How radical should your Innovation risk-taking strategy be?

‘Innovation’ has become a go-to buzzword that you’ll hear in nearly every senior strategy meeting and most boardrooms up and down the country. It’s not just at the coal face either, the government has even made it one of its focuses too.  

In 2021 the then Secretary of State at the Department of Business, Energy and Industrial Strategy (BEIS), Kwasi Kwarteng, laid out ambitious plans to turn the UK into a global innovation hub by 2035, as part of its UK Innovation Strategy. To support this growth, it launched grants and funding through its Innovate UK Investor Partnership scheme.

While it’s encouraging to business owners and senior leaders that some support is there, is funding the only problem and does it tackle the other challenges facing UK SMEs?  

What’s the state of play?

In 2021, the BEIS found that innovation planning amongst SMEs was in decline at the time, perhaps a knock-on effect of the pandemic when businesses had more pressing concerns and attentions were no doubt fixed elsewhere.  

However, over the last two years, the focus at a national level has seen the tide turning and 55% of SMEs surveyed (2021 UK Innovation Survey) claimed to have ramped up their innovation planning activity. While funding is an issue, it nearly always is, there are other challenges, including a lack of skills and expertise, and SMEs higher level of risk aversion.

So, how radical should you innovation risk taking strategy be?

First and foremost, it's important to understand the strategic perspective of your company, looking at your appetite for risk and tolerances and processes around strategic decision-making, the management, culture and behaviours within your company – otherwise known as your business’s Entrepreneurial Orientation or EO.

Innovation is all about how you introduce new ideas, engage in transformation, take risks, your customer-centricity, proactive thinking, a culture of creativity, and learning from failures.

Entrepreneurial Orientation is a necessary driving force for innovation in your company in response to these environmental changes and requires promoting a dynamic and forward-looking organisational mindset that results in a high frequency and intensity of innovation output e.g., more creating, more changing, and more improving business’s products, services, processes, while keeping an eye on your markets, to name just a handful of areas of influence.  

Using Entrepreneurial Orientation as a driving force for innovation

Entrepreneurially oriented firms support and exhibit a sustained pattern over time characterised by five elements - innovativeness, proactiveness, risk-taking, competitive aggressiveness and autonomy - used to pursue a combination of short-term and long-term interventions and actions for innovation.  

Let’s explore these five areas in more details:

Exploring for the long-term while at the same time exploiting in the short-term

Time plays a crucial role in business strategy, which involves balancing both short-term (exploiting) and long-term (exploring) opportunities. Short-term opportunities focus on resolving immediate competitive challenges while exploring opportunities is focused on finding prospects beyond immediate results.  

Innovation risks associated with these two approaches can categorised into Horizons (1-3, 2-5, 5-12 years) and evaluated using McKinsey's Horizon Framework. The longer it takes to realise your goals, the riskier the innovation may be. A mix of both approaches is needed for future success. For instance, companies like O2 Telefonica simultaneously optimised and exploited their platforms while exploring new opportunities when they formed Giffgaff as a budget service.

Have a balanced innovation portfolio of radical vs incremental changes

The second involves the size of the change, ranging from incremental to radical (products or services, process innovations, or marketing innovations). Incremental changes are associated with smaller, more manageable risks, and usually involve “known unknowns” (e.g., size, impact, probability, and controllability) - risks that can be quantified and prioritised for effective management. The decision-making process in this case tends to involve identifying acceptable risks and then tailoring your approach to managing these. Like running a marketing campaign for a new product.    

On the other hand, more radical changes involve disrupting the status quo and introducing new ideas to the world. These carry “unknown unknown” risks whose nature and consequences are less predictable and unknown – reminiscent of entrepreneurial environments comprised of volatility, uncertainty, complexity, and ambiguity and managed using tools like the Harvard VUCA framework. Here, the decision-making process for more radical changes is orientated towards what you are prepared to lose to achieve their goals, i.e., affordable loss. For example, starting SpaceX or Virgin Galactic.

Innovate as often as possible

Another consideration in your innovation strategy is the frequency of your innovation initiatives. A great example of a company that excels at innovation is 3M (known for Post It notes). They have a '15% rule' which dedicates 15% of all employees' time to innovation which has resulted in almost 120,000 patents. This entails having a combination of initiatives of varying degrees of frequency and degree of change -- you can plot and track these as a frontier i.e., low to high frequency vs incremental to radical to find your sweet spot.

Use cognitive diversity as an enabler

At the core of innovation are people. All people possess creativity, problem-solving skills, and decision-making abilities, which are crucial for taking risks and driving innovation. However, each person has a unique approach to developing new solutions, which can range from incremental to revolutionary. Some individuals are more inclined towards ‘Innovative’ thinking, characterised by a willingness to challenge norms, take bold risks, and embrace revolutionary change. Others are more ‘Adaptive’, preferring incremental change, making practical improvements, taking calculated risks, and leading with group conformity.

Elon Musk is a highly accomplished entrepreneur who tends to disrupt industries and start afresh. He exhibits a more Innovative cognitive preference. While other successful entrepreneurs like Jeff Bezos, on the other hand, appear to be more cognitively Adaptive preferring to optimise and improve the system.

Everyone has a unique cognitive style. There is no right or wrong way to think. Some people are naturally more comfortable at making more radical or revolutionary changes, while others excel at making small, incremental changes. Having a diverse range of thought can be beneficial for innovation and risk-taking. The Kirton Adaption-Innovation (KAI) Inventory is a powerful psychometric tool for measuring an individual’s problem-solving style. This can be used to enable creative teams, reduce conflict and improve collaboration.

In combination, different horizons (short vs long term), size (incremental vs radical), innovation frequency (low vs high), and people's problem-solving styles (adaptive vs innovative) together form important elements when developing your innovation risk strategy. Similarly, using the suggested tools can help ensure companies are investing in the right resources depending on their innovation needs.

In today’s marketplace innovation amongst SMEs is essential for short-term business continuity and long-term growth. The ability to better understand your innovation strategy and have a strategy for risk-taking is key to understanding where change is needed and how to enhance an organisation’s ability to innovate, develop, and drive success.