Modeling Risk and Innovation Management

INTRODUCTION Establishing something new is the essence of product innovation. Since this process necessarily involves risk, early risk identification and management is required by innovative firms. So the purpose of this paper is to explore methods for managing risk in innovation projects. To begin with the proposal method for managing risk in specific kinds of innovation will be explained. In the next section, definition of innovation and different types of innovation are described. Moreover, different stages of innovation are presented. Section three illustrates the definition of risk, sources of risk, and risk management systems. Section four states the methodology of this research. Section five explains the proposal method for managing risk in innovation projects and includes an example, and section six concludes this paper. Innovation Innovation is the main source of economic growth (Mokyr, 2002) and a key source of new employment opportunities, as well as providing potential for realizing environmental benefits (Foxona et al., 2005). One of the most important arguments is that in a global economy where economic actions can be more cheaply carried out in low-wage economies such as China, the main way in which the other economies can compete and survive is to find new and better products and processes; in other words, to innovate (Storey & Salaman, 2005). According to the Oxford Dictionary of Economics, "innovation refers to the economic application of a new idea. Product innovation involves a new or modified product; process innovation involves a new or modified way of making a product" (Black, 1997). According to Afuah (2003), innovation is the employing of new knowledge to provide a new product or service that customers want. In another words, it is invention + commercialization. Van de Ven (1986) describes innovation in terms of a new idea, which may be a recombination of old ideas, a plan that challenges the present order, a formula, or an exclusive method which is perceived as new by the involved individuals. The literature provides different categories of innovation classified by type, degree, competence, impact, and ownership (Narvekar & Jain, 2006). Innovation can be considered in both manufacturing and service sectors of different sizes (small, medium, and large). Although there is a difference between these two sectors, the general definition and process of innovation are the same. Services have their own characteristics different from manufacturing. For instance, services are intangible, perishable, and heterogeneous (Johne & Storey, 1997). Tidd et al. (2005) say innovation is not just about opening up new markets; it can also present new ways of serving older and established ones. They classify innovation into 4 groups (product, process, position, and paradigm)--each of which can happen along an axis, running from incremental through radical change. Incremental product innovation entails the introduction of an improved product, which, compared with its predecessor, has at least one additional desirable characteristic or is efficient with the same characteristics. In contrast, radical or fundamental product innovation takes place when a new market has opened up and the innovator begins to satisfy a hidden demand (Ferguson & Ferguson, 1994). By considering the different kinds of innovation mentioned above, for this study three dimensions were selected to classify innovation types. The first one is based on a company (manufacturing or service).The next one considers innovation based on product or service. Among different kinds of innovation which are mentioned in the literature, such as marketing, organization, position, paradigm and so on, product and process were selected. It seems, from a general point of view, that all of these different kinds of innovation can be categorized based on these two dimensions (product and process). Also, these two kinds of innovation are more common in comparison to other ones. …