Take the Test: Are You Ready for Corporate Innovation?

Corporate Innovation: Uncertainty as Fuel for Progress

A company that wants to achieve progress through innovation should first learn to accept risks. After all, innovations are one thing above all: experiments. What sounds like a good idea at first can turn out to be a flop when put to practice. It can be based on unrealistic assumptions and erroneous assessments of the available resources. Maybe important parameters were not considered. Factors related to competition or the customer base can change in the course of the development process. New legislation might be passed; a key staff member could have an accident.

Nevertheless, it is worth it - because even if failures are possible, the potential benefits of a corporate innovation are often greater than the risks associated with it.

Default Setting: Better Safe Than Sorry

I once carried out a test during a workshop for managers of a high-tech company. I asked them to choose between two corporate innovation projects in a simple situation requiring a decision:

• Project A was significantly more profitable but came with a certain risk (an 80% probability of profits amounting to EUR 500,000 as opposed to a 20% risk of losing EUR 100,000).
• Project B offered a more modest return, which, however, was certain (100% probability of profits worth EUR 200,000).

From an objective point of view, the managers should have gone with Project A. Why? Because the expected value of Project A (EUR 380,000) is much higher than that of Project B (EUR 200,000), rendering a 20% risk marginal. But managers are people, and people naturally shy away from risks. In humankind’s history, it simply made more sense for a long time to take off at the sight of an unknown animal than get too friendly with the next saber-toothed cat. We have a loss aversion bias, meaning that risks weigh more heavily for us than the associated opportunities.

Does your Company Lack the Courage to Innovate?

At my workshop, the CEO was shocked when all 20 managers actually opted for Project B. And rightly so! At EUR 4 million, the potential profits in this fictional scenario were only half of what they could have been with Project A (EUR 7,6 million). And if 20 Projects A had been carried out, the overall risk would have amounted to the same as in 20 Projects B, namely (close to) nil.

Too Much Caution Means Missed Opportunities

This is the case because when risks accumulate, they cancel each other out. A simple Bernoulli process is all it takes to show that the probability that 20 Projects A are less successful than 20 Projects B amounts to only 0.2%, while the probability that 20 projects A would overall incur a loss is at a mere 0.000000007%.

And the likelihood of the worst-case scenario, in which all 20 Projects A would fail and incur a total loss of EUR 2 million, is a figure with 12 zeros after the comma (0.0000000000001%). This should not even scare the most chicken-hearted amongst us.

Assuming that the managers’ decisions in the experiment reflect their conduct in real business life, the company should be really worried. To shun a laughably small risk, the business leaders forfeited the chance of making millions of euros. Such a company will not be able to keep up in the race for innovation. It simply lacks the courage needed.

Not Vilifying Mistakes Bolsters Courage to Innovate

When we discussed this outcome at the workshop, one of the managers revealed what’s behind this cautious attitude when he said that “success is celebrated in our company; you get a lot of pats on your back. But if you mess up, even just once, you can pack your bags.” No wonder there was little innovation in this company. A culture like this will further intensify the risk aversion of its employees.

Encouraging and Rewarding Courage: What Does Corporate Innovation Need?

To foster a culture conducive to corporate innovation, a company must take measures to address staff members’ risk aversion. To this end, employees must be encouraged to take risks. This also entails congratulating them on their guts to take a chance even if something does not work out in the end. It can still be an important learning for the entire company.

This is why it’s important that the decision to pursue something like Project A pays off for the individual even when it is likely to fail. And that means paying off in monetary terms, career-wise, and also with regard to the employee’s reputation. This takes clearly communicated and unambiguous measures and role models. If all a company does is punish its employees for making mistakes, it will soon be left with cowards.

Are you Ready for Corporate Innovation? Take the Test!

In an anonymous setting, ask your managers to choose one of the following two innovation projects for implementation in your organization. Ask them to be honest and genuine in their decision.

• Project A’s probability of success is 80%. A success would mean profits of EUR 500,000 for the company. A failure would incur a loss of EUR 100,000.
• Project B’s probability of success is 100%. The company is sure to make a EUR 200,000 profit.

You can only choose one of these two options. The workload is the same. Assume that you can trust the figures, and nobody will find out your choice. You alone will be responsible for the success. Which project would you choose?

Then count how many of your managers chose Project A.

Results: What Innovation Type Does Your Company Represent?

100% chose A: Your Company has Silicon Valley DNA

Congrats! Your managers are not afraid of innovation. Your corporate culture whole-heartedly supports corporate innovation and does a great job offsetting individuals’ risk aversion. The innovation-orientation of your company parallels that of start-ups in the Silicon Valley.

50-99% chose A: You Work in an Innovation-Minded Company

Your managers’ courage regarding corporate innovation is above average. Your corporate culture partially offsets individuals’ risk aversion. As a result, your company is innovation-oriented and focused on opportunities. But keep in mind that there are some staff members who are quite cautious, and you will benefit from working on their mindset.

20-49% chose A: Once Bitten, Twice Shy

Your company is very cautious. The corporate culture hardly offsets individuals’ risk aversion. Your company can be sure to miss out on many opportunities this way. You could be much more innovative if you took measures to counteract this mindset and, e.g., introduced incentives for taking risks.

0-19% chose A: You are a Bunch of Cowards

Your employees are paralyzed by fear. Your corporate culture does not offset individuals’ risk aversion in any way but probably does the opposite. The resulting dispirited approach to doing business will let you fall behind in today’s race for corporate innovation.

Update for Leaders

Join 15,000 + professionals and get regular updates on leadership and management topics. Learn something new every time.