9. Dealing With Uncertainty Shorter 2024.pptx

9. Dealing With Uncertainty Shorter 2024.pptx

1. 9. Dealing With Uncertainty Disarikan oleh: Yos Tri Atmodjo Ada banyak peluang menarik dan menantang yang dihadapi organisasi tetapi dilain pihak setiap organisasi memiliki keterbatasan . Ketidak pastian harus disiasati bukan dengan gambling tetapi dengan berbagai cara dan metoda sehingga risiko dapat dinyatakan dalam calculated risk 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 1

2. Background 1 The world is full of interesting and challenging possibilities for change – but the organization doesn’t have deep enough pockets to face them all. The issue is ‘out of all the things we could do, what are we going to do?’ Making decisions is about resource commitment and so choosing to go in one direction closes off opportunities elsewhere. This isn’t easy Organizations cannot afford to innovate at random – they need e.g. an innovation strategy. In a complex and uncertain world, it is nonsense to think that we can make detailed plans ahead of the game and follow them systematically The strategic framework for innovation should be flexible enough to help monitor and adapt projects as ideas move towards more concrete solutions – and rigid enough to justify continuation or termination as uncertainties and risky guesswork become replaced by actual knowledge Innovation decision making is made more complex by the fact that it isn’t a simple matter of selecting among clearly defined options. By its nature, innovation is about the unknown, about possibilities and about opportunities associated with doing something new, and so the process involves Dealing With Uncertainty . 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 2

3. Background 2 The problems we don’t know in advance if an innovation will work  will the technology actually do what we hope, will the market still be there and behave as we anticipated, will competitors move in a different and more successful direction, will the government change the rules of the game and so on. The only way we can get more certainty is by starting the project and learning as we go along. So making the initial decision – and the subsequent ones about whether to keep going or cut our losses and move in a different direction – becomes a matter of calculating as best we can the risks associated with different options 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 3

4. Ch. 9 Dealing With Uncertainty The process of innovation is much more complex than technology responding to market signals . Effective business planning under conditions of uncertainty demands a thorough understanding and management of the dynamics of Innovation, including conception, Development, adoption and diffusion. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 4

5. Forecasting Process Forecasting the development and adoption of innovations is difficult , but there are highly relevant methods to innovation and sustainability Participative methods such as Delphi Scenario planning 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 5

6. Forecasting Process The process of forecasting, including consultation and debate, is probably more important than the precise outcomes of the exercise . A business plan, however informal, Helps to articulate, share and debate the key assumptions, aims and resources of a new venture. It can also be useful to attract support and resources Forecasting methods assist in the identification and assessment of market opportunities and potential competition , ranging from simple market research through to scenario planning. It is critical not to ignore risks and uncertainty, but instead to identify the types, sources and ways to avoid, transfer, mitigate or accept such risks . Financial planning is essential, especially analysis of cash flow, but is not sufficient. In addition, more qualitative methods of assessing innovation projects are necessary 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 6

7. 9.1 MEETING THE CHALLENGE OF UNCERTAINTY What distinguishes Innovation Management From Gambling? Both involve committing resources to something that have an uncertain outcome. But innovation management tries to convert uncertainty to something closer to a calculated risk  – there is still no guarantee of success but at least there is an attempt to review the options and assign some probabilities of chances of a successful outcome . This isn’t simply a mechanical process   The assessment of risk is still based on very limited information; There is a balance between the risks involved and the potential rewards, if the innovation project is successful 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 7

8. 9.2 THE FUNNEL of UNCERTAINTY Knowledge converts uncertainty to risk. The more we know about something, the more we can take calculated decisions about whether or not to proceed. getting hold of knowledge as early as possible  In innovation management, the challenge is to invest in acquiring early knowledge through technological R&D, market research, competitor analysis, trend-spotting a host of other mechanisms – to get early information to feed decision making. Figure 9.1 Thinking of innovation as a process of reducing uncertainty but increasing resource commitment In essence: The further we go into a project the more it costs but the more we know 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 8

9. 9.2 THE FUNNEL OF UNCERTAINTY Figure 9.1 Thinking of innovation as a process of reducing uncertainty but increasing resource commitment In essence, the further we go into a project the more it costs but the more we know FIGURE 9.1 Uncertainty and resource commitment in innovation projects John R. Bessant_ Joseph Tidd - Managing innovation _ integrating technological, market and organizational change In practice, this is shown in the ‘innovation funnel’,  –  a roadmap which helps us make (and review) decisions about resource commitment. Figure 9.2 The Innovation Funnel 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 9

10. Formal Planning? 1 To secure support or funding for a project or venture. Can translate abstract or ambiguous goals into more explicit operational needs, support decision-making and identify trade-offs. Can help to make the risks and opportunities more explicit, expose any unfounded optimism and avoid arguments concerning responsibilities and rewards 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 10

11. Formal Planning? 2 There is no standard business plan but, in many cases, venture capitalist will provide a pro forma for their business plan However, most business plans submitted to venture capitalists Are strong on the technical considerations Having common serious inadequacies in all four areas (marketing plan, management team, technology plan and financial plan, but the worst are in marketing and finance) 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 11

12. 9.3 PLANNING UNDER UNCERTAINTY A typical formal business plan will include the following sections Details of the product or service Assessment of the market opportunity Identification of target customers Barriers to entry and competitor analysis Experience, expertise and commitment of the management team 6. Strategy for pricing, distribution and sales Identification and planning for key risks Cash-flow calculation, including break-even points and sensitivity Financial and other resource requirements of the business 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 12

13. 9.4 FORECASTING INNOVATION 1 Forecasting the future has a pretty bad track record, but has a central role in business planning for innovation. In practice, there will be a trade-off between the cost and robustness of a forecast The more common methods of forecasting (trend extrapolation and time series) are of limited use for new products, because of the lack of past data. However, regression analysis can be used to identify the main factors driving demand for a given product and therefore provide some estimate of future demand, given the data on the underlying drivers. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 13

14. 9.4 FORECASTING INNOVATION 2 The more common methods of forecasting (trend extrapolation and time series) are of limited use for new products, because of the lack of past data. Regression analysis can be used to identify the main factors driving demand for a given product an, given the data on the underlying drivers. Exploratory forecasting attempts to explore the range of future possibilities. The most common methods are: • Customer or market surveys • Internal analysis, for example, brainstorming • Delphi or expert opinion • Scenario development 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 14

15. 9.5 ESTIMATING THE DEMAND FOR INNOVATIONS Conventional marketing approaches are fine for many products and services, but not for innovations. To better plan for innovations, we need a deeper understanding of what factors promote and constrain adoption how these influence the rate and level of diffusion within different markets and populations There are many barriers to the widespread adoption of innovations, including: Economic – personal costs versus social benefits, access to information, insufficient incentives Behavioral – priorities, motivations, rationality, inertia, propensity for change or risk Organizational – goals, routines, power and influence, culture and stakeholders Structural – infrastructure, sunk costs, governance For these reasons large, complex sociotechnical systems tend to change only incrementally. More radical transformations can occur, but these often begin in strategic niches, with different goals, needs, practices and proc 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 15

16. 9.6 ASSESSING RISK, RECOGNIZING UNCERTAINTY 1 Dealing with risk and uncertainty is central to the assessment of most innovative projects. Risk is usually considered to be possible to estimate, qualitatively – high, medium, low  or ideally by probability estimates. Uncertainty is, by definition, unknowable, but, the fields and degree of uncertainty should be identified to help to select the most appropriate methods of assessment and plan for contingencies. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 16

17. 9.6 ASSESSING RISK, RECOGNIZING UNCERTAINTY 2 Traditional approaches to assessing risk focus on the probability of foreseeable risks, rather than true uncertainty or complete ignorance Individual characteristics and organizational climate influence perceptions of risk and propensities to avoid, accept or seek risks Formal techniques e.g. failure mode and effects analysis (FMEA), potential problem analysis (PPA) fault tree analysis (FTA) have a role, Formal techniques have a role, but the broader signals and support from the organizational climate are more important than the specific tools or methods used  14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 17

18. 9.6 ASSESSING RISK, RECOGNIZING UNCERTAINTY 3 There are many approaches to risk assessment , but the most common issues to be managed include Probabilistic estimates of technical and commercial success Psychological (cognitive) and sociological perceptions of risk Political and policy influences, such as the ‘precautionary principle’ 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 18

19. RISK AS A PROBABILITY 1 Research indicates that 30–45% of all projects fail to be completed Over half of the projects overrun their budgets or schedules by up to 200%. Figure 9.3 presents the results of a survey of R&D managers . GURE 9.3 Uncertainty in project planning John R. Bessant_ Joseph Tidd - Managing innovation _ integrating technological, market and organizational change 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 19

20. RISK AS A PROBABILITY 2 Most appear to be relatively confident when predicting technical issues e.g. development time and costs, But a much smaller proportion are confident when forecasting commercial aspects of the project 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 20

21. CRITERIA USED Different criteria were used and how useful they were Table 9.3 summarizes some of the results. Probabilistic estimates of technical and commercial success are near universal and considered to be of critical importance in all types of project assessment and are usually combined with some form of financial assessment and fit with the company strategy and capabilities 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 21

22. THE AIM of PROJECT APPRAISAL and EVALUATION The right projects is worth an effort ( avoid wasting time and resources in meaningless activities ) and improve the chances of success, Project appraisal and evaluation aim to : Profile and gain an overall understanding of potential projects. Prioritize a given set of projects , and where necessary, reject projects. Monitor projects , for example, by following up the criteria chosen when the project was selected. Where necessary, terminate a project . Evaluate the results of completed projects . Review successful and unsuccessful projects to gain insights and improve future project management , that is, learning 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 22

23. COMMON ELEMENTS OF ANY PROJECT EVALUATION TECHNIQUES Some techniques have been developed and are still being developed. Common elements of any project evaluation technique: Inputs into the assessment include likely costs and benefits in financial terms, probability of technical and market success, market attractiveness and the strategic importance to the organization. Weighting gives certain data more relevance than other (e.g., of market inputs compared with technical factors), in order to reflect the company’s strategy or the company’s particular views. The data is then processed to arrive at the outcomes. Balancing a range of projects, as the relative value of a project with respect to other projects is an important factor in situations of competition for limited resources, eg. Portfolio management techniques There is no single ‘best’ technique. The extent to which different techniques for project evaluation can be used will depend upon the nature of the project, the information availability, the company’s culture and several other factors. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 23

24. PERCEPTION OF RISK Probability estimates, being the objective criteria for evaluation are usually significantly moderated by psychological (cognitive) perceptions and bias , or overwhelmed by sociological factors, eg. peer pressure and cultural context Experience and context have a profound influence on the assessment of, and appetite for, risk At the individual , cognitive level, risk assessment is characterized by overconfidence, loss aversion and bias 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 24

25. PROBLEMS of LIMITED COGNITION Problems of limited cognition include : Reasoning by analogy Adopting a single, prior hypothesis bias , even where information and trails suggest that this is wrong Limited problem set, the repeated use of a narrow problem-solving strategy Single outcome calculation and denying value trade-offs Illusion of control and predictability, Devaluation of alternatives, emphasizing negative aspects of alternatives 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 25

26. 9.7 ASSESSING OPPORTUNITIES FOR INNOVATION 1 Report by European managers on R&D project evaluation No method can guarantee success, No single approach to pre-evaluation meets all circumstances Whichever method is used –  the most important outcome of a properly structured evaluation is improved communication . 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 26

27. 9.7 ASSESSING OPPORTUNITIES FOR INNOVATION 2 Three characteristics of corporate investments in innovative activities: They are uncertain, so that success cannot be assured. They involve different stages that have different outputs that require different methods of evaluation. Many of the variables in an evaluation cannot be reduced to a reliable set of figures and into a formula , but depend on expert judgements Hence Communication is important, especially between the corporate functions concerned with R&D and related innovative activities, Along with the allocation of financial resources 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 27

28. FINANCIAL ASSESSMENT OF PROJECTS Financial methods are still the most commonly used method of assessing innovative projects, but usually in combination with other, often more qualitative approaches. The financial methods range from simple calculation of payback period or return on investment, to more complex assessments of net present value (NPV) through discounted cash flow (DCF). Project appraisal by means of DCF is based on the concept that money today is worth more than money in the future ( not because of the effect of inflation , but reflects the difference in potential investment earnings, that is, the opportunity cost of the capital invested)   Pt = Forecast cash flow in time period T = Project life i = Expected rate of return on securities equivalent in risk to project being evaluated C = Cost of project at time t = 0 . 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 28

29. HOW TO EVALUATE LEARNING Potential benefits of innovative activities are twofold. Extra profits are derived from increased sales and/or higher prices for superior products and from lower costs and/or increased sales from superior production processes. Conventional project appraisal methods can be used to compare the value of these benefits against their cost. Accumulated firm specific knowledge (‘learning’, ‘intangible assets’) that may be useful for the development of future innovations. Conventional techniques cannot be used to assess this second type of benefit, because it is an ‘option’ it creates the opportunity for the firm to invest in a potentially profitable investment, but the realization of the benefits still depends on a decision to commit further resources. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 29

30. THREE CATEGORIES OF INNOVATION THAT LARGE FIRMS MUST FINANCE The successful allocation of resources to innovation depends less on robustness of decision-making techniques than on the organizational processes in which they are embedded. There are three (overlapping) categories of innovation that large firms must finance. Each category has different objectives and criteria for selection, 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 30

31. CHECK LISTS 1 Checklists are a commonly used example of a simple qualitative technique. A checklist is simply a list of factors that are considered important in making a decision in a specific case A simple checklist could be one made up of a range of factors that have been formed to affect the success of a project and that need to be considered at the outset In the evaluation procedure, a project is evaluated against each of these factors using a linear scale, usually 1 to 5 or 1 to 10. The factors can be weighted to indicate their relative importance to the organization. The value in this technique lies in its simplicity, but by the appropriate choice of factorS FACTORS SCORE* WEIGHT S X W 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 31

32. CHECK LISTS 2 (See Table 9.6 for more detailed factors) FACTORS SCORE* WEIGHT S X W Corporate Objectives Marketing and Distribution Manufacturing R & D Regulatory and legal factors Financial 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 32

33. SELECTION AND REFRAMING A key part of organization challenge to face with “Reframing” - viewing the world in different ways and changing the ways they make selection decisions as a result Human beings cannot process all the rich and complex information coming at them and so they make use of a variety of simplifying frameworks – mental models – with which to make sense of the world. Organizations – as collections of individuals they construct shared mental models through which the complex external world is experienced  Of necessity such models are simplifications – for example, business models provide lenses to make sense of the environment and guide strategic behavior. The problem with discontinuous innovation is that it presents challenges that do not fit the existing model and require a reframing  Psychologists call this ‘cognitive dissonance’ in individuals, organizations often selectively perceive and interpret the new situation to match or fit their established world views The need for radical reframing is unavoidable, it is often too late 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 33

34. RATIONALIZE THE REJECTION DECISION Rejection is easier to understand if we see it as a problem of what makes sense within a specific context  – the firm has little knowledge or experience in the proposed area, it is not its core business, it has no plans to enter that particular market and so on. Table 9.7 lists some examples of justifications that can be made to rationalize the rejection decision associated with radical innovation options 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 34

35. MATRIX MEASURING RISK VERSUS REWARD A typical example is to construct some form of matrix measuring risk versus reward , for example, on a ‘costs of doing the project’ versus expected returns FIGURE 9.4 An example of a matrix-based portfolio FIGURE 9.4 An example of a matrix-based portfoli John R. Bessant_ Joseph Tidd - Managing innovation _ integrating technological, market and organizational change 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 35

36. HOW PRACTICING MANAGERS COPE How successful managers allocate resources to technological activities. In particular, they: Encourage incrementalism  – step-by-step modification of objectives and resources, in the light of new evidence. Use simple rules models for allocating resources , so that the implications of changes can be easily understood Make explicit from the outset criteria for stopping the project or program . Use sensitivity analysis to explore if the outcome of the project is ‘robust’ (unchanging) to a range of different assumptions Seek the reduction of key uncertainties (technical and – if possible – market) before any irreversible commitment to full-scale – and costly – commercialization. Recognize that different types of innovation should be evaluated by different criteria 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 36

37. 9.8 DECISION MAKING AT THE EDGE When the innovation decision is about incremental innovation there is relatively little difficulty. But as the options move towards the more radical end so the degree of resource commitment and risk increase, and decision making resembles more closely a matter of placing bets . Uncertainty is high and emotional and political influences become significant. At the limit, the organization faces real difficulties in making choices about new trajectories  – in moving ‘outside the box’ in which its prior experience and the dominant technological and market trajectories place it. Under such ‘discontinuous’ conditions – triggered, for example , by the emergence of a radical new technology or the emergence of a new market, or a shift in the regulatory framework –  established incumbents often face a major challenge. Heuristics and internal rules for resource allocation are unhelpful and may actively militate against placing bets on the new options because they are far outside the firm’s ‘normal’ framework. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 37

38. FIGURE 9.5 Outline map of innovation selection space [40] Source: The original idea of the matrix comes from Boulton, J. and P. Allen. Strategic management in a complex world. In BAM annual conference. 2004. St Andrews, Scotland: BAM. 14/05/2023 Source: John R. Bessant_ Joseph Tidd - Managing innovation 38