeping areas, the problem being that steam from the shower could set off the smoke detector and sound the alarm, and the law requires that a fire alarm in a multi-occupancy building means the evacuation of the inhabitants. This is a costly process in terms of time and money, not to mention customer satisfaction. This requirement occurred at a time of increasing pressure from the fire and rescue services to reduce false alarms.
The Nittan parent company in Japan developed a new type of ‘dual photoelectric’ smoke detector which could differentiate between smoke and steam by using coloured light of different wavelengths, this was duly patented and designed for manufacture, then launched onto the market. The market uptake was very slow because, in most cases, customers needed a range of complementary products, for example, heat detectors, flame detectors, call points, intrinsically-safe products, interface and control modules etc, and, without these, the innovative smoke detector by itself was unlikely to be a market leader, however, Nittan is working towards completing this range. Evolution is still evolving!
The Evolution dual photoelectric smoke detector was built on the existing design of plastic body and top cover mouldings, consistent with other Evolution models, with only the electronics and sensing components being unique, the manufacturing technology is conventional in every other respect.
There are a number of reasons for the early failure of products; these are grouped together here under four main headings:
New product development and marketing risks
Lack of commitment by senior managers
The power of legacy products
2.2.2. New product development and marketing risks
Communicating the new product to target consumers should follow a clearly identified market need, or in the case of technology-led markets, should fulfil a perceived need. This is probably best illustrated in the automotive industry, where the need is often created when new technology is available. The fire protection industry in the UK is somewhat cohesive, with its own trade body and trade journal, and most of its manufacturers have a network of distributors, so that communicating new products is quite easy. Nittan’s dual photoelectric smoke detector was greeted with enthusiasm by the industry, and in 2004, the first installation of the Evolution series to include the dual photoelectric smoke detector was completed at the University of Galway in Ireland. However, the combined effect of the lack of complementary products and the success of the legacy products hampered the rapid take-up of the Evolution series.
Marketing risk largely concerns price risk, market availability, and the invasion of imitators. Following the launch of Evolution, copycat products soon started to appear, but, due to patent protection, other dual photoelectric products could not use the innovative part of the product (one company tried, but withdrew its product because of the potential for litigation). To evade imitators, manufacturers tend to risk a hasty reduction in the lead time thus risking ‘premature marketing’ of a product which has not been fully tested or certified, which allows the competitors to seize upon the idea and complete it ready for the market. Apart from imitation, there is the risk of not being able to cope with the various certification requirements that dominate different geographic areas. For example, electrical and electronic products placed on the market in the EU must be certified, the testing and certification being performed by ‘notified bodies’ of the European Union. Placing the same products on the American market would require a separate and different certification regime, with substantial additional costs, in Nittan’s case, a little over £300k. In countries with no certification regime, it is still necessary to obtain certification, but European, and more especially British certification is seen as a mark of quality. A certified product range, however, is no guarantee of a sale in any country.
Nittan’s market is divided between industrial and marine business, and the latter is primarily sold through the Consilium group in Sweden, with the destination being shipbuilding countries like Korea. Marketing in countries with protectionist import polices would have the same effect as marketing in geographic areas without appropriate product certification, the lack of appropriately certified product for example, provides a trade barrier to exports to the Americas.
2.2.3. Unrealistic scheduling
Scheduling for ‘ready to market’ should be a flexible process with key stages allocated to realistic timing to allow for failure/re-design contingencies. Nittan’s products usually pass through the certification process without the need for technical re-assessment, most of the delays being bureaucratic and due to the certifying bodies, a phase which hampers scheduling for product launch and trade fairs. New demands or suggestions from managers ‘scope creep’ also cause delay. Changes made after the certification submission can be costly and will cause considerable delay, in cases of third-party testing, the project may be halted until the revised products are re-submitted.
Coincident with the certification, special component parts may need to be developed in partnership with suppliers. This development may require the production of special tools and the formulation of special materials or individual component certification. All of these factors may increase the ‘product to market’ lead times and should be included as part of the schedule. Pre-production is often considered the same as production except for the scale of quantity, but is often hampered by the need to experiment with new materials, new process parameters, and the need to re-train staff. The consideration of economic order quantities is usually ignored at this stage, but the learning curve for the manufacturer may hamper pre-production, resulting in unrealistic or over-optimistic scheduling.
An often overlooked phase of certification is the third-party test schedule. This will of course depend on the workload of the certifying body, which is driven in part by new legislation (since competitors will also require the same certification).
2.2.4. Lack of commitment by senior managers
Senior management commitment is usually the most decisive factor in defining the success (or otherwise) of the project in particular in innovation projects. Other reasons for a lack of management commitment include a corporate culture oriented towards selling existing products to the exclusion of committing resources to new products. The selling of existing products will generate revenue to finance new products, creating a continuity of business.
2.3. The power of legacy
The power of legacy products cannot be ignored in mature industries like the fire protection industry, where customers feel safe with products they have purchased over a generation, often to the exclusion of new products and newer technologies. In the fire protection industry, legacy products are often not compatible with new systems because of differing communication protocols, making the replacement of whole systems inevitable (and costly). However, industries like fire protection are driven more by legislation than fashion and consumerism. So the need for innovation is more likely to be technology-driven, which is probably the story of Evolution.
Fig.1. Approximate overall risk position O (3, 3) of the new product Evolution
Senior commitment O
Scheduling creep O
O Overall risk
Fig.1 gives an approximate answer to what the overall level of the single project risk should be. Due to the importance of severity and also judging by the number of years lapsed since the start of the new product the position of O reflects a near critical situation. For detecting the precise location of O masses of reliable data would be required. Fig 1 may not be an ideal answer for decision theorists but would certainly give reasonable ground for a project or risk manager to act.
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