Strategic Risk Management in New Product Development

Product development for technology-based, small-and-medium enterprises (SMEs) reflects their most significant efforts in the innovation process in the industry in which their product competes. Competitive advantage is often determined by how well these entrepreneurial ventures "innovate" and manage the associated risks with innovation. Research pertaining to risk in new product development appears to be divided between project "selection" and project "execution". Project selection is often analogized to financial models used for capital investment decisions while project execution is founded in project management principles. The management of risk in project management has, for a long time, been given a great deal of consideration in research. Interestingly, the dichotomy of project selection versus execution has the potential to induce myopia in decision making. If a project has been approved through a rigorous selection process, the decision to continue or terminate the project at various stages is not normally revisited as the organization slips into project management mode. There can be a general assumption that because the project was selected, due consideration of risk had already been made and the focus should now be on the "management" of the project. This paper explores strategic risk management in new product development for an SME in a technology-intensive industry. Specifically, the paper analyzes the current risk management process for a small, Canadian-based design and manufacturing company that uses an open systems model to discuss how a formal approach to risk management can be implemented. From the initial evaluation of the risk appetite of the company to applying a risk reference framework, it is shown that a more formal strategic risk management approach can be integrated into the current product development infrastructure of the company. The Product Development and Priorities Committee (PDPC) at the company has existing process for both selecting projects and monitoring their progress. A discussion of the gradual adjustments to these processes to incorporate a real options approach is also presented. A real options approach includes a comprehensive set of inputs from related stakeholders that the PDPC would use to categorize each innovation project and to better understand related organizational constraints. While an integrated product development approach incurs higher risks due to risk interdependencies, the advantage is that more of the organization is involved in the process. Thus, a new model of strategic risk management in new product development for an SME, as concluded from this case study, is presented in this work.