Synopsis

Session 5: Managing Risk in Innovation

Presented by

Main Speaker – Mr. Adrian D. PereraPanelist – Mr. Krishan Balendra

Panelist – Ms. Deepthie Wickramasuriya

Synopsis – Session 5: Managing Risk in Innovation

In today’s highly competitive environment, innovation has become inevitable to create valueand spur growth. However, additional value may not be able to create through innovationalways or may not be commercially viable. Therefore, the risk of failure is an inherent aspectof innovation. The success of innovation depends on the design skills of its engineers, uponthe effectiveness with which it can mobilize, apply, and develop its distinctive knowledge ascircumstances change. Identifying, analysing and managing these risks (market, technology,environment, and organisation related risks) will lead to effective decision making in variousinnovation projects. How best organisations manage innovation will be dependent on howbest they manage the associated risks. The focus of this session will be the role ofprofessionals in innovation process and particularly in managing risk aspect.

Presentation

on

Managing Risks in InnovationBy - Adrian Perera

MBA (Sri. J), FCCA, FCMA(UK), FCMA, FCPM, AIB

Chief Executive Officer

RAM Ratings (Lanka) Ltd

“Only the Paranoid Survive”

“Only the paranoid survive,

Sooner or later something fundamental In the world will change”

WANG Computers

Success breeds success but it also builds arrogance.

Blackberry

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RISK MANAGEMENT ISN'T THE ANTITHESIS OF INNOVATION;

IT'S THE ESSENCE.

Premium Price Tools undercut by price

Competition

Leased Tool sets

Premium Products

Risk Management and innovation are not opposites, but successful innovative companies

core competency is risk management

Risk management should not be the break on innovation but the accelerator

INNOVATION IN SRI LANKA

Global Innovation Index Sri Lanka 98 out of 142

Malaysia 32

Doing Business Index 81 up from 96

R&D has declined as percentage of GDP from 0.4% to 0.11%

Not bad but room for improvement

R&D AND INNOVATION

R&D Involves Investment in new discoveries, improving capacity.

Willingness to forego current profits for future unknown profits.

Successful R&D can lead to new innovative products but no guarantee

Innovation may not require funding and very focused on key objective.

• "At work for a better life, a better world for all."

• Objective is not protecting disabled people but finding employment for them

• Manufactures very high quality medical equipment

• 99% of employees disabled

SLINTEC

• Established in 2008

• Opened the nano Technology and Science Park in 2013 Oct 21st

• Partners,• Brandix, Dialog, Hayles, LoadStar, MAS, LANKEM, National

Science Foundation

• NASA has over 200+ Sri Lankan Scientists

CHALLENGE

No Venture Capital industry

Herd Mentality

VC managed by Bankers and Finance people

Too much focused on numbers

Few engineers & Scientist on Board

THE BEST WAY TO PREVENT SURPRISE IS TO CREATE ONE

DARPA

US Solution

Sputnik 1 & 2 in 1957

Explorer 1 in 1958

Ambitious Goals

• Improved water purification technology to reduce logistic burden.

• 10% of casualties due to transport of water

• Light weight water purifier.

Temporary project teams

• High performing contract project teams.

• Partner with Small firms

Independence

• Stealth was not requested by Air Force or Navy

KEY TO DARPA’S SUCCESS

Motto “creating and Preventing Strategic Surprises”

Expanding Basic Science and Solving Society’s Problems

PURE BASICRESEARCHBOHR

USE-INSPIREDBASIC RESEARCHPASTEUR

PURE APPLIED RESEARCHEDISON

UNNAMED

QUEST FORFUNDEMENTALUNDERSTANDING?

PRACTICAL USE?

NO YES

NO

YES

The late political scientist Donald E Stokes distinguished four categories of research and highlighted how basic science can be employed to create practical applications.

Bohr’s Quadrant. Work here is curiosity-driven basic research, which seeks foundational knowledge without consideration of practical use. This quadrant is named for the early-20th-century atomic physicist Niels Bohr.

Edison’s Quadrant. This Category is pure applied research, aimed at finding a solution to a practical problem, and has no interest in explaining or understanding the phenomena of a scientific field. It’s named for the inventor Thomas Edison.

Pasteur’s Quadrant. Research here expands basic scientific knowledge in order to meet pressing societal needs. This quadrant is named for Louis Pasteur,

a founder of the field of microbiology, who invented ways to prevent disease and food spoilage.

Stokes didn’t bother to give the fourth quadrant a label; both the science and the use here tend to be uninteresting.

SOURCE DONALD E. STOKES, PASTEUR’S QUADRANT: BASIC SCIENCE AND TECHNOLOGICAL INNOVATION, BROOKINGS INSTITUTION PRESS, 1997

MODEL USED BY DARPA

Basic Research –

• Blue Sky research,

• Fail due to step motherly treatment

• Takes a very long time to give commercial results

• Eg: Nuclear Energy

Pure Applied Research

• Takes around 3-10 years

• Light Bulb

User Inspired Research

• To address societal issues

• Corporates should pay more attention to Pastures quadrant whilst allocating resources to others.

• This gives a balance portfolio

LINEAR MODEL

Observation

Conceptualization of

problem or need

Conceptualize

solution

Technical definition

Experimentation

Prototype Perfection PatentingCommercialization

LONG TERM VISION

• Identification –Learn from Toyota (started as a Textile firm)

– Cost competitive Model Reduce cost by 30% within 3 years

– Partner with Small firms

• To improve Productivity –

– Robo Technology started in 1970 by 2020 in all areas such as “Partner Robots”.1st Installation in 1980.

– Smart Mobility

- Can we have a 20 year plan?

PROJECT IDENTIFICATION

Project Identification and Prioritizing

Panasonic has a 300 year plan

Future generation kept informed.

(5,000 years)

1953 started the R&D Center for new product development and basic research.

GET THE BEST

Select the right project champion

Do not have them in the permanent payroll

Commitment and focus from the very top.

Play to win and do not play not to lose.

Minimize number crunchers

Attractive remuneration package

Retention is the key

CONCEPTUALIZATION

• Clear definition and expected out come.

• New thinking to the same game,

– When a company finds its easy to make a buck and hard not to make a buck it losses the disciple to face hard time.US auto mobile industry. There were 1,800 manufactures now only a few survive

• Large - Low fuel consumption

Small & Fuel efficient

• Futuristic outlook

– May not come from the same industry people

• Garments to Technology

US Cars

Japanese Cars

TECHNICAL DEFINITION

Spot on with the definition

• Kodak Failed to define the Photographic Industry

• Success was its enemy

Small teams

Harley Davidson Perfume

Clairol – Yoghurt Shampoo

Proto Typing

Second largest consumer of finance & time

Have a risk governance framework

Stakeholders have come to the pinnacle in their patient curve

Resist to deliver a throw away product,

– Requirement Risks

• Smokeless Cigarettes, RJ Reynolds spent USD 325 Million a failure product could have been a life saver

– Technical Risks

– Technological risks

– Market risk

– Schedule Risks

MITIGATING THE RISKS

Allocate Additional Resources

Have several prototypes and levels of testing

Obtain feed back

• Apple Newton failed but paved the way for IPAD

Be ready to change course

New Coke Vs.

Old Coke

PERFECTION

Final Phase

Re-look at the competitive landscape

Vs. HD Lost

What is the new value proposition

McDonald Arch Deluxe (failure) at $2 compared to the usual price of $0.99

Solo or Join with another can give more value

Leasing companies and vehicle importers +

Pricing

Packaging

Product life span –

Perfection can also be your enemy

Commercialization

Patent the product – Basmati Rice US holds the patent.

o Patented in 1997

o Special forces team will be leaving taking away the knowledge

o Finance & marketing play a major role

o What is Finance professionals role?

RISK MANAGEMENT IN INNOVATIONCFO’s ROLE

•Risk Management helps to keep the feet on the ground with a clear focus that no business model is perfect and needs refinement.

•Should not be a break on innovation but an accelerator.

•Real discipline in risk management means more funding for R&D.

RISK MANAGEMENT IN INNOVATION CFO’s ROLE

FUTURE RISKS IF THERE IS NOINNOVATION

Risk Event Type(H/M/T/S)

Impact(Rs.)

Likelihood[%]

Severity(Risk Score)

[H,M,L]

1.

2.

3.

4.

5.

Types:H – Human ResourceM – MarketingT – TechnicalS- Strategy

Risk:H – HighM – MediumL – Low

PROBABILITY IMPACT ANALYSIS

CAN ORGANIZATION GET THE UPSIDE RISK?

Yes if Innovation and Risk management are married properly

INNOVATION CAN BERISK TAKING

Most successful companies in any economy got there by seeking out and exploiting risks and not by avoiding risk.

Across time on average risk taking has paid off,risks exist when imporatant innovations are not under taken

At the same time there is a large number of firms got destroyed due to risk taking

Risk taking is not gambling or going with the herd

No risk no innovation but some innovations will never be commcialisedand may never progress and waste resources minimizing this is CFO’s role

CFO’S ROLE

Develop futuristic vision GHD is a global engineering ,environmental and consulting firm, there vision

Have a system to get innovative ideas but ensure there are no leakages of ideas

Have a innovation selecting model for risks identified

Democratic and transparent decision making for selecting the innovation

KEY ISSUES CFO’S WILL FACE

Strategic Alignment– Aligned

– Not Aligned

• Shoyeido is a 300 year old incenses company innovations have been in full alignment to the company objective of “life with a fragrance”. Annual turnover is as at 2010 was around 3 Billion yen

Sustainability, Innovation and corporate strategy aligned

Toyota adopts sustainable innovation through vehicle recycling, efficient fuel usage, etc..

STAKEHOLDER COLLABORATION

Very important not to release a product with high maintenance.

Internal Stake holders • breakdown department silos and knowledge

sharing• Improving linkages to draw up diverse knowledge

External stakeholder go beyond traditional boundaries,

P&G Connect & Develop website focuses on getting solutions to issues and challenges it faces

BMW’s virtual innovation agency request ideas and successful ideas are paid Euro 500-60,000

Identifying enablers and barriers

− Scale

− Industry of operation and regulatory environment

− Organization culture and leadership

− Assets and capabilities to deliver

− Risk tolerance

Approach

− Top down and bottom up

− KPI’s

− Implement a innovation risk management framework

Analysis of innovation risk Cash flow impact if innovation is not taken

Cash flow impact if innovation is done

Get actively involved in market research (Leave the comfort Zone)

Similar to companies having a portfolio of investments develop a portfolio of innovations in different stages .(pastures Model)

Look at innovations through acquisition

Change the mind set “failing is bad”

Edward Deming's advice to Japanese was reduce reliance on numbers the logic being not future focused.

RAM Ratings (Lanka) LtdNo 11 Melbourne Avenue

Colombo 4www.adrian@ram.com.lk

Tel: 2553089Fax: 2553090

Thank you

Session (Number)

SESSION TITLE

Synopsis – Session 5: Managing Risk in

InnovationMain Speaker

Mr. Adrian D. Perera initiated his speech by describing the current situation of the Country, andaccording to his view Sri Lanka is still in the growing stage helped in part by the tourism industry. Astourism has become a focus of Sri Lanka the hotel industry will obviously reap the benefit, andfurther to the growing trend in the hotel industry increased foreign investment is being provided tothis particular industry. However, with the increase in foreign investment in this space, localcompanies may face mounting challenges in order to compete as perception, both locally andglobally, is that foreign hotels carry with them higher quality than local hotels.

Globally, there is an agreed-upon belief that industries which are successful breed successfulparticipants, however, with this success one must cautious to ensure that with this successarrogance is curtailed. When examining the case of Blackberry, there were initially an innovativecompany that captured their particular market, however they grew complacent and stoppedinnovating.

Session (Number)

SESSION TITLE

Synopsis – Session 5: Managing Risk in

Innovation (Contd.)Mr. Adrian D. Perera compared a normal tea cup used by hotels in Sri Lanka against a cup thatStarbucks/Coffee Bean & Tea, where tea served in a normal tea cup with cost the consumer LKR. 300and the same tea served in a Starbucks/Coffee Bean & Tea cup would cost the consumer LKR 2,000. Mr.Adrian D. Perera feels that this is due to a perceived value that the consumer would have towards aproduct offered by Starbucks/Coffee Bean & Tea as opposed to the same tea offered by a local hotel. SriLankan producers of tea should recognize this factor, and as the second largest tea exporter in the worldwe as a country should identify this factor and work to innovate our culture to this mindset.

Research and complex planning are not always required for innovation to be a success, simplepsychological changes in the minds of our leadership and people can lead to innovation. In examiningthis point Mr. Adrian D. Perera provided a recent example in the pastry industry, recently aninternational company came into the local market with the perceived goal of being the leading providerof short-eats and cakes, this international company identified a local short-eat in high demand (fish bun)and provided the same item (with a slight change in ingredients) and sold that item for a significantlyhigher price. While certain consumers were able to, in essence, get the same item for significantlycheaper at a local shop they elected to buy this product for this international provider because thisprovider utilized shops with better ambience. As Sri Lankans we need to look at this example and seehow we can change our current business practices to evolve when faced with international competition.

Session (Number)

SESSION TITLE Mr. Adrian D. Perera emphasized that “… risk management isn’t the antithesis of innovation, it is theessence.” Risk management and innovation are not opposites, but can be an innovative company’score competency. Further, risk management need not slow down innovation but be the driving forcefor innovation. CFOs and financial personnel should be flexible when it comes to assessing potentialproducts/services for innovation and look at the potential lasting impact of an innovation instead ofthe one year forecast. Having this mindset will allow local companies to strive to find solution to thechallenges faced in the environment that the companies are operating in.

According to Global Innovation Index, Sri Lanka is 98 out of 142. In stating this it important to notethat Sri Lanka is not ‘bad’, however there are significant areas for improvement. CFOs should look atinvesting in R&D and be more ready to take risks if the potential long-term reward is worth it.Currently in the local context there are several challenges that need to be addressed beforeinnovation can be fostered. The main issues are the dearth of venture capitalist (banks and financecompanies are the source of capital) and focus on short-term performance. While reviewingprojected cash flows and using financial analysis such as ROE is okay this is resulting in a barrier toresearch and development. In assessing the potential returns of a project one must utilizeengineering and other technical people along with accountants. When examining severalinternational companies there are many success stories for how innovation has drastically increasedthe growth rate of those companies (for example, Toyota).

Synopsis – Session 5: Managing Risk in

Innovation (Contd.)

Session (Number)

SESSION TITLE Companies in Sri Lanka should carefully choose project champions for innovation projects and theseproject champions should not be compensated based on a fixed salary but should be driven by aperformance based salary – further, these project champions should be recruited from outside thecompany on a temporary basis.

Activities aimed at prototyping should be encouraged however, the finance team should assist byproviding a risk governance framework for the project to be developed in. Otherwise costs mayspiral out of country and the project will be tabled as a loss. In order to meet increasing prototypingefforts additional resources should be allocated to mitigate risks. Further, in examining thecompetitive landscape we should not operate in silos but work in collaboration with othercompanies (even competitors) in establishing products that benefit the market as a whole.

Mr. Adrian D. Perera concluded his speech by underscoring the key message: without risk there is noinnovation.

Synopsis – Session 5: Managing Risk in

Innovation (Contd.)

Session (Number)

SESSION TITLE Panelist – Mr. Krishan Balendra

Mr. Krishan Balendra provided insight on how his company, John Keels, managed risk while strivingfor innovation. He highlighted that the key risks affecting his career were centered around this thedevelopment of building projects, these were: Funding for the projects; Construction/Raising of theproject; and the Actual operations of the Project.

Panelist – Ms. Deepthie Wickramasuriya

Risk management and innovation should not work in opposition to each other. The core competencyof successful innovative companies is risk management; however, risk management that supportsinnovation is new to Sri Lanka.

We should not hope for innovation to naturally occur, innovation can only occur when theorganization fosters an environment where there are opportunities for innovation. Risk should bemanaged in a way to maximize opportunities to provide the organization with value.

Synopsis – Session 5: Managing Risk in

Innovation (Contd.)