21.10.2020

In the first part of our blog series “Necessity is the mother of invention,” we looked at the role of innovation during the coronavirus crisis.

Part 2 will now focus on how decision-makers can successfully manage the balance between innovation and risk.

An article by our Project Lead Marian Sander.

An inseparable pair: innovation & risk

By definition, innovations deal with the new and unknown. They therefore potentially involve a considerable investment risk. The average flop rate of company-driven innovations is estimated to be between 70 and 95 percent, depending on the subject area, type of survey and evaluation.

Particularly in the current situation, it is therefore crucial to structure innovation activities as low-risk and cost-efficiently as possible. Modern innovation methods such as design thinking and lean start-up and also the Nunatak Growth Engine®, which is based on these methods – enable an efficient “de-risking” of innovation activities. Such methods aim to significantly reduce the investment risk in just a few weeks, with the lowest amount of time and resources.

But first of all, it is important to dispel a long-standing myth: Innovations rarely arise from the magical inspiration of individuals or from creative brainstorming workshops where ideas are randomly collected. Such brainstorming workshops are often introduced with this sentence: “Today there are no good or bad ideas – no right or wrong.” The goal is to produce a comprehensive longlist of ideas – which in the continuing innovation process almost always turn out to be unsuitable for the market. 

The truth is this: There are bad ideas, and those who place idea generation at the beginning of the innovation process make innovations a random exercise – and accordingly accept a high risk of failure.

Rather than blindly “shooting innovations from the hip”, a structured and evidence-based approach yields much better results.

Customer-first: Which problem in the life of the customer or consumer should be solved in the first place?

An essential success factor for good ideas is the development of fundamental insights about customer and consumer needs, challenges, and pain points which – when solved through innovations – can yield a corresponding willingness to pay. Often times companies lack exactly such insights. Although the decision-makers involved may follow widely accepted beliefs and their general opinions about customer or consumer needs, there are no reliable facts and no suitable methods to analyze these facts in such a way that the actual business potential becomes apparent.

In order to create this basis, modern and cost-efficient forms of customer and consumer research are available – quantitatively, using digital survey tools, or qualitatively, for example via video interviews or online diaries. These can also be applied cost-effectively via instant messaging technology, such as WhatsApp. 

„You should look at the workarounds that your customers are needing to do. It becomes a real source of a lot of insights.“
Clayton Christensen, economist and author

Valuable insights are provided by, for example, the daily routines that consumers follow in their everyday lives and the challenges they face. Clayton Christensen, the late Harvard professor and pioneer of modern innovation strategy, put it in a nutshell: “You should look at the workarounds that your customers are needing to do. It becomes a real source of a lot of insights.”

By combining further insights into the digital skills and assets available within a company, and through relevant technology trends and the relevant competitive environment – additional perspectives that many innovation departments also fail to capture in a structured way – it is possible to pinpoint suitable solution areas or opportunity spaces for future innovation activities.

This ensures, with comparatively little effort, that future innovations address a relevant problem, and it significantly reduces the risk of misinvestments.

Precisely defined assumptions, cost-effective pretotypes and suitable test formats are crucial for reducing investment risk

Suitable value propositions for new products, services and use cases can now be developed for the solution areas or growth areas identified in this way. The decisive question here is: What must be true in order for this value proposition to be successful in the market?

Important: This step requires concrete assumptions to be made. In order to continue to minimize risk efficiently, it is also necessary to record the respective assumptions on which a value proposition is based – and to do so as transparently and comprehensively as possible. 

One example: Digital services often assume that consumers are willing to share their data with the service provider. In this step, innovation managers must first make assumptions about what data the future users will be willing to share and for what specific purposes they will give their approval. For the success of an innovation, it is essential to test this willingness before the actual development.

Accordingly, the next step should be to define efficient validation methods to check the defined assumptions. These steps can come in the form of in-depth research e.g. to validate assumptions about the market potential.

Important assumptions regarding the potential adoption of an innovation by a specific target group can, however, be validated primarily by applying agile test methods.

Validation through agile test methods and pretotypes

For agile test methods, the use of so-called pretotypes (early prototypes) is particularly recommended. The term originates from Albert Savoia (Google) and describes a kind of preliminary stage to complete prototypes – i.e. pre-prototypes, or pretotypes for short. 

In contrast to prototypes (which are often already considered as fully functional precursors of an end product), pretotypes are intentionally limited to specific aspects of a planned innovation and simulate functionality only as far as necessary.

Pretotypes are representations of specific features and functionalities of products, services and use cases that are developed for the sole purpose of validating this specific aspect of an innovation (and the underlying assumptions) with minimum time and cost.

Specifically, pretotypes (or early prototypes) can range from sketches and wireframes to click dummies and data simulations, all of which pursue the same goals:

  • to prove or disprove whether a value proposition would be successful in the market,
  • to determine the need for adjustments, 
  • and to estimate the market potential.

These pretotypes should be validated in situations that are as “lifelike” as possible, using suitable test formats such as customer intercepts, fake doors, A/B testing or Wizard-of-Oz testing with customers, consumers or users. By means of iterative test cycles, interdependent assumptions can be fully permeated.

Such a “test-and-learn” approach provides – depending on the complexity of the topic – a solid basis in the form of–proof of concept after only a few weeks, thus securing further investments in the development of a complete MVP (minimum viable product) – i.e., the most pared-down version of a product or service that can still be released. Before allocating substantial budgets, decision-makers can thoroughly check the marketability of their innovation using such a procedure.

In the course of this, the specific product or service requirements can be iteratively substantiated and transferred into a list of requirements (backlog). These can, for example, take place directly in the form of user stories to enable agile implementation using methods such as Scrum.

The days of requirement documents spanning hundreds of pages of technical specifications which are then to be implemented via waterfall projects in a time- and resource-intensive way, only to fail spectacularly in the market are clearly over.

Long story short – the most important takeaways:

  • The winners during the coronavirus crisis will be those companies that are already adapting to the new development stage of digitalization, which we call #NextLevelDigital. Innovation is essential for this.
  • Investment in innovation always involves risk. The challenge for those responsible for innovation is to minimize this risk.
  • Evidence-based methods are crucial for assessing the viability of an innovation at an early stage and for supporting investment decisions.
  • To clearly define solution areas and growth fields, it is crucial to have knowledge of customer and consumer needs, of digital skills and assets in your own company, and of the competitive environment and accompanying technology trends.
  • When new value propositions are developed, the underlying assumptions should be clearly defined, and appropriate methods should be chosen to prove or disprove these assumptions with cost-effective pretotypes – to provide proof of concept and to estimate the market potential.

Photos: unsplash.com 2020, pexels.com 2020,

© 2021 The Nunatak Group