Relationship between Risk Management and Innovation in the Private or Public Sector - Coursework Example

The Relationship between Risk management and Innovation University’s Name: Submitted by Names Tutor: Date: Relationship between Risk Management and Innovation in the Private or Public Sector Introduction Risk management and innovation are always viewed as partners because when they are merged together an organization is in a better position to explore more risky opportunities that other risk-averse businesses fear venturing into (Berglund, 2007). Stiff competition across industries has made innovations inevitable if a business wants to have a competitive advantage in the market and large and multinational companies like Toyota, Samsung, BMW, and Apple have been facing stiff completion that have forced them to be innovative by taking higher risks in order to dominate the market (Globerman, 2014). In addition, the rapidly changing business environment has forced firms to be creative and innovative (Cogliandro, 2007). Just like innovation is indispensable in today’s entrepreneurship, so does the risk. However, it is important to understand the risks any organization is willing and able to take in order to create innovations that are likely to improve its operations. Every organization in private or public sector, or even nonprofit organization needs strives to improve efficiency in their operation through innovation and creativity, which is only possible through effective risk taking. The essay, therefore, focuses on the relationships between risk management and innovation in either private or public sector. Innovation and Risks in Public or Private Sector Innovation is basically be defined as the process where idea or inventions are translated into products that have value and that can attract clients to pay for them (Drucker, 2014). The relationship between innovation and risk management is found in almost all sectors in public and private sector because they are independent on one another. For instance, if a firm creates or introduce new goods or service in the market, the opportunity related to such particular new product is associated with the utility customers derive from the product. The adoption or acceptance of the new product is always determined by the end consumers and an organization is likely to face some challenges if the new product is not suitable enough to meet the needs, desires, and expectation s of the end consumers (Drucker, 2014). A new product that has been received well by customers always leads to losses in the business and despite the innovation; a firm can loss competitive advantage among other players in the industry. Innovation, therefore, come with some level of risks that a firm must face or incur. The primary purpose why organization, especially business, engage in innovation process is to maximize customer satisfaction so that they can increase their sales volume leading to optimal profit (Barton et al., 2002). Despite the fact that innovation is necessary in both service and manufacturing sector, it is needed more in service industries because they deal in intangible products that need high levels of customer satisfaction to gain loyalty and consistency of customers (Drucker, 2014). The innovations are always aimed at improving the features of goods or services that a firm offers in an already existing market and not to create a new market. In addition, an organization can choose to engage in incremental or radical innovation. Incremental innovation is when an organization decides to improve existing goods or services in a small way in order to gain competitive advantage in the market by increasing customer satisfaction (Davenport, 2013).On the other hand, radical innovation is when an organization decides to exploit existing technology in order to have major transformation on the goods and services that it offers in order to change the existing market. However, many organizations in private or public sector prefer incremental innovation because it is less risky compared to radical innovation. Regardless of the type of innovation that an organization chooses, the main aim of any innovation is to increase customer satisfaction by improving the goods or services that they offer to meet customer needs and expectation (Drucker, 2014). With improved goods or services, an organization is likely to gain competitive advantage in the existing or new markets. The only way a company can survive the high competition in almost all industries in the world is to understand the environment in which it operates, especially the potential risk in the market. To ensure stability and continued growth of a business, the management must be aware of the relationship between innovation and risk. Effective risk management is important and should be incorporated in strategic decision-making process for the successful execution of innovative organization strategies (Chance and Brooks, 2015). Risk management should be part and parcel of an organization culture and every stakeholder should be involved in it to ensure its success. Integration of business risk and innovation call for effective risk management where the departments and individuals involved in it fully understands and are aware of their entrusted responsibilities regarding risks that a business is likely to face. Business management that employs effective risk management is in a better position to identify possible risks while at the same time it is able to introduce innovative processes that are less risky to the operations of the business (Reuvid, 2010). The innovation introduced in a business should not be reactive to the changes in the market, but instead, it should be strategic and proactive for it to be less risky and sustainable in the long run. Strategic and proactive innovations can lead to positive impact on the business because it can lead to higher profits due to increased customer satisfaction. There is strong interdependence between risk management and innovation. An organization that introduces new innovative processes is likely to encounter some risks in its operations like sales and marketing, human resource management and the general administration. It is important for an organization to come up with effective and appropriate measures to mitigate risks through proper risk assessment process and methods. An organization with poor risk assessment and risk mitigation strategies is likely to fail even after introducing new innovations that improves goods or services because every innovation is associated with some level of risks (Chance and Brooks, 2015). A business with proper risk management strategies is likely to succeed in its operation when it introduces innovations due to reduced level of innovation risks, which can give it a competitive advantage among its peers in the industry. There are two principal ways that an organization can take to effectively manage risk to ensure success of a business through innovation. First, the management can every identify risk situation and initiate particular measures that are associated to each risk situation by involving broad participation in risk management (Chance and Brooks, 2015). Secondly, an organization can utilize more general analysis to create security objectives and guidelines to globally mitigate risk by avoiding direct and personal means with little management participation (Chance and Brooks, 2015). Innovation in cooperation with effective risk management plays crucial roles in private or public sector because they ensure that sustainable and beneficial improvement in goods or services, effective competition in the market, compliance with required standards and rules, and reduced political and economic uncertainties that can negatively affect the operation of business. Tools and Techniques used in Risk Management in Relations to Innovation There is no innovation that does not come with risks associated with it. At the same time, a company that has introduced any new product in the market must face some risks like the difficulties in matching the product improvement with the needs and desires of customers, unfavorable customer behavior towards the improved product, and the possibility of market resistance (Davenport, 2013). There are also a number of risks that are associated with innovation process and they include unexpected increase in the cost of innovation, untimely completion of innovation, and inability to attain the desired quality of the products. In addition, there are a lot of uncertainties in local and international business environment leading to various types of risks like international risks, holistic risks, and contingent risks that may negatively affect business operations. However, if a business is in a right position to effectively manage risk, it can successful initiate and implement any types of innovation that can improve its goods or services (Chapman, 2011). A business is only able to properly reduce or mitigate potential risk if it employs appropriate and modern methods and techniques of risk management. Risk assessment is one of the best techniques that that an organization can use to mitigate risk in order to successfully implement innovation. Risk assessment involves identification of potential risks, evaluation of potential risk, and the identification of the best ways to mitigate the identified risks (Chapman, 2011). Most organizations are risk averse and they attempt to come up with strategies that can help them in reducing potential uncertainties. Risk averse theory is based on psychological intuitive and diminishing marginal utility. For instance, people value an extra dollar that makes them avoid poverty extra dollar that makes them richer (Rabin, 2000). In addition, individuals are risk neutral when the impact of the risk is small. However, risk assessment helps an organization in coming up with the right picture of potential risks and better methods that can be used to mitigate the risks. Risk assessment helps an organization to identify some of the hidden that are not common in the industry. Identifying the right potential risks and coming up with the best solution helps an organization to successfully implement innovations with minimal challenges. Perspective of Risks in Public or Private Sector There are a number of risk perspectives that an organization can experience when it is introducing or implementing innovation. Organizations should ensure that they identify potential risks and come up with solutions to such risks to reduce negatively impact their negative impacts. Three main perspectives of risk include technical risks, operational risk, and policy risks. Technical risks are associated with hazards emanating from activities like design, engineering, and technological process, which can lead to some types of risks leading to loss in time, resources, and can even cause harm to individuals working in an organization (Pritchard & PMP, 2014). Operational risk, on the other hand, is type of risks that an organization faces when it operates in a given industry and it comes from breakdown of internal procedures in an organization, people working in the organization, and systems that are put in place. Operational risks are not based on financial or market risks. Further, strategic risks are uncertainties a company is facing in executing its strategies. The ability to effectively manage the above perspectives of risks is important in ensuring success introduction and implementation of innovation that gives an organization a competitive advantage in the market. Before an organization introduce innovation in its system, it is important to identify and understand technical risks that are associated the innovation. Most innovations are associated with technical risks that pose major threat to the operations of business. The management should ensure that it employs the right expertise, follow the required standards and do through assessment before initiating an innovation to mitigate such type of risks. Following the right procedures in coming up with innovations ensure that the process is successful without imposing a lot of risks to the organization. Operational perspective of risk is reputational and it can successfully it can be managed by adopting qualitative approaches where the management is coming with effective strategies (Pritchard and PMP, 2014). Operational risks are always associated with human resource in an organization and it is important for an organization to have appropriate structures and cultures that can control behaviors and emotions of all its workers. Effective management of strategic perspective of risk requires that an organization come up with strategies with regard to market competition, customers, and the regulatory authorities. Therefore, effective management of the three perspectives of risks can lead to successful introduction and implementation of innovation that can give an organization a competitive advantage in the market. Impact of Innovation on Business Reputation Business reputation represents firms past and present perspective by describing the company’s overall attractiveness to its key stakeholders compared to its main competitors in the industry (Horn et al., 2015). Business reputation is one of the intangible assets that improve the company’s competitive advantage in the industry. There are many factors that determine the reputation of a business and they include signals received from an organization, media, and stakeholders like customers and suppliers (Padgett and Moura-Leite, 2012). Bad reputation negatively affects the operation of a business while good reputation enhances its performance and growth. Innovation, therefore, has a significant effect on the reputation of a business. Innovation makes a company to different from other companies in the same industry that offer the same goods or services (Padgett and Moura-Leite, 2012). One of the ways that innovation is able to enhance business reputation is when an organization introduces come up with improved new ways serving its key stakeholders or new ways of improving the goods or services that it offers. When key stakeholders like customers are satisfied with the good or services that a business offers then they are likely to share positive information with other people about the company that can boost its reputation. Reputation also leads to a long term and sustainable performance of a business, which make key stakeholders and the public in general to view it as one of the most successful business in the industry. People like associating with success and any business that always succeeds in its operation is likely to have a positive public image that can help in boosting its reputation. There is a close relationship between innovation and corporate social responsibility (CSR) and a business that innovations that enhance quality of products or services improves the CRM of a company because stakeholders will perceive such improvement as product quality improvement (Padgett and Moura-Leite, 2012). Institutional theory also supports the participation of business in various innovations they are in a position to attend to pressures and issues of stakeholders that require innovative solutions, which leads to good reputation (Padgett and Moura-Leite, 2012). Innovative business also engenders favorable responses by employees because it improves their integrity and self-respect from other stakeholders and the public. A good business reputation is believed to be a by-product of effective management, including effective risk management. Therefore, a business that wants to build its reputation among the stakeholder to gain competitive advantage in the market must be effective risk management, which plays an important role in the successful implementation of innovation. Reputation in business is earned through developing virtuous characters and innovation is one of the business virtues that lead to customer satisfaction. Incorporating Risk Management and Innovative in Organization Risk management process should entail a thorough risk analysis and it is the responsibility of business management to clearly differentiate between risk management and risk analysis (Beyani and Kasonde, 2008). Risk analysis refers to the techniques employed by organization to identify potential hazards that may interfere with operations of business that may hinder it from achieving the set objectives. Therefore, risk analysis is focusing on the end product while risk management is focusing on the process that can help in identification and mitigation of potential risks. Risk analysis should be a by-product of effective risk management. In order for a business to achieve its objectives of optimizing profits through customer satisfaction, the management should integrate risk management and risk analysis. One of the best way of integrating risk management and risk analysis is through the use of risk management framework known as GoeQ (Beyani and Kasonde, 2008). The framework differentiates six phases of a project to be implemented. The six generic phases include feasibility, pre-design stage, the design stage, the contracting, the construction and the operation & maintenance phase in business projects. Geo Q is important in risk management, especially in relation to innovation because it ensures that appropriate standards are followed. A business can only succeed by coming up with appropriate innovations by taking a risk. Innovations are always associated with risks uncertainties in any economy. Risk management, which is taken as learning process not only initiate innovations, but it also accelerates it (Johnson, 2010). Entrepreneurs are under pressure to reduce risks that threatens the maximization of profit and they rely on various innovations to achieve their primary objective. Many businesses also sponsor huge projects in order to promote innovation so that they reduce risks and remain competitive in the market (Culp, 2013).Entrepreneurship is full of uncertainties and risks that threat operations of businesses and most suitable way in countering the challenges is to come up with innovations. Consequently, there has been increased innovation in business areas like finance, human resource, supply, sales and marketing, and production process. The desire to have effective risk management techniques, therefore, have led to increased innovations in the private sector, which is profit oriented. Effective working relationship between innovators and risk managers is important for the success of any business (Culp, 2013). Businesses are only able to attain a significant competitive advantage in the market after coming up with innovative risk management strategies. Innovations enable entrepreneurs to take advantage of the risks that other players in the industry face, which come with new business opportunities (Juul, 2009). Business environment is changing at an alarming rate and the changes come with new uncertainties that can only be solved through innovation (Culp, 2013). What is obvious from the previous discussion is that both innovation and effective risk management is important for the success of any private sector. There are existing and emerging risks in the business environment that business should mitigate while at the same time a business must engage in innovations for it to have a competitive advantage in the market. The two concepts, therefore, must work hand in hand for the success of a firm. Conclusion The relationship between risk management and innovation, in most cases, is mutual their success depend on one another. Many risks that businesses face and that threaten their success make them to carry research and development that lead to innovation. At the same time, high competition in many industries forces businesses to find a better way of satisfying their customers and effectively managing the risks that they face. The primary aim of private or public sector is to satisfy the needs of customers by improving the quality of goods or services that they offer through innovation. However, there is no innovation that can succeed without proper risk management. Any management, therefore, should understand all risk management and techniques in order to achieve the set objectives. Reference List Barton, T.L. et al, 2002, Making Enterprise Risk Management Pay Off. John Wiley & Sons. Berglund, H. 2007. Risk conception and risk management in corporate innovation: lessons from two Swedish cases. International Journal of Innovation Management, 11(04), 497-513 Beyani, M., & Kasonde, R. (2008). 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