Navigating Risk, Innovation & Profits: A Strategic Balance

Table of Contents

Balance & Harmony

Why does it seem as if organisations are constantly performing a balancing act between the opposing forces of risk and innovation? And why do they fail to find the right balance or avoid trying? This blog post delves deep into the relationship between risk and innovation, emphasising the need for innovation in all types of business. It provides a 'light' literature review of evidence-based practices and theories for balancing innovation and risk. 

Creative Innovation 

According to the Cambridge Dictionary^[1], innovation refers to a new idea or method or the creation and utilisation of new ideas or methods. For instance, sprint suits for runners were an innovation introduced in the Olympics. Similarly, technological innovations have made it possible to carry out drilling with less environmental disturbance. The latest innovations in computer technology have brought significant advancements in the industry.  

 Innovation is about creating new products and enhancing the existing ones to make them more functional, efficient, or accessible. For instance, the first cellular phone^[2] was an invention, but the first smartphone^[3], IBM Simon, was a groundbreaking innovation that integrated mobile phone technology with computing features^[4]. 

Assessing Risks 

On the other hand, risk^[5] refers to (exposure to) the possibility of loss, injury, or other adverse or unwelcome circumstances; a chance or situation involving such a possibility. Innovation and risk go hand in hand. Innovation requires bold actions and a willingness to adapt. It often involves taking calculated risks with uncertain results.^[6] 

Imagine being a company—standing on a tightrope, holding a scale. On one side are the valuable coins of sales; on the other, they are the seeds of innovation that can blossom into future prosperity. If you lean too much in one direction, you risk becoming irrelevant as a company. However, over correcting in the other direction could lead to financial death. 

This sounds like the modern dilemma^[7] of negotiating quick profits with long-term growth. This challenge isn't unique to industry giants like Microsoft, Google, and Samsung; it's a commonly performed dance in today's business environment.^[8] 

Innovation is usually associated with agile and fancy organisations. Think Microsoft, Google, Samsung, and Apple: companies that incorporate innovation in their business models and structures.^[9] However, they are not the only ones who should be associated with innovation. All organisations must walk this tightrope, from startups with new and creative ideas to established businesses. While both elements (profit and innovation) are needed, they often compete for the organisation's priority. This is probably because not all companies have the same innovation budget and cannot push boundaries like the innovation giants. And even the giants need to cut back occasionally, resulting in tough staffing decisions.^[10] But what is the significance of innovation, and why is it required? 

Sales Dynamics 

Let's say an organisation that never innovates and only focuses on quick profits. While occupied with making day-to-day profits, that type of organisation could miss market opportunities.^[11] An organisation that fails to innovate risks becoming irrelevant in its industry. 

For instance, Blockbuster, a video rental company, needed to recognise the need for innovation in its business model. It relied heavily on charging customers late fees, which at some point generated a significant portion of its revenue.^[12] 

Unfortunately, this became the company's Achilles heel. By prioritising short-term gains over long-term growth^[13], Blockbuster failed to keep up with the changing market trends. As a result, it was overtaken by a new dominant player in the industry, Netflix.  

Opting for immediate profits at the expense of longer-term projects or sustainable growth necessitates readily available alternative solutions. Business literature often calls this Short-Termism. A company characterised by short-terminism^[14] is focused on short-term goals and short-term results.^[15] 

Central Focus 

Embracing innovation can be challenging, and alternatives to avoiding it altogether exist. Organisations can find a balance by deploying practical strategies to integrate innovation into their business framework while making profits.  

Risk Management 

Innovation comes with risks, but the inherent uncertainties can be managed. It all starts with the idea of "Risk Appetite", which is about the level of risk a company is willing to accept. Risk Appetite has become a critical component of many formal risk management frameworks, such as ISO 3100016.^[16] 

A risk management framework is essential to navigate the uncertainties associated with innovation. A framework helps to evaluate opportunities, acceptable risks, and potential threats. Its goal is to enhance the probability and impact of positive outcomes while diminishing the likelihood and consequences of adverse events.  

Managing risk is a central theme in innovation management literature. The PMBOK® Guide (2021) by the Project Management Institute (PMI)^[17] exemplifies a risk management framework rooted in innovation management literature. According to this framework, comprehensive risk management plans and regular reviews and updates are suggested methods for managing risk effectively. 

Some other commonly used methods for identifying and managing risks to make room for innovation opportunities are:  

1. Pestle Analysis – a framework marketers use to analyse and monitor the macro-environmental (external marketing environment) factors that impact an organisation, company, or industry. It examines the external environment's Political, Economic, Social, Technological, Environmental, and Legal factors. A PESTEL analysis is used to identify threats and weaknesses, which are used in a SWOT analysis. (Pestle Analysis)^[18] 
2. SWOT Analysis – SWOT stands for "Strengths, Weaknesses, Opportunities, and Threats" and is used for planning and optimising business models. A SWOT analysis assesses a company or organisation's current business model, identifies areas for improvement, and evaluates potential opportunities or threats (both internal and external).^[19] 
3. Benefit Tree or Decision Tree Analysis - involves making a tree-shaped diagram to chart a course of action or a statistical probability analysis. It is used to break down complex problems or branches. Each branch of the decision tree can be a possible outcome. 
4. Risk Matrix – Prioritising these opportunities based on their probability and potential is standard practice in risk management. It is often visualised through a "Risk Matrix" that promotes a robust discussion where risks are mapped based on an optimistic likelihood of an occurrence and the severity of their impact. Furthermore, a Risk Matrix helps with the mitigation of risks on track and helps present complex risk data in a concise visual way (e.g., bubble charts).
5. Failure Mode and Effects Analysis (FMEA) – Potential failure modes and effects analysis, failure modes, effects, and criticality analysis (FMECA). Failures are prioritised according to how severe their consequences are, how frequently they occur, and how easily they can be detected. The purpose of the FMEA is to take actions to eliminate or reduce failures, starting with the highest-priority ones. Failure modes and effects analysis also document current knowledge and actions about the risks of failures for use in continuous improvement. FMEA is used during design to prevent failures. Later, it is used for control before and during the ongoing operation of the process. Ideally, FMEA begins during the earliest conceptual stages of design and continues throughout the product or service's life.  

The Art of Failure

As we've explored the myriad ways organisations can manage risk to foster innovation, it becomes clear that navigating the uncertain waters of innovation requires strategic frameworks and a robust approach to dealing with potential failures. In a well-managed risk environment, failures are learning experiences and opportunities perceived as learning experiences rather than setbacks. Peter Senge proposed the concept of a "Learning Organization" that fosters such an environment. The "Fail Fast, Learn Fast" concept is popular in agile methodologies and startup cultures.^[20] 

The journey from risk management to embracing failure as a catalyst for learning and growth marks a pivotal shift towards building a resilient and innovative organisational culture. In this next section, we delve into how adopting a reflective learning culture, emphasising the critical role of leadership, and nurturing an organisational culture conducive to innovation are indispensable elements in turning potential setbacks into stepping stones for success.  

Furthermore, leveraging business intelligence and data analytics emerges as a critical strategy in aligning innovation efforts with customer needs, ensuring sustainable growth and relevance in a rapidly evolving marketplace. 

Guiding Leadership 

Transforming organisational culture to promote reflective learning or learning from failure requires a shift in mindset that encourages innovation, experimentation, and outside-the-box thinking. The role of leadership is fundamental in fostering a culture where failure is viewed as a stepping stone to growth, as discussed in the frameworks of transformational leadership.^[21] 

Cultural Dynamics 

Edgar Schein's Organizational Culture and Leadership model^[22] delves into connections between an organisation's culture and innovation. Culture plays a pivotal role in influencing innovation and its outcomes.^[23] 

Data & Analytics 

When it comes to balancing innovation and sales financial targets, there are several approaches suggested by literature: 

• Business intelligence and data analytics principles can help create realistic forecasts for future sales. 
• Regular risk assessments could be based on market trends and past performance.  
• Pursuing opportunities with a clear potential for success can help with accepting the risk. 

Customer Focus 

Customer success must be the primary goal for all innovation efforts. Focusing on customer needs as the driving force behind innovation is well-supported by human-centred design principles and frameworks such as the jobs-to-be-done theory. 

Company	Focus Area	Overview	Outcome
Amazon	Customer Experience and Operational Efficiency	Uses data analytics and BI to enhance customer experience and streamline operations through its recommendation engine and logistics optimisations.	Increased sales and customer satisfaction, reduced delivery times and costs. Read↗︎"The Power of how Amazon utilizes big data to drive sales" Read↗︎"Understanding Customer Experience Throughout the Customer Journey"
Netflix	Content Personalisation and Strategic Decision Making	Utilises big data and analytics to personalise viewer recommendations and make decisions based on viewing behaviour.	Increased user engagement and retention, informed choices on original content production. Read↗︎"Netflix Bigdata Analytics - The Emergence of Data Driven Recommendation" Read↗︎" How does Netflix make money"
Starbucks	Enhancing Customer Experience and Operational Efficiency	Uses BI to analyse customer data from its loyalty program and app usage, informing menu adjustments, promotional strategies, and store location decisions.	Offered personalised promotions, improved customer satisfaction, and optimised store performance. Read more ↗︎"Starbucks: Using Big Data, Analytics And Artificial Intelligence To Boost Performance"
Supply Chain Optimisation		Leverages data analytics to streamline its supply chain and respond quickly to fashion trends by adjusting production and distribution based on sales data and customer feedback.	Brought new designs from concept to store shelves quickly, keeping inventory low and customer satisfaction high. Read↗︎"Zara Leverages Data Analytics to Understand Consumer Tastes"

Creative Minds 

Psychological theories of creativity, such as Teresa Amabile's Componential Theory^[24], look at factors including expertise, creative thinking skills, and motivation. Discovering the specific habits that nurture creativity allows leaders to encourage those habits. Design thinking aligns with widely accepted frameworks for innovation, such as the Stanford School's Design Thinking Model. Employing techniques like the Design Thinking model encourages thinking outside the box. Leaders should recognise habits that hinder creativity and work on behavioural change to cultivate a culture that nurtures creative ideas. 

Final Thoughts 

The fusion of creativity, controlled risk-taking, and customer-centric innovation is essential for business growth. Companies like Amazon, Netflix, Starbucks, and Zara have demonstrated the transformative power of data and business intelligence (BI) tools. These organisations showcase how advanced analytics and BI can drive decision-making and enhance customer experiences. 

Harnessing technological enablers is essential for embedding innovation within an organisation. Tools like the Power Platform, with its low-code development capabilities and advanced AI features, offer a practical pathway for organisations to cultivate a culture of innovation. These technologies facilitate predictive modelling and intelligent automation and empower organisations to transform data into actionable insights. 

As leaders in this digital era, it's imperative to recognise that the path to innovation is iterative and data-driven. Embracing tools that offer deep insights and foster agile decision-making can significantly mitigate risks associated with innovation while simultaneously propelling organisations towards their strategic objectives.^[25] 

In conclusion, the symbiosis of innovation, technology, and strategic risk management ^[26]defines the blueprint for future success. Let us embrace these technological enablers, fostering a culture that values creativity, embraces change, and leverages data to drive impactful innovation. The future belongs to those who innovate intelligently and do it right now.  

1. Innovation. (n.d.). Retrieved from Cambridge Dictionary↗︎↗︎
2. Chronicling America: Historic American Newspapers. The Invention of the Telephone. Link to article↗︎↗︎
3. Science Museum. The Invention of Mobile Phones. Link to article↗︎↗︎
4. Science Museum. The Rise of Smartphones. Link to article↗︎↗︎
5. "Risk." Oxford English Dictionary (Online ed.). Oxford University Press. ↗︎
6. The idea that risk management can navigate uncertainties inherent in innovation stems from Jalonen and Harri. (2011). The Uncertainty of Innovation: A Systematic Review of the Literature. Journal of Management Research. 4. 10.5296/jmr.v4i1.1039. ↗︎
7. The Harvard Law School Forum on Corporate Governance. (2019, June 20). The modern dilemma: balancing short- and Long-Term business pressures. Link to article↗︎↗︎
8. Christensen, C.M. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press. (An exploration of how and why established companies can be displaced by newcomers with disruptive technologies.) ↗︎
9. A comprehensive list of 2023 & 2024 tech layoffs. - TechCrunch Link to article↗︎ ↗︎
10. Challenges Faced by Industry Giants - "The New York Times" Grant, N. 2023. "It is a challenge for industry giants like Microsoft, Google and Samsung." The New York Times, April 16, 2023. Accessed September 14, 2023. Link to article↗︎ ↗︎
11. Disruption - Gans, J. S. (2016). What is disruption? In The MIT Press eBooks (pp. 13–32). Link to article ↗︎ ↗︎
12. Disruption - Gans, J. S. (2016). What is disruption? In The MIT Press eBooks (pp. 13–32). Link to article ↗︎
13. Satell, G. (2014, September 6). A Look Back At Why Blockbuster Really Failed And Why It Didn’t Have To. Forbes. Link to article ↗︎
14. Pessoa de Araujo, B., and A. Robbins. 2019. "The Modern Dilemma: Balancing Short and Long-Term Business Pressures." Harvard Law School Forum on Corporate Governance, June 20, 2019. Accessed September 14, 2023. Link to article↗︎ ↗︎
15. Short-Termism - CEPR. 2018. "Assessing the Optimality of Corporate Short-Termism." VoxEU. Accessed September 14, 2023. Link to article↗︎ ↗︎ ↗︎
16. Short-Termism - "Why Stock Market Short-Termism Is Not the Problem in the US (or the EU) - A Review of Mark Roe’s Book." 2022. Oxford Law Blogs, June 8, 2022. Accessed September 14, 2023. Link to article↗︎ ↗︎
17. International Organization for Standardization. (2018). ISO 31000:2018, Risk management - Guidelines. (This standard provides guidelines on managing the risks organisations face, enabling a systematic approach to risk management.)↗︎
18. PMBOK Guide by the Project Management Institute PMBOK Guide by the Project Management Institute ↗︎
19.  In the field of business analysis, PEST analysis is a framework used to study the external macro-environmental factors that can impact a business. It involves identifying and analysing the political, economic, socio-cultural, and technological factors that can affect the growth or decline of a business. This helps in understanding the market conditions, business position, and potential for growth. It is a strategic tool that can help businesses make better decisions and plan for their operations. Link to article↗︎ ↗︎
20. SWOT analysis is a method used for strategic planning and management. It helps individuals or organisations to identify the strengths, weaknesses, opportunities, and threats that are related to business competition or project planning. This technique is also known as situational assessment or situational analysis, and other acronyms like TOWS and WOTS-UP use the same elements. Link to article↗︎ ↗︎
21. Peter Senge Learning Organisation P. M. Senge, “The fifth discipline, the art and practice of the learning organisation,” Performance + Instruction, vol. 30, no. 5, pp. 37–37, May 2006, doi: https://doi.org/10.1002/pfi.4170300510.‌ ↗︎
22. Teece, D.J. (2007). Explicating dynamic capabilities: The nature and micro-foundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. (This paper discusses the concept of dynamic capabilities and their role in providing the foundation for enterprise performance in the face of innovation and change.) ↗︎
23. E. H. Schein, Organizational Culture and Leadership, 5th ed. Hoboken, New Jersey Wiley, 2017. ↗︎
24. Transformational Leadership And Organisational Culture - BASS, B. M., & AVOLIO, B. J. (1993). TRANSFORMATIONAL LEADERSHIP AND ORGANISATIONAL CULTURE. Public Administration Quarterly, 17(1), 112–121. http://www.jstor.org/stable/40862298 ↗︎
25. Amabile, T. (1998). How to Kill Creativity. Harvard Business Review. (This article provides insights into factors that enhance or hinder organisational creativity, an essential component of innovation.) ↗︎
26. Strategic management is the process of setting goals, procedures, and objectives in order to make a company or organisation more competitive. Typically, strategic management looks at effectively deploying staff and resources to achieve these goals. Often, strategic management includes strategy evaluation, internal organisation analysis, and strategy execution throughout the company. Link to article↗︎ ↗︎