Chapter 8 - Decision Making Under Uncertainty - Managing Innovation: Integrating Technological Market and Organizational Change PDF

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MANAGING INNOVATIONCHAPTER 8: DECISION MAKING UNDER UNCERTAINTYPHAM THI THUY LAN | 경영혁신 | 201950145“Out of all the things we could do, what are we going to do?” Organizations cannot afford to innovate at random – they need some kind of framework that articulates how they think innovation can help th...

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MANAGING INNOVATION CHAPTER 8: DECISION MAKING UNDER UNCERTAINTY PHAM THI THUY LAN | 경영혁신 | 201950145

“Out of all the things we could do, what are we going to do?” Organizations cannot afford to innovate at random – they need some kind of framework that articulates how they think innovation can help them survive and grow, and they need to be able to allocate scarce resources to a portfolio of innovation projects based on this view. This is complex because innovation is about the unknown and uncertainty. The only way we can get more certainty is by starting the project and learning as we go along. In this chapter, will explore some of the ways in which organizations deal with this difficult area of decision making under uncertainty. I.

MEETING THE CHALLENGE OF UNCERTAINTY

Innovation management tries to convert that uncertainty at the outset to something closer to a calculated risk – there is still no guarantee of success but at least there is an attempt to review the options and assign some probabilities as to the chances of a successful outcome. • •

The assessment of risk is still based on extremely limited information. There is a balance between the risks involved and the potential rewards.

Incremental: lower risk than radical. Under such condition’s decision making is often shaped by emotional forces as well as limited facts and figures. II.

THE FUNNEL OF UNCERTAINTY

Central to this process is knowledge – this is what converts uncertainty to risk. The more we know about something, the more we can make calculated decisions about whether or not to proceed. Innovation as a process of reducing uncertainty but increasing resource commitment → The “innovation funnel,” – a roadmap that helps us make (and review) decisions about resource commitment.

outline concept

detailed design

testing

launch

FIGURE 8.2 The innovation funnel. Given this model, it makes sense not just to make one big decision to commit everything at the outset when uncertainty is extremely high but instead to make a series of stepwise decisions. Each of these involves committing more resources but this only takes place if the risk/reward assessment justifies it. “Stage-gate” approach involves putting in a series of gates at key stages and reviewing the project’s progress against clearly defined and accepted criteria. The effectiveness of any stage-gate system will be limited by the extent to which it is accepted as a fair and helpful framework against which to monitor progress and continue to allocate resources. III.

DECISION MAKING FOR INCREMENTAL INNOVATION

When we are deciding about incremental innovation the process of deciding is (relatively) straightforward. Since this involves comparing something new with something that already exists, we can set up criteria and

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measure against these. This is where stage-gate systems become powerful tools for innovation management. One area where systematic management of incremental innovation becomes important is in “high involvement” systems, where a large proportion of the workforce becomes engaged in innovation. But how will we manage a large amount of ideas from employees? → “policy deployment” (“hoshin planning”) - essentially devolving the top-level innovation strategy to lower levels in the organization and allowing people at those levels to make the decisions: IV.

The creation of a clear and coherent strategy for the business. The deployment of it through a cascade process. BUILDING THE BUSINESS CASE

The development and presentation of a persuasive business case are important, and much can be done with tools and techniques to explore and elaborate the core concept. → to move an outline idea to something with clearer shape and form, on which decisions about resource commitments can be made. (more radical innovation projects → the “business case” needs to be more strongly made). Business Models are useful for several reasons: -

Provides a roadmap for how innovation can create value. Provides a way of sharing the idea with others. Offers a helpful checklist of areas to consider in making sure the idea and the route to creating value with it are well-thought-out.

Probe and Learn Approaches to Concept Development: The concept of “lean start-up” and “agile” development → Early-stage innovation. Central: the “minimum viable product” and the “pivot.” Tools: simulation and prototyping (advanced computer modeling). V.

CONCEPT TESTING AND ENGAGING STAKEHOLDERS

Many of the problems in product and process innovation arise from the multifunctional nature of development and the lack of a shared perspective on the product being developed and/or the marketplace into which it will be introduced. → Places a premium on involving all groups at the earliest possible stage, that is, the concept definition/product specification stage. For entrepreneurs trying to start a new venture, the problem of resource limitations often means that they need to develop expertise in building coalitions and networks of support. As organizations move to the increasing use of “open innovation” approaches, the potential for engaging a wider community of stakeholders such as suppliers, users, and so on, increases. Bringing in the ideas of end-users not only improves the quality of the final design but can also help accelerate the diffusion of the innovation. Interaction with outsiders also needs to take account of external regulatory frameworks. VI.

SPREADING THE RISK

The innovation process has a funnel shape with convergence from a wide mouth of possibilities into a much smaller section, which represents those projects to which resources will be committed. → which projects and the subsidiary one of ensuring a balance between risk, reward, novelty, experience, and many other elements of uncertainty? No organization can do everything, and so it must make choices and try to create a broad portfolio that helps with both the “do what we do better” and the “do different” agenda. “portfolio management”: from simple judgments about risk and reward to complex quantitative tools based on probability theory → provide a coherent basis on which to judge which projects should be undertaken and to ensure a good balance across the portfolio of risk and potential reward.

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Failure to make such judgments can lead to several problem issues: VII.

No limit to projects taken on Reluctance to kill-off or “de -select” projects Lack of strategic focus in project mix Weak or ambiguous selection criteria Weak decision criteria DECISION MAKING AT THE EDGE

When the innovation-decision is about incremental innovation (“do what we do but better”), there is relatively little difficulty. But as the options move toward the more radical end so the degree of resource commitment and risk rises and decision making resembles more closely a matter of placing bets. “Discontinuous” conditions established incumbents often face a major challenge. The existing decision making, and underlying reward and reinforcement systems strongly favor the status quo, working with existing customers and suppliers. → creates an opportunity for new entrants to colonize new market space. •

Selection and Reframing

A key part of this challenge lies in the difficulties organizations face with “reframing” – viewing the world in different ways and changing the ways they make selection decisions as a result. The problem with discontinuous innovation is that it presents challenges that do not fit the existing model and require a reframing. “Core competencies become core rigidities”: discontinuous shifts usually begin as weak signals of major change → cannot recognize. And then the disconnect between the two becomes apparent and the need for radical reframing is unavoidable → too late. Much of the difficulty in radical or discontinuous innovation selection arises from framing problem. “The architecture of an innovation”- Successful innovation management requires that we can get hold of and use knowledge about components but also about how those can be put together. •

Not Invented Here and the “Corporate Immune System”

When there is a shift to a new mindset, established players may have problems because of the reorganization of their thinking that is required. It is not simply adding new information but changing the structure of the frame through which they see and interpret that information. They need to “think outside the box” within which their bounded exploration takes place – and this is difficult because it is highly structured and reinforced by organizational structures and processes. “Not invented here”: Recognition of interesting idea with potential but reject it – often by finding flaws or mismatch to current internal trajectories. Rejection is easier to understand if we see it as a problem of what makes sense within a specific context (little knowledge or experience, not its core business…). TABLE 8.4 Examples of Justifications for Non-adoption of Radical Ideas: -

“It’s not our business”: Recognition of an interesting new business idea but rejection because it lies far from the core competence of the firm. “It’s not big enough for us”: Emergent market size is too small to meet growth targets of a large established firm. “Invented here”: Recognition of interesting idea but rejection because the internally generated version is perceived to be superior. “Nice idea but doesn’t fit” It ain’t broke so why fix it”: No perceived relative advantage in adopting new idea. We’ve never done it before”: Perception that risks involved are too high along market and technical dimensions.

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“Immune system”: rejects the strange in order to preserve the health of the current body unchanged. It is important to understand the problem of reframing since it provides some clues as to where and how alternative routines might be developed to support decision making around selection under high uncertainty. VIII.

MAPPING THE SELECTION SPACE

Decision making, even around radical options, is often constrained – this gives rise to the anxiety often expressed about the need for “out of the box” thinking. Higher levels of uncertainty put pressure on the existing models – and one effect is that they reject ideas that do not fit – and over time build a “ self-censoring” aspect. FIGURE 8.3 Outline map of innovation selection space. Rising complexity means that it becomes increasingly difficult to predict a particular state because of the increasing number of potential configurations of these elements. And it is here that problems of decision making become significant because of the extremely high levels of uncertainty.

Zone

Selection Challenges

Enabling structures

Zone 3: Alternative frame – taking in new/different elements in the environment

Reframe – explore alternative options, introduce new elements. The challenge involves decision making under uncertainty but not simply a problem of lack of information and the need to take risky bets to learn more. Here there is also the issue of unfamiliar frames of reference and the difficulty of letting go of dominant logic. Cognitive dissonance means that incumbents have trouble “forgetting” enough to see the environment through “new eyes”. Emergence – need to coevolve with stakeholders - Be in there - Be in there early - Be in there actively

Unlikely to fit with established decision structures – stage gate and portfolio – since these are designed around established business model frame. Needs parallel or alternative evaluation structures – at least for early stage

Zone 4. Radical – new to the world – possibilities. New architecture around as yet unknown and established elements

Far from mainstream Satellite structures – skunk works or even outside the firm “Licensed dreamers” Outside agents and facilitators

Tools to Help with High Uncertainty Decision Making

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Building Alternative Futures: using tools such as forecasting, trend extrapolation, and scenario building to create and explore alternative models of the future and the potential threats and opportunities which they contain → open up new innovation space. Prototyping as a Way of Building Bridges in the Selection Process: Prototyping offers a way of creating such steppingstones toward that new option, allow both building up of better understanding and shaping the idea while it is still in its formative stages. There are many ways of prototyping including physical models, simulation, and so on, and this span both manufactured products and service concepts. Probe and Learn: Closely related to boundary objects, the idea here is to help move from outside the box to a new place outside the comfort zone by a series of planned experiments. → Provide new information about what does (and does not) work and so help build the case for selection, represent ways of mapping “unsafe” territory and reducing emotional anxiety. Using Alternative Measurement and Evaluation Criteria: adapting existing systems which may be only partially effective. (using conventional criteria but increasing the limits). Mobilizing Networks of Support: radical innovation identifies the role of “champions” (“power” promoters, and “knowledge” promoters), several types of champions (technical champions, project champions, senior management champions, business unit champions), in some cases a single individual champion who takes on multiple championing roles. Using Alternative Decision-making Pathways: To help provide a pathway for developing radical ideas at least to the stage where they can stand up for themselves in the mainstream innovation funnel process. “fuzzy front end”- building a potential portfolio of higher risk ideas and options, and some mechanisms for gradually building a business case that can be subjected to increasingly critical criteria for resource allocation. Deploying Alternative Funding Structures: Increasingly organizations are developing alternative and parallel funding arrangements that provide access to funding on different terms. ( special project teams, incubators, new venture divisions, corporate venture units, and “skunkworks.”) Deploying Alternative Funding Structures: Increasingly organizations are developing alternative and parallel funding arrangements that provide access to funding on different terms. (special project teams, incubators, new venture divisions, corporate venture units, and “skunkworks.”). provide helpful vehicles for growing ideas to the point where they can be more fairly evaluated against mainstream criteria and portfolio selection systems. → temporary mechanisms. Using Alternative/Dedicated Implementation Structures: One strategy for dealing with the selection problem associated with radical ideas is to allow them to incubate elsewhere. this strategy bridges both the selection and implementation challenge and makes use of different mechanisms for incubation and early-stage development. These can take the form of special external vehicles, which operate outside the existing corporate structure (skunkworks, “satellite” SMEs, third-party consultants). Mobilizing Entrepreneurship: use intrapreneurship to help with radical innovation.

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