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Integrating risk
Integrating risk management management
in the innovation project
John Bowers
University of Stirling, Stirling, UK, and
25
Alireza Khorakian
Ferdowsi University of Mashhad (FUM), Mashhad, Iran

Abstract
Purpose While innovation has many similarities to other forms of projects it is characterised by a high
failure rate and the need to stimulate creativity. More explicit risk management could help in achieving
success in innovation projects. However, too much or inappropriate risk management might stifle the
creativity that is core to innovation. So, what project risk management should be applied and where in the
innovation project?
Design/methodology/approach A theoretical framework is proposed which combines the generic
innovation process with project risk management. The framework was used to analyse the current
attitudes to managing innovation risk in a series of companies.
Findings The decision points of the stage-gate innovation process model provide an effective interface
for incorporating project risk concepts. The general concepts appear most relevant to innovation
management though it is useful to customise them to emphasise the particular characteristics of
innovation projects. The experience of using the resultant combined model in a number of diverse case
studies indicates the relevance of the model in understanding attitudes towards risk management in
innovation. The analysis of the case study companies suggested that risk management needs to be
applied in differential manner: simple, unobtrusive techniques early in the innovation life cycle with
more substantial, quantitative methods being considered for later stages.
Research limitations/implications It would be useful to extend this research by examining more
case studies from other countries and industries.
Practical implications The combined innovation and risk management model provides a
framework that diverse companies can appreciate. The framework offers a basis for discussing the
most appropriate form of risk management in different innovation-based industries.
Originality/value Although there are many separate models for innovation and project risk
management described in the literature, there is very little discussion about explicitly combining these
theories. This paper aims to help fill this gap in the knowledge.
Keywords Management, Innovation, Risk, Integration, Project
Paper type Research paper

1. Introduction
Companies have to innovate in order to survive (Taplin and Schymyck, 2005) and in
economic recessions innovation can help convert a crisis into an opportunity (Mahroum,
2008; Lazzaron, 2010). However, in such turbulent times add further risk to that inherent
in innovation (Zhao, 2005; Wang et al., 2010) and product innovation is recognised as an
especially high-risk business activity (Stevens and Burley, 1997). Greater competition,
rapidly changing technology and customer expectations tend to make innovation more
complex with less predictable outcomes (Keizer et al., 2005), increasing the innovators
exposure to risk (Berglund, 2007). While companies should not pursue a strategy of risk European Journal of Innovation
avoidance, better project risk diagnosis and management might help adjust the balance Management
Vol. 17 No. 1, 2014
between success and failure. More extensive use of explicit risk management might pp. 25-40
r Emerald Group Publishing Limited
reduce expenditure on failed innovations and also accelerate projects (Mu et al., 2009; 1460-1060
Johnson, 2010). But too much or inappropriate risk management could discourage and DOI 10.1108/EJIM-01-2013-0010
EJIM stifle innovation (Taplin and Schymyck, 2005): a balance is needed. Many organisations
17,1 recognise the need for a risk management system integrated within project management
in general (Williams, 1995; Emblemsvag and Kjlstad, 2006) but this practice is rarely
explicit in innovation management.
The main objective of this paper is to consider whether the concepts of project risk
management have a role in innovation. The paper explores inter-relationships between
26 models of innovation and project risk management, developing an integrated
framework. The framework is then used to examine attitudes to innovation project risk
management through a series of five case studies. The studies involved interviews with
a range of staff in each company reflecting the roles of different management functions
in the innovation process. The experience suggests that the combined framework is
relevant in diverse industries and may help to bridge the gap between project risk and
innovation management. The paper also offers some more specific recommendations:
comprehensive, rigorous risk management can be appropriate at some stages, in some
innovation projects, but simpler risk management tools may often be more effective.

2. The need for risk management in innovation

Innovation is the use of newly acquired knowledge in developing a new product or service
(Afuah, 2003). Novelty is central to innovation but this inevitably implies risk. Risk is
found in all projects but it is especially important in innovation and a high failure rate is
common (Simon, 2009): 35 per cent of innovation projects fail commercially, accounting for
45 per cent of new product expenditure (Halman and Keizer, 1994). In some industrialised
countries the success rate of new products is 15 per cent and among developing countries,
such as Hong Kong, it is just 2 per cent (Ozer, 2006). Efficient innovation management
should identify the unacceptable risks as early as possible but often they only become
apparent in the later stages, at great expense. However, a fear of failure would be
detrimental to innovation; indeed accepting the possibility of failure as an everyday reality
is one of the defining characteristics of the innovation project. Any model of the innovation
process needs to incorporate failure as a likely outcome. In many other projects
abandoning the venture is a theoretical but remote option whereas in the innovation
project it is integral to good management. Risk management can help managers make the
critical decision to abandon a project, providing an effective filter of the good and poor
prospects and helping direct the continuing research that is fundamental in innovation
projects. Risk is central to innovation but it is often not managed explicitly. This is in
contrast to some other areas of project management where risk has become a major theme
(e.g. see: Smith and Merritt, 2002; Smith et al., 2006; Aloini et al., 2007; Lam et al., 2007).
Creativity is a distinctive characteristic of the innovation project and this stage is
often problematic (Dewett, 2004; Burroughs et al., 2011). It can be difficult to encourage
people to generate ideas and excessive risk management might deter radical suggestions
stifling this critical stage. When determining the appropriate, cost-effective form of
risk management, all projects have to consider the costs, data availability and the
management value of the outputs of the additional analyses. Innovation projects also
have to balance the possible effect on creativity. Risk management is implicit throughout
the innovation process but there may be value in making it more explicit by integrating
the models of innovation and project risk management.

3. Innovation process models

There are many models of the innovation process capturing the various stages from
the generation of the new ideas through to full scale implementation (e.g. see: Goffin
and Pfeiffer, 1999; Narvekar and Jain, 2006; Chandra and Neelankavil, 2008). These Integrating risk
models were typically developed to manage the innovation of new manufactured management
products but the same concepts are relevant in process and service innovation (Gobeli
and Brown, 1993). The use of more formal management processes has helped improve
innovation performance in a range of industries (Griffin, 1997; Tatikonda and Rosenthal,
2000). These formal processes distinguish the classic aspects of innovation management:
creativity and ideas management; selection and portfolio management; implementation 27
(Oke, 2007). Many companies adopt a stage-gate approach, considering the process as a
series of stages with intermediate decision points. This provides an operational structure
taking new products from idea to launch and beyond (Cooper, 2008). However, one
criticism of the stage-gate approach is that it focuses on process factors potentially
ignoring organisational factors that can have a major impact on innovation performance.
The Pentathlon framework (Goffin and Pfeiffer, 1999) offers a more general model
including a wider range of soft organisational issues.
Although there are many variations, the same basic process model can often be
identified (Tidd et al., 2005) as in the standard five stage model adopted for this study:
creativity, selection, incubation, implementation and learning. The first critical stage of
creativity involves examining the internal and external environment: customers needs,
competitors products and in-house R&D can all be sources of creativity. Selection
follows as the company assesses the relative merits of competing ideas, considering the
organisations strategy and operational constraints. In the incubation stage the
company develops a prototype, using it to identify problems and resolving them before
progressing to the larger scale activity of the following stages. During implementation
the company scales up the prototype to full production and launches the product in the
market. Whether the innovation is successful or not, the experience should provide an
opportunity to learn, with the company expanding its knowledge base to support
future innovation (Tidd et al., 2005). Given the high failure rate in innovation, this
ability to manage knowledge is most important. Many innovations projects fail but
they may still make a valuable contribution, helping develop the expertise that leads to
future success (Worthington et al., 2009).

4. Integrating project risk and innovation management models

Each of the stages of the innovation process can be viewed as an information gathering
activity. This may involve a variety of specific actions including trials of prototypes,
laboratory safety tests, computer modelling, market research, investigations of
potential raw materials and assessment of skills availability. The information is
reviewed at the subsequent decision point considering appropriate criteria. The
specific criteria may vary between organisations reflecting the local context but will be
consistent with those generally judged to be critical to success in product innovation
(Keizer et al., 2002). Each decision involves determining the prospects for the
innovation and the merits of progressing to the next stage, or abandoning the project.
This cycle of information gathering, analysis and management action is itself a form of
risk management. However, project risk management makes this process more explicit,
formalising the information collection and analysis while acknowledging that many of
the data are uncertain. The risk analysis involves estimating the probability of the
innovation achieving the desired objectives and also identifying the remaining
uncertainties that need to be addressed in the subsequent stages of the innovation
process. Figure 1 illustrates this model combining the concepts of the stage-gate
innovation process with project risk management. Such graphical models can help
 28
17,1
EJIM

Figure 1.

management
risk and innovation
A framework combining
Risk Management System

Identifying

Analysing

Actions

Monitoring and Controlling

Abandon Abandon Abandon Abandon learning

stop

Implementation
D1 Creativity D2 Selection D3 Incubation D4 Pilot D Mass D5
continue

Innovation Process
Customer feedback Financial viability Customer feedback Market
Employees opinion Implementation Standard and technical Customer feedback
capability tests
Competitors Profit
High level
managements opinion internal control

Customer feedback

Criteria
communicate practice and stimulate debate (Smith and Merritt, 2002). While decisions Integrating risk
may result in abandoning innovation projects that are assessed to be high risk, the management
outcomes do not always have to be a binary progress or abandon. Sometimes the
outcome may be a recommendation that the decision to proceed is postponed until
additional data are provided resulting in a more iterative innovation cycle rather than a
simple linear progression, as noted in some variations of the standard stage-gate model
(Cooper, 1994). Project risk management encompasses a wide range of technical, 29
financial and market risks and also a range of potentially critical soft organisational
issues, as recognised in the Pentathlon model (Goffin and Pfeiffer, 1999; Oke 2007).
Risk analysis techniques are often classified as qualitative or quantitative (Table I).
In many projects the management requirement is to understand the relative severity of
the risk, compared to other projects and options available to the organisation.
Qualitative risk analysis is often sufficient and the quality of the data do not justify any
more sophisticated techniques (Patterson and Neailey, 2002; Edwards and Bowen,
2005). Quantitative techniques offer more rigour and objectivity but they are very
demanding in terms of data. They typically involve a statistical analysis of historic
data drawn from a database of experience developed in previous projects. Quantitative
analysis is expensive and requires considerable expert effort but this may be justified
in large-scale projects, providing a disciplined and relatively objective risk assessment.
However, quantitative data are not always objective and care is needed, as noted in
Table I. For example, Monte Carlo simulation is a classic quantitative technique but the
estimates of the uncertainties may be obtained from a diverse collection of sources,
including expert judgement implying a degree of subjectivity (Bowers, 1994).
Although a variety of sources may be used, blending different types of data to provide
the input for the quantitative models, the available quantitative data may still be
limited. If quantitative analysis is deemed essential, data availability may restrict the
scope and critical risks may be ignored (Ahmed et al., 2007). In contrast, qualitative
analysis tends to be cheap, flexible and quick to apply. However, it usually relies on
human judgement, with the inevitable scope for personal bias, experience and
preference (Edwards and Bowen, 2005; Patterson and Neailey, 2002). The bias can be
minimised using systematic techniques such as risk mapping to enhance the
transparency of the analysis. Techniques such as event tree analysis (ETA), fault tree
analysis (FTA), failure modes and effect analysis (FMEA) maybe used in either a
qualitative manner or incorporating quantitative data if desired.

5. Customising project risk concepts

Project risk management has evolved in a range of industries and a set of general
concepts has been developed (e.g. see: Smith and Merritt, 2002; Smith et al., 2006;
Aloini et al., 2007; Lam et al., 2007). Although the detailed implementation has to be
customised to suit the particular context, the core risk management activities can
be summarised as identification, analysis, action, and monitoring and controlling risk,
as incorporated in the framework of Figure 1.

Subjective Objective

Quantitative (such as Methods of moment, Monte Carlo simulation and & Table I.
Exact algebraic solution) Risk techniques
Qualitative (such as Risk mapping, ETA, FTA, FMEA) classification
EJIM In the identification phase, a projects specific potential sources of risk are distinguished.
17,1 A wide range of factors can create risk in innovation and a variety of categorisation
schemes have been proposed that can help structure the risk identification activity (e.g.
see: Eden, 2001; Keizer et al., 2002; Berglund, 2007). Using these schemes and also
experience from innovation case studies (e.g. see: van de Ven et al., 1999), this study
adopted a high-level categorisation of possible risk factors for innovation projects:
30 environment, technical, resources, management, marketing, integration and strategy.
Each of these categories include sub-divisions, for example, environment includes:
governmental policy (Foxon et al., 2005), currency rates (Eden, 2001), weather (Green and
Serbein, 1983), intellectual property (Keizer et al., 2005), as well as social factors such as
poverty, crime and culture (Green and Serbein, 1983). The consequences of each potential
source of uncertainty may be positive or negative, for example, a change in government
policy relaxing regulations could increase the profitability of a product but it may also
encourage other companies to enter the market.
Various risk identification techniques may be used, including checklists, cause and
effect analyses, influence diagrams, and hazard and operability studies (e.g. see: Chapman
and Ward, 1997; Ahmed et al., 2007). Structured checklists, using a hierarchy reflecting a
risk categorisation scheme, can support simple, quick and effective risk identification.
Risk checklists should be dynamic, evolving over time through contributions from
various functional experts and collective experiences (Chapman and Ward, 1997; Ward,
1999). A risk checklist can be a practical mechanism in for organisational learning,
disseminating knowledge from previous innovation projects across the company
(European Federation of Chemical Engineering, 1985). The checklist should include
company specific, as well as generic success factors and encourage project team members
to consider the less obvious issues and possible new sources of risk (Keizer et al., 2002;
Edwards and Bowen, 2005; Ackermann et al., 2007). Following the initial risk
identification, the risk checklist provides the basis of the risk register recording regular
reviews of a projects risk and the management responses in a dynamic process (Williams,
1994; Patterson and Neailey, 2002). This dynamic approach can be especially important in
innovation projects where there is a high degree of novelty: lessons may be learned from
previous projects but it is always to be aware of new sources of risk.
Having identified a projects potential risks, a more detailed analysis may follow
typically based on two parameters: probability and impact (e.g. see: Chapman and
Ward, 1997; Zhao, 2005). Simpler, qualitative risk analysis (Patterson and Neailey,
2002) may be sufficient in the early stages of innovation projects since the main
requirement of the earlier stage-gate decisions is for an understanding of the relative
severity of the risks rather than a precise estimate of the absolute risk (Edwards and
Bowen, 2005). Quantitative risk analysis typically requires a substantial statistical
analysis of relevant historical data. However, such data may not be readily available
and the environmental or technological change inherent in many innovation projects
may make some of the older data irrelevant.
Risk analysis is followed by management action. A suitable response for each risk
should be specified and recorded in a risk register. Many generic project risk
management actions have been identified and these may be summarised in categories
reflecting the particular characteristics of innovation projects (e.g. see: Pyra and Trask,
2002; Smith and Merritt, 2002):
. acceptance: the company decides to do nothing about the risk, accepts the risk
and its consequences;
 . avoidance: revising the project plan to remove the risk; in innovation this may often Integrating risk
involve recognising the increased likelihood of failure and abandoning the project; management
. transfer: risk responsibilities may be reallocated in a more appropriate manner; a
company may realise that it does not have enough experience with a vital
technology and decide to sub-contract part of the development, or even sell the
partially developed product to another organisation;
. redundancy: in some cases, such as new drug developments, the high failure rate
31
of innovation leads to the use of parallel paths to increase the probability that an
effective solution will emerge; and
. mitigation: reducing uncertainty or the impact is fundamental to managing
project risk management and many of the routine activities of innovation might
be described as mitigating risk, undertaking more technical or market research,
performing laboratory tests, developing prototype products and building small
scale pilot production plants can reduce the probability or impact of risk.
Having agreed the appropriate management actions, their effects should be subject to
continuous monitoring and controlling. While there is variation in the approaches
(e.g. see: Turner, 1993; Smith and Merritt, 2002) all emphasise the need to regularly review
the status and closure of targeted risks and to identify new risks, typically using a formal
risk register. This process is reflected in the decisions of the framework of Figure 1, with
each decision implying a review of the risks highlighted in the previous stages.
Many project success factors have been identified as being potentially important in
innovation (Cooper and Kleinschmidt, 2007; Simon, 2009) and these provide a basis for
selecting the decision criteria of Figure 1. Although risk management should use this
generic knowledge, it must also consider the specific context of the particular innovation
project (Keizer et al., 2002). Some companies adopt a formal approval mechanism using
such decision criteria to determine whether a project may proceed to the next stage of
innovation, other companies use more informal approaches.

6. Methods
The main objective of this study was to determine whether project risk management
can offer an explicit contribution to the innovation process. The first explanatory
phase involved exploring the literature form the two management disciplines led to
the development of the combined framework. This framework appears to provide
a consistent model to help appreciate the inter-relationships between project risk and
innovation management theory. The second phase of the study used this idealised
model in an exploratory manner. It provided a clear structure for examining practice
and then identifying the potential for enhanced risk management in innovation. As in
other studies, the case study strategy contributes to both theory-testing and theory-
building (Eisenhardt and Graebner, 2007).
The combined model of Figure 1 was used to examine innovation risk management
with 40 interviews across five case study companies from Iran and the UK, see Table II.
As Table II shows the average age of the companies was more than ten years; mature
companies were selected since they have had the opportunity to develop risk
management skills and experience (Mu et al., 2009). The nature of the risk management
can be related to the company size (Mu et al., 2009) so the companies chosen were all
relatively large. Furthermore all of the case study companies selected had a significant
degree of innovation experience. While the companies had some similarity in age,
EJIM Number of Location
17,1 Name of company Nature of business Example of innovationa interviewees (year formed)

1. Shahab Khodro Bus manufacturing Converting from diesel to gas 10 Iran (1982)
2. Firoozeh Tile Tile manufacturing Unifying the formula of floor 8 Iran (1994)
and wall tiles
3. Razavi Dairy Dairy product New milk flavours 7 Iran (1993)
32 Products manufacturing
Corporation
4. Sepideh Jam Porcelain New variety of raw materials 7 Iran (1993)
Toos manufacturing to reduce the breakage rate
5. Scottish and Production and Using waste products as fuel 8 UK (1998)
Southern Energy supply of energy
Table II.
The case study companies Note: aSome of these developments have since been approved and are now being implemented

experience and size, they operated in diverse industries. Despite this diversity, all of the
companies recognised the same fundamental innovation stages though this was not
always reflected in their formal management systems and different terms were often
used to describe various analyses and management actions.
It was expected that many of the individual interviewees might be unfamiliar with
some of the concepts and terms of innovation and risk management so semi-structured
interviews were used to collect that data. In the selection of the interviewees, a range of
perspectives were sought, spanning a variety of management and technical functions
from: financial, production, operation, quality assurance, technical, marketing and
sales, business development, research and development. This provided a more
complete view of the innovation process in each company and also a degree of
validation through the comparisons of the different, independent interviews in each
company. The majority of interviewees had more than five years experience; some had
worked on specific innovation projects while others had a broader knowledge. Most
had at least an undergraduate degree in wide range of subjects from engineering to
business and finance. The interviews were summarised using content analysis to help
develop the transcripts into a series of five case studies which were then compared to
theory, structured using the integrated risk-innovation model.

7. Current innovation risk management practice

7.1 Response to the integrated model
A variety of attitudes towards managing innovation risk was identified. However, the
combined model appears to be relevant across diverse industries. Staff from different
countries (the UK and Iran), industries and functional backgrounds could all relate to it
and the framework provided a useful structure in understanding the detail of
implementing risk management. The staff discussed examples of innovation in their
companies in terms of the five stages of Figure 1. In general there was a clear
correspondence between practice and the stage-gate innovation process model.
However, there were some deviations, notably the absence of a distinct creativity stage.
For instance, the manager of quality assurance in case 1 explained that: Creativity and
selection are part of a single stage because sometimes there are not many different
ideas. We do not have many choices, because most of the time, our ideas are based on
customers needs. In some companies at least, there was a paucity of competing new
ideas and there was no need for a distinct selection stage.
7.2 Familiarity with risk management Integrating risk
Many of the interviewees (e.g. case 2, Tile Co; case 4, Porcelain Co) were keen to talk management
in terms of the probabilities of events and reducing the impact of risk suggesting
a greater familiarity with the basic concepts of risk management than might be
expected in such companies in Iran; the UK interviewees had a substantially greater
knowledge. While the companies undertook various actions that are consistent with
good risk management, these actions typically involved resolving specific technical 33
problems rather than considering project risk management in a systematic manner.
Although some of the Iranian interviewees demonstrated a basic appreciation of more
sophisticated risk analysis tools, there was no evidence of significant application.
In most companies there was no use of formal, scientific methods in analysing and
prioritising risk, even though many interviewees appreciated the potential for
such approaches. It was suggested that the attitude to risk management is largely
dependent on the attitudes of high-level management (e.g. case 2, Tile Co): some of the
managers were thought to be risk averse and less innovative. Interviewees in case 3
(Dairy Co) believe that most managers in state controlled companies in Iran are
particularly risk averse when compared with private companies.

7.3 The potential contribution of more explicit risk management

The interviewees from all of the companies agreed that innovation always entails risk,
and some recognised a need to manage risk more explicitly. For example, a marketing
manager in case 3 (Dairy Co) cited a new caramel dessert that was developed and
launched without any risk analysis: he felt that even a simple analysis might have
prompted more incisive questions about the target market and avoided a costly
mistake. Although very few of the interviewees had any formal training in project risk
management they appreciated that it should be seen as a continuous process
throughout the projects life. However, a number of interviewees (e.g. case 2, Tile Co;
case 5, SSE) expressed concern that too stringent control of risk in the creativity stage
could deter successful innovation, as noted in other studies (Dewett, 2004). For
instance, operation manager in case 2 explained that: One idea developed by this
company involved the combination of tile and nanotechnology to produce ceramics
which are anti-fungal and anti-bacterial. However this idea was very radical and there
was great concern about the risk. The idea was so radical that there was no
information about the possible market at the creativity and selection stages; it was
impossible to compare the costs and possible income in a quantitative manner.
Insisting upon a quantitative risk analysis at this point in the innovation process
would have prevented the idea from being developed any further and a valuable
product could have been abandoned. The interviewees generally believed that
while risk management is appropriate in the later stages, participants need to be
encouraged to champion ideas in creativity stage. The interviewees believed that risk
managements greatest potential contribution is in the later stages of the innovation
process, where the transition to the actual product development and engineering of
a particular product or product range takes place; this view has been noted in other
studies (Keizer et al., 2002). Interviewees suggested that project risk management
should be implemented in a differential manner through the innovation project cycle.
Simple risk identification and qualitative analysis may be more appropriate in the
creativity stage, avoiding an environment that might discourage novel ideas. In the
selection stage the company might begin to move to more formal risk management,
analysing and prioritising the risk factors. Ideally, risk analysis should be used not just
EJIM in judging whether the innovation might proceed to the next stage but it should also
17,1 contribute to specifying the plan for the following stages in the innovation development.
The risk analysis should help identify critical gaps in current knowledge, and determine
the requirements for more technical and market research. In the later stages of the
innovation process there may be opportunity for more quantitative forms of risk
analysis and also a greater need for more rigorous risk action plans and monitoring/
34 controlling of risk. Figure 1 reflects this differential application of risk management with
the shading suggesting a lighter touch early in the process. In addition the broken line in
this figure, connecting D1 to the risk management system, indicates the need for simple
risk identification in this stage (in comparison with other decision points). However, there
is no uniform pattern: some staff, an operation manager in case 2 (Tile Co) believe that
financial risks should be addressed early in the process.
A single approach to risk management is not appropriate for all companies. Some
(e.g. case 5, SSE) use a range of techniques but these were adapted to suit the particular
innovation project. The characteristics of the industry were also thought to be
important. In some industries in Iran the lack of any real competition has a strong
influence on the perceived need for more formal methods of risk and innovation
management. For instance, the bus and truck manufacturing industry (case 1) is
protected from foreign competition and there is little market risk.

7.4 Risk management and organisational learning

Acquiring external knowledge, learning from experience and sharing knowledge
throughout the company is claimed to be essential in innovation (e.g. see: Jantunen,
2005). However, formal learning seems to have a low priority in the companies examined.
The management focus appears to be on the individual innovation projects. Often each
project had a distinct budget with few resources available for more holistic activities
such as organisational learning. Knowledge of past innovation projects tended to be
dependent on individuals experiences with no formal method of capturing previous
experience. This lack of systematically recorded historic data limits the possibility of
using more sophisticated forms of risk analysis. Reliable, rigorous risk analysis is
impossible when it depends on individuals availabilities and their memories. Although
quantitative historic data can be useful, qualitative data describing past innovations
could still be valuable. Although there was general agreement that organisational
learning, including formal documentation, was important, this was not reflected in
practice. This failure to capture and exploit experience suggests an avoidable knowledge
deficit and hence greater uncertainty and risk.

8. The potential for enhancing risk management practice in innovation

projects
Comparing the combined risk and innovation management model of Figure 1 with the
experiences from the empirical cases study suggests some potential for enhancing
practice. The companies used a variety of risk analysis and management techniques,
even though they may not always have described them as risk management.
However, these techniques were not deployed in a systematic manner. Using the
combined model the staff readily discussed gaps in their current management systems
and how they might be resolved. Such discussions emphasised the need to deploy risk
management with care. In particular innovation is dependent on creativity and there
were fears that this could be discouraged by excessive risk management at an early
stage. However, simple qualitative risk analysis and management could be valuable as
part of the process of filtering the innovations, rejecting more bad ideas while retaining Integrating risk
the good. More stringent risk management may be more useful in the later stages as management
the costs and commitment start to increase.
Comprehensive risk management might be deployed at every stage of the
innovation project. However, a more selective use could be more appropriate with
varying degrees of risk management being employed throughout the innovation
process, as suggested by the shading in Figure 1. The issue of nature and timing of the 35
most appropriate risk management is a major question in practice for all projects.
Effective risk management should start at the very beginning of the project, and also
go well beyond the technical phases to capture lessons for future projects (Smith, 1999).
It is commonly claimed that the cost of change and iterations in the design stage is
much less than resolving problems in the implementation phase (Salomone, 1995);
early identification of risks allied with action to avoid the risk events actually occurring
is usually much more preferable than dealing with the outcome (Ahmed et al., 2007).
However, it may not be practical or desirable to apply a comprehensive, rigorous risk
management system throughout all projects: different aspects of the risk management
system may be more useful at different stages of the innovation project.
A distinctive characteristic of the innovation project is the high failure rate. Typically
there will be a large number of innovation projects that start at the creativity stage but
the large majority will be abandoned at various stages of the innovation process, with
very few surviving through to implementation, as illustrated in Figure 2. As an
innovation project advances from the creativity stage through to implementation,
knowledge increases. There is always a significant degree of uncertainty but if the
innovation has been managed well, any project progressing to the later stages should
have a good chance of success, as illustrated in Figure 2. The ideal risk management
system provides a structure that copes with the high amount of uncertainty inherent in
the innovation project and the flows of information from completing studies of
technological feasibility, competitor behaviour, regulatory and market demand. The
alternative is to rely on a chain of best guesses (Tidd et al., 2005).
The costs of abandoning innovation projects vary with the different stages,
reflecting the typical investment profile (Salomone, 1995). The creativity stage usually
involves minimal investment whereas implementation is expensive. A key objective of
the innovation process is to reject the likely failures at an early stage and minimise the
Information/Certainty
about one project

Number of projects
Figure 2.
Information and survival
in the innovation process
Creativity Implementation
EJIM implementation of inappropriate products. While companies want to maximise the
17,1 rejection of potential failures, this can involve rejecting potentially successful prospects
(van Oorschot et al., 2010). Figure 3 illustrates four different zones which summarise
the relationship between the rejection of good and bad ideas.
If the management is very relaxed, as in zone 2, there is no effective filter and very
few ideas, good or bad, are rejected resulting in high costs as more inappropriate
36 products are pursued through to implementation. In a very critical environment,
as in zone III, many good and bad ideas may be rejected. Zone IV is the worst as it
rejects all good ideas; zone II represents the most desirable innovation management
system with an effective filter, perhaps provided by appropriate risk management.
However, achieving such a system is challenging: companies may be tempted into
applying stringent risk management in order to move away from zone I only to find
themselves operating in zone III, stifling the creativity that is critical to innovation.
While it may be impossible to quantify the parameters of Figure 3, the concept was
useful when discussing the appropriate balance of risk management.
The combined framework of Figure 1 proved useful as a visualisation tool,
facilitating discussion about the appropriate form and timing of risk management at
different stages of the innovation project. Each company should customise a risk
management system that suits their particular environment. Even a relatively simple
but formal template, using structured checklists to help analyse the risk based on past
qualitative experience, could offer a significant advance in risk management in many
of the Iranian companies. The combined risk and innovation management model may
also provide a framework for better collaboration between different organisations.
Innovation often involves cooperation at different stages, both between companies and
also research institutes. The risk-innovation model can help identify responsibilities,
clarifying their relationships.

9. Conclusion
Innovation projects are distinguished by the high rate of failure and the need to
encourage creativity: a dramatic attrition is expected with a large number of ideas
resulting in just a few successful products. The possibility of abandoning a project is
ever present and inherent in the management of the innovation process. Risk is a major
feature in innovation projects but the focus is resolving technical problems rather than
Rejecting good ideas

IV III

I II
Figure 3.
The challenges of filtering
the good from the bad
Rejecting bad ideas
considering project risk management in a systematic manner. There appears to be Integrating risk
significant scope for more use of project risk analysis and management, with a greater management
emphasis on learning from previous projects. However, risk management has to be
deployed selectively. In particular there is concern that excessive risk management in
the early stages could stifle the creativity that is critical to innovation. The combined
innovation and risk management model provided a framework that diverse companies
can appreciate. It offers a practical basis for designing the most appropriate form 37
of risk management in different innovation-based industries and it also highlights
the possibilities for better integration of the theories of innovation and project risk
management. In particular the decision points of the stage-gate model provide an
effective interface for incorporating project risk concepts. The general concepts appear
most relevant to innovation management though it is useful to customise them to
emphasise the particular characteristics of innovation projects.

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About the authors

John Bowers is a Professor of Management Science at the University of Stirling. His career began
in the energy industries before moving to academic life to pursue research in the modelling of
complex management systems. He has studied risk in a wide range of industries, from offshore
EJIM oil to healthcare and has published in various journals such as the Journal of the Operational
Research Society.
17,1 Dr Alireza Khorakian has a BSc in Mechanical Engineering, an MBA and a PhD from the
University of Stirling, UK. He is an Assistant Professor in the Department of Management,
Faculty of Economic and Administrative Sciences, at the Ferdowsi University of
Mashhad (FUM), Iran and has research interests in change management, innovation and
40 technology management, with a particular emphasis on risk and strategic management.
Dr Alireza Khorakian is the corresponding author and can be contacted at:
[email protected]

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