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How Increasing Risk Tolerance Fuels Growth

How Increasing Risk Tolerance Fuels Growth

Many companies invest in research and development yet fail to launch transformative products and services. Here’s how to change that.

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How Increasing Risk Tolerance Fuels Growth
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This article is part of a series of sponsored content created in partnership with Fortune, available on our Breakthrough hub.

As companies look for innovative ways to fuel growth, investments in research and development are up nearly 5.5% in 2022. Yet, even with these investments, many businesses are still not seeing the kind of transformative outcomes they need to stay competitive. The reason? They’re afraid of risk. 

“When it comes to innovation, the risk tolerance of large incumbents is very low,” explains Marissa Dent, global lead of Innovation Systems at Bain & Company. In fact, says Dent, most of what companies today call innovation is a mere tweaking of their existing products and practices.

Many companies are relying on incremental change rather than investing in transformational ideas. While this may have worked before, today’s rapidly evolving business environment requires even companies with the strongest and most profitable core businesses to invest in new areas of growth. If companies want their outcomes to match their aspirations, says Dent, they must rewire their cultures and norms to not only tolerate risk, but to value it.

A new approach to risk

Dent, who has advised some of the world’s most prominent brands in the consumer-products industry on growth strategy and operating model redesign, says organizations make three common mistakes when they try to innovate: The first is expecting that an innovation will be as profitable as existing products in a portfolio; the second is expecting that an innovation will generate significant revenue in its first year; the third is not thinking beyond the narrowly defined product categories to which these businesses have become accustomed.

When businesses turn to Bain, they generally want to know how they can act more like insurgent brands that embrace risk and continually grow their brands. The answer, says Dent, is not to make small adjustments to existing business but, instead, to use the organizations’ resources to build new businesses at scale. To do this, leading companies often create two separate innovation systems within their organizations—one that encourages part of the organization to focus more on efficiency and high return on investment (ROI) for those projects close to the core business and another that focuses on truly innovative, but riskier, opportunities. 

“The existence of two separate models acknowledges that a different approach is needed to refine something the company already knows how to produce, as opposed to developing something much less familiar,” says Dent. 

The model for success

When innovating “close-to-core,” companies can specify the desired outcome before they start, building in capabilities and expectations that match their goals and associated risk tolerances. The second innovation model doesn’t have preordained outcomes and can tolerate much more risk. 

A system to promote disruptive innovation needs its own dedicated funding and resources, as well as very different goals and operational metrics from the rest of the business, says Dent. It also requires leaders with a growth mindset who encourage experimentation and agility and who can tolerate multiple attempts or iterations before finding commercial success.

By liberating this second “breakout innovation” system from the burden of having to behave like the core business, companies can start to expand their risk tolerances while building the capabilities and mindset needed to truly win the innovation game. 

Below are the hallmarks of the two approaches, according to Dent.

Characteristics of a “Close-to-Core” Innovation Approach:

  • A lower-risk profile with carefully tracked ROI hurdles 
  • A streamlined process focused on speed
  • Use of internal and external expertise

In short, sustaining innovation models are geared for efficient outcomes and near-term value delivery. 

Characteristics of a Breakout Innovation Approach: 

  • A higher-risk profile with an unknown ROI
  • An agile process, with significantly more decisions that are informed by direct consumer and retailer feedback
  • Aligned to a “growth mindset” rather than to traditional sources of expertise, this approach encourages experimentation, agility, and iterative learning models.
  • KPIs are focused on long-horizon value creation, not short-term ROI. 

Overall, breakout innovation models are geared for very different goals and operational metrics than the rest of a company’s business.

“With the proper strategies, the right ambitions, and the right operating models,” says Dent, “companies can innovate, migrate into new spaces, and really grow their businesses.”

If you want to learn more, feel free to get in touch with Marissa Dent.

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