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You are here: Home / Operations / Balancing Risk and Innovation for Market Success

Balancing Risk and Innovation for Market Success

January 27, 2016 By Jessica Johns Pool

innovation vs riskBusiness owners tend to be conservative, particularly where innovation is concerned. Why should you encourage innovation with its inherent risks?

According to the National Center for the Middle Market, significant innovation in the form of new products, services or processes provides significantly greater rewards:

“… companies that invested in new knowledge in existing markets reported an average initial investment of $1.6 million with a return of $5.2 million in revenues and $2.7 million in profits for their last completed innovation project. Per dollar invested, that’s 100% more revenue and 125% more profit than companies received when they innovated more conservatively.”

Here are a few tips to help you capture those extra profits.

Create a framework for innovation

Need to encourage new ideas or channel great ideas in a more productive direction? Create a formal framework. Think of this framework as an extension of the common advice to go to your boss with a problem but with possible solution too.

Such a framework could take several shapes. You could post a form on the company intranet or a shared drive that is available 24/7, company-wide for a continuous improvement program. To address specific problems, you might create a one-time campaign directed at the single issue and name a specific deadline.

Regardless of timing, you should require the employee (or an entire team) to thoroughly think through their idea. Their proposal should state the issue, the potential solution, anticipated costs in both money and time, and return on investment.

Don’t forget to follow up and communicate with employees about their proposals. Your formal framework should include a list of the decision-makers, a timeline on when they’ll hear whether their idea will be implemented, and if you’d like more research to be done.

If an idea is rejected, communicate why. Was the idea too complicated to implement? Too expensive? Too risky for the reward? Your feedback will help employees revamp their next ideas in a more useful direction.

Finding innovative change anywhere

Be open to those outside your company when looking for good ideas to improve your business model. During those regular talks you have with your major customers, ask them if there’s something more your company could do. Maybe a small line extension by your company will allow them to consolidate vendors and improve product delivery.

Another option: Your vendors may have ideas that help both your companies streamline processes or improve profitability. Some companies even open their call for innovation to the wider world through online forums, social media and outside consultants.

An excellent primer on how to apply another company’s innovation to your own business model can be found at Harvard Business Review.

Push to innovate, not just renovate

Yes, incremental change can offer substantial benefits to the company over time. However, the most profitable companies rely upon innovation, not just renovation, to feed their success.

According to the National Center for the Middle Market, highly innovative companies apply a greater percent of their efforts to new markets for existing products and services and new products and services to new markets. Less successful companies play a less risky game by relying most heavily on applying their existing portfolio to existing markets and a much smaller percent to new products in new markets.

The most successful companies, when it comes to true innovation, also involve its highest-level executives in the planning and execution of new ideas.

The buyer’s perspective

A proven culture of innovation can be a key element in making your company attractive to future buyers. A formal framework can convey to buyers that employees are willing to help grow and continuously improve the business. Also, continuous innovation will prevent your company and its staff from becoming complacent and satisfied with the status quo. Buyers look for organizations that are constantly challenging themselves to improve, develop, and grow. If you can foster an environment like this in your business, you will be truly “buyer ready.”

© 2016 Generational Equity, LLC. All Rights Reserved.

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Filed Under: Operations Tagged With: employees, Innovation

The Private Business Owner – A Generational Equity Blog

The Private Business Owner is an online publication sponsored by Generational Equity. PBO aims to provide useful tips and information that will improve both the lives and businesses of entrepreneurs, as well as provide valuable insight into the company exit process through bi-weekly M&A Digests.
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