Risk Management in Relation to Smaller Businesses - Case Study Example

Risk and Innovation Name Institution Professor Subject Date Introduction In the world of business, every company or business organisation aims at ensuring that they grow to enjoy market monopoly. They always want to achieve this by being entrepreneurial and innovative. Due to this, every organisation does put a culture that would help spell out ways of supporting innovators who pursue intelligent risks (Marinos, 2010). Sadly, such organisations do recognise only those individuals who bring success and ignores the failures whenever they give them an opportunity to take risks. This means that no one would always want to associate with failures. However, the concept of risk and innovation believes in the opposite of this. Managers and leaders in the business world need to give support to risk takers and entrepreneurs if they have the need to create a culture of risk-taking and innovation in their companies. Therefore, for employees to initiate change and innovation, they will need to get positive feedback, comments and remarks about every effort they make. This paper is out to see how organisation has adopted the culture of risk taking, risk management and innovation. Through a detailed discussion on the relationship between risk and innovation together with sampled case studies, this aim would be met. The road to establish this relationship between risk and innovation thus requires a definition of a few terms like risk and innovation. The process of generating new ideas and implementing them into a new product, process and service with the result being: growth in the national economy; increase in employment opportunities; and creation of more profits to a business enterprise entails the concept of innovation (Urabe et al, 1988, p. 03). This process of generating new ideas and implementing them is normally gradual and cumulative as it involves the process of organizational decision-making. A new idea in this sense is regarded as the unique thought on a new customer or ways of production (Urabe, et al, 1988, p. 03). After a heavy process of information gathering and entrepreneurial thoughts and plans, the idea is developed and commercialized into a new market product (Urabe et al, 1988, p.03). In other words, innovation is characterized by the creation of opportunities in traditional business activities and adding new ideas to realise a higher level of specialization in the business (Marinos, 2010). When this happens, the company improves in terms of its competitive nature, knowledge on economy and prosperity of the surrounding society. As a new way of doing something, innovation can be revolutionary or radical. One major challenge with innovation is that when it is implemented, the outcome is never clear as it can either fail or succeed. As new ideas continue to crop in and implementation is taking place, the business environment is at times characterized by uncertainties. This explains why the outcome of innovation is not predictable; the risks involved. Risk is the possibility that a hazard will occur (Lam, 2003, p. 210). Managers in any business environment should always ensure that they manage the environment so that it can be safe and be to sustain the growth of a business. This actually entails being aware of the weaknesses and vulnerabilities to the hazards surrounding the business. The awareness will make them to take a step to reduce the chances of such hazards turning into disaster. This means that if managed properly, a risk can reduce. The management of risk in this sense will be beneficial in that it will enable sustainable development of the business. The process of risk management entails mitigation and prevention, which actually means taking measures to stop a bad event from occurring and reducing the vulnerability of the hazards (Lam, 2003, p. 210). Risk Management and Innovation The major thing that drives innovation is the ability to take a risk. The ability to take risks during innovation must also be accompanied by the ability to mange those risks. This is because without risk, there will be no innovation and without proper risk management, there will never be successful and affordable innovation (Shavinina, 2003, p. 818). The question that comes next then is what risk management is. Any activity directed towards the assessment, mitigation and monitoring of risk is what can be referred to as risk management; dealing with anything that would tamper with the value of an object. Therefore, as much as it is risky to practice innovation because the outcome is not clear, the practice of risk management in the process of innovation helps deal with any uncertainties. It should thus be understood that risk management plays a very important role in enhancing innovation in several ways. Risk management helps to balance innovation, keeping it from going off the rails and protecting from danger (Johnson, 2010). According to Johnson (2010), the perception an organisation has will determine how an organisation will pursue innovation. Even though risk management is seen as a preventive measure it helps to support the vision behind innovation; risk management is the essence of innovation (Johnson, 2010). Secondly, risk management can as well speed up innovation. As well, risk management in innovation requires high level of discipline, which at last does give a good approach to financials (Johnson, 2010). This is shown as in when a business implements a new innovative idea and it fails to work. Normally, the organisation can abandon it or invest more money to push it forward. This at times needs patience and at last, a company can reap good benefits. Once every manager understands what role risk management plays in the innovation process, it is also worth exploring the relationship between risk and innovation by trying to which risks can be rewarding when taken. This would call the need the managers to group the risks into two categories: unrewarded and rewarded risks. Unrewarding risks are those such as strategic risks, operational risks, reporting risks and compliance risks (Bernacki, 2010). As the organisation chooses strategies to enable it achieve it objectives, it needs to identify those risks that relate to ineffective and inefficient business processes and add them to those that tie to reliability, accuracy and timeliness due to lack of systems to provide information (Bernacki, 2010). Such are the ones to be watched carefully. Rewarding risks on the other hand are those that help enlarge insight into opportunities for innovation because the process of innovation helps capture opportunities from risks (Bernacki, 2010). Concisely, for managers to manage risk and innovation effectively, they have to take care of three factors that would ensure their success: alignment, insights and mobilization. Every organisation must ensure that they make each of their employees to understand their role and contribution in line with the organisation's mission. This should extend to their understanding of the need for innovation after which, the information got from them becomes knowledge in the organisation (Desai.com). When this knowledge is got, it becomes insight and thus would lead to every person involved in the organisation including the customers being included in its development. The concept of the mobilization also comes with the idea that only those organisations with the ability to execute insights become successful (Desai.com). This means that every value of an innovation must be captured to its fullest so that the products and services can be improved (desai.com). The integration of the concept of innovation and risk can be shown through the case study below: Case Study 1: GHD's Global Innovation Program As an engineering company, GHD concerns itself with private and public clients. The company often does feasibility studies, design, project and construction management (Stone &Keating, 2010, p.23). The company also does a service of management consulting in asset and risk management and sustainability for its clients. The company registers a long history of consistent healthy innovation (Stone & Keating, 2010, p. 24). The achievement has been because of cooperation between the manager and the staff through Research and development partnerships with universities and co-operative research centres (Stone & Keating, 2010, p. 24). The innovation has been constantly in response to clients' needs and project challenges. Later, the company identified a range of issues like duplication of effort, lack of transparency, unclear targets and determination, inconsistent capturing of effort and outcomes and insufficient communication of success in the firm as a result of the globalisation, competition and technological changes that were taking place (Stone& Keating, 2010, p. 24). This called for the alignment of innovation with their strategies and a boost in the risk management process. Therefore, an innovation program was launched in March 2008 after an extensive research, design, and inclusion of all employees in the generation of ideas (Stone& Keating, 2010, p. 24). An advisory board was set up to look into any idea that came from the employees and the best ideas would receive funding for trial. Thousands of ideas have been collected since then and this raised the firm’s ability to leverage intellectual capital across all boundaries (Stone & Keating, 2010, p. 24). The internal ideas collected were statistically reported to be able to save the firm approximately, $ 750, 000 per annum (Stone & Keating, 2010, p. 24). External ideas were driven by a need to respond to climate changes that have called for machines with low consumption of energy. With this, a junior staff member gave an idea of how energy could be cut down during the use of water treatment technology by at least 50%; an initiative that could help their clients to save close to one million kilowatts ($ 150,000) (Stone & Keating, 2010, p. 24). The project was thus given funding and a team assembled to advance on the concept, a move that showed the firm's open approach to innovation. The project impacted positively globally especially with respect to financial and environmental benefits (Stone & Keating, 2003). Some of the risks that were associated with this project were that this project could not have been adopted simply because the employee was junior and lacked influence within the organisation in order to achieve executive championship (Stone & Keating, 2010). In addition, the project risked abandonment if at all there would not have been a commercialization staff with skills and experience to push on the idea (Stone & Keating, 2010). The two risks were managed by GHD by establishing a tool for collectively picking up any innovative idea; a democratic process for evaluating ideas; and a team trained to drive innovative projects to implementation (Stone & Keating, 2003, p. 25). Generally, the investment on innovation is very different from all kind of investments (Stone & Keating, 2010, p. 24). The process is risky because of the way it integrates with many parts of an organisation and as well includes co-operation with external parties (Stone & Keating, 2010). This case study presents a very good approach for other organisations that want or are in the process of managing and mitigating the risk of innovation spending to drive competitive advantage (Stone & Keating, 2010). The overall belief in this firm is that innovation comes with both risks and opportunities and therefore there is need to mange the risks; risks can be done away with when vital innovations are undertaken to avoid the ideas progressing to waste (Stone & Keating, 2010). Therefore, for a firm to have successful innovation, it needs to come up with ways of selecting and implementing ideas while taking precautions to prevent such ideas from leaking out of the firm prematurely (Stone & Keating, 2010). Case Study 2: Risk Management in Relation to Smaller Businesses The concept of risk management and innovation cannot be discussed without reference to small businesses because it does not leave out any small businesses but runs across all sizes of businesses. As stated earlier innovation works well when one identifies the risks that comes with it and then plans to control them. Small and medium sized businesses do find many challenges especially when competition increases in the market and when customers pile up pressure for high standard goods (Brown, 1997). The pressure do increase when the suppliers push in terms of tighter cost control and faster response making them increase their speed in terms of innovative production (Brown, 1997). This state normally leaves the SMEs with high risks of innovation than the large enterprises because of the few technical and managerial competencies, limited finance and limited access to information (Brown, 1997). This is also because at some points, one unsuccessful product can always cause the enterprise to remain shaky and may affect even the entrepreneur's personal assets due to the aversion of a risk (Brown, 1977). The challenge of risk management for SMEs largely starts with the chain that connects them to the large corporation. With the above discussion, it might look like investing in large businesses would reduce risk but that is not true. When innovation is viewed from the context of a supply chain, then the aspect of stiff competition between businesses come in linking the small industries to the large ones (Brown, 1997). An example is the engineering industry that does push aspects of technological development towards smaller firms (Brown, 1997). The suppliers as well use the small-scale businesses to show their competitive nature in production of quality products as well as development of skills and resources (Brwon, 197). The understanding of innovation in small businesses given by stakeholders in large corporations has largely been seen as fallacies. For example, the large firms do have the view that when small businesses are provided with information through links to public sector science base and universities, then the SMEs will risks associated with innovation as acceptable (Brown, 1997). In addition, large firms do exhibits the ability to spread risks across a variety of product developments with a range of risk reward ratios (Brown, 1997). Small-scale businesses cannot afford this because of their homogenous nature and the variety of aspirations that the owner may have in the business. To subvert this misunderstanding on the concept of innovation in SMEs especially in financing the technological business opportunities, certain approaches have been provided by policy maker, support organisations and individuals (Brown, 1997). The approaches are in such a way that they integrate good practice with SME tools and methodologies. The approaches are in both internal and external. From the internal perspectives, a facilitator can be taken to do an assessment in the business with the aim of adding value. This would extend to involving the staff, putting issues open, interpreting findings and then arriving at an action plan (Brown, 1997). Secondly, the small-scale businesses can adjust its culture starting with its organisational structure to dissemination of financial data and making the staff give suggestions for possible improvements (Brown, 1997). The SMEs can also focus on their product development but should be careful not to mix it with new market development because when the two go together, the exercise becomes risky (Brown, 1997). An example of a company that reduced innovation risk through the above method is Paraid, a UK engineering company. The company licensed it products overseas and developed the existing markets in UK before the took manufacturing rights (Brown, 1997). The result was new customers. In a bid to expand, the company developed ads for the licensed products like adaptors. The result was high sales to already existing customers. The funds got from this expansion were recycled into market product development (Brown, 1997). The initiative was supervised by a senior and experienced staff member. From the external perspectives, an SME can correct misunderstandings about innovation through a simple SWOT analysis with the aim of linking internal competencies and capabilities into opportunities and threats posed by the environment (Brown, 1997). In addition, the SMEs can invest in attending exhibition to get relevant information. This would be given strength by a regular benchmarking to ensure that the level of sophistication suits the firm (Brown, 1997). Conclusion This discussion has been based on the concept of risk and innovation. Through it, perspectives have been made on the concept of risk as possibility of a hazard interfering with the value of a product or an object. Innovation has been seen as the generation of new ideas into a product, process or service with the aim of increasing specialization and profits. This principle of these concepts and the relationship that exist between them show that it is worthy for all organisations to arm themselves with the skills, processes and systems to manage and mitigate the risks associated with innovation. The management of all innovation programs starts with risk management because it acts as an accelerator, and is the real essence of innovation. The management of innovation involves identification of ideas that go in line with the organisation’s strategic objectives and have every employee contribute ideas (Stone & Keating, 2010). Innovation success also depends on the ability to capture fresh ideas from varied sources to ensure a democratic evaluation and decision-making. This should be followed by a proper process that allows room for identification of risks and opportunities in the initiative (Stone & Keating, 2010). The innovation should as well be managed by an experienced team with appropriate skills to push on the idea. The expertise of such a team will always ensure that there is a clear and transparent measurement of costs and benefits associated with innovative activities (Stone & Keating, 2010). Generally, the investment on innovation is very different from all kind of investments (Stone & Keating, 2010, p. 24). The process in risky because of the way it integrates with many parts of an organisation and as well includes co-operation with external parties (Stone & Keating, 2010). This case study presents a very good approach for other organisations that want or are in the process of managing and mitigating the risk of innovation spending to drive competitive advantage (Stone & Keating, 2010). References: Bernacki, Ed. (2010). The relationship between innovation and risk. Web, March o5, 2010 http://unlimited.co.nz/unlimited.nsf/growth/the-relationship-between-innovation-and-risk Accessed on 12th December, 2012. Borghesi, Antonnio & Gaudezi, Barbara. (2012). Risk Management: How to Assess, Transfer and Communicate Critical Risks. New York: Springer. Brown, David. (1997). Managing risk and Innovation: The challenge for Small Businesses. Warwick Risk Initiative: University of Warwick Risk Initiative Briefing, 2368582.pdf . Johnson, Mark. (2010). Risk Management and Innovation. Bloomsberg Business Week. Web, 08 November, 2010 http://www.businessweek.com/innovate/content/nov2010/id2010118_752981.htm Accessed on 12th December, 2012. Lam, James. (2003). Enterprise Risk Management: From Incentives to Controls. New York: John Wiley & Sons Marinos, Louis. (2010). ENISA-ANACOM Workshop on Risk and Innovation. Web, January 22, 2010 Accessed on 11th December, 2012. Shavinina, Larisa (2003). The International Handbook on Innovation. London: Elsevier. Stone, Jeremy & Keating, Nicole. (2010). Innovation- a Business Risk That Can be Managed and Mitigated. Keeping Good Companies Final Published Article Feb10.pdf. The Desai Group (2012). Risk and Innovation. Web, 2009-2012 < http://www.desai.com/about-us/riskand-innovation-/tabid/89121/Default.aspx> Accessed on 12th December, 2012. Urabe, Kuniyoshi et al. (1988). Innovation and Management: Its International Comparison. London: Walter de Gruyter. Read More