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Companies that fear innovation risk stagnating

Some years ago, the Harvard Business Review ran a must-read article called, 'Countering the Biggest Risk of All'. It talks about seven major classes of strategic risk, that is, industry, technology, brand, competitor, customer, project and stagnation. The concept of stagnation risk is not often discussed.

The article defines market stagnation as ‘the inability to find new sources of growth’. It says that the best countermeasure for dealing with this class of risk is ‘demand innovation’, which involves ‘redefining your market by looking at it through the lens of the customers’ economics and expanding the value you offer your customers …'

In my experience, I’ve seen two types of stagnation risk.

Stagnation risk I: fear of radical change

Take the scenario of a strategic discussion where a course of action that involves radical change is being considered. The actuaries and other risk professionals will thoroughly analyse the risks of proceeding with a course of action. However the risks of not proceeding are not often given as much emphasis. That is: what happens if we don’t do this? What if we delay and don’t do it now? And what do we lose by not acting?

As a result bold decisions may be deemed too risky, or pared back and dumbed down, without proper consideration of the costs of inaction. This is the stagnation associated with lack of innovation. It is particularly prevalent in large organisations with dominant market shares, which feel safe in their current operating mode. A perception can grow that ‘everything is OK and we have a lot to lose by implementing a radical change’. However, when an organisation does not innovate, competitors step in and fill the gaps.

In product development, there is always the dilemma of whether and when to introduce a radically new product, especially if it is a lower cost, lower margin product that will cannibalise the organisation’s existing (and profitable) book of business. Then once it is launched there is the moral dilemma of how the new product is marketed to the existing customers. Does the organisation proactively tell them that they would be better off switching to the new, lower cost product? Or leave them paying more and hope they don’t notice?

If the organisation looks through the customer lens, there is an argument that it should definitely market the new product to the existing book, recognising that if it doesn’t, then eventually a competitor will. However in superannuation, with a disengaged customer base, it’s not always an easy call to cannibalise profits, as organisations know that a large part of the customer base in the old product may stay there for many years.

If customers are left consuming outdated products for years without being offered the more competitive alternatives, once they do find out (and they will, eventually), they are likely to become disgruntled and lost to a competitor. There is also the risk of reputational damage to the organisation from a large portion of existing customers becoming net detractors, possibly with a spill-over into consumer advocacy and negative publicity. This risk should be fully costed and be part of the decision-making process.

Stagnation risk II: taking your eye off the ball

Take the example of an organisation that is busy implementing responses to legislative changes, as pretty much every super fund in Australia has been for the last five or more years. Everyone has their heads down and bottoms up, and the whole organisation puts in long hours on tight deadline projects. Everyone takes the view that ‘we’re all exhausted but we really feel like we’re achieving something’. This is a classic set-up with all the elements necessary for deep stagnation.

In such busy workplaces, the widely-held view is:

We are simply running to stand still. We’re bogged down and spinning the wheels. All that action gives us the illusion of progress but we’re stagnating. We can’t remember the last time we innovated because all the leadership, strategists and product development teams are completely consumed in a reactive, fire-fighting mode facing new legislation and changes to our processes. We don’t have the time and space to think.

It’s difficult for busy people to innovate. Creativity requires being out of the madness of day to day activities. As someone who has been outside the super industry for the last few years looking in, the lack of innovation is clear, especially in the post-retirement space. That's easy for me to say, because I didn’t have to implement the FOFA and Stronger Super changes!

How many organisations take their best people out of the busy yet distracted day-to-day workforce and give them space to be creative – for example, an innovation ‘skunk works’? We’re starting to see Chief Innovation Officers appointed now, so perhaps this is coming.

So can we change? Yes, we can. But to do so, we need to take the time and space to look for a vision of the future, where we can drive growth in our business by stimulating demand. We’ll need to look at issues through our customers’ eyes and expand the value proposition we offer them. This will involve radical change. We need to weigh the downside of not acting along with the risks and rewards of acting. And believe that if we build it, they will come (misquoted, with apologies, from 1989 movie Field of Dreams).

 

Melinda Howes is an actuary, a financial services executive and a non-executive director.

 


 

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