IMHO: Driving productivity while minimising risk

At a recent Institute of Directors’ branch meeting, I was lucky enough to be involved in a discussion about the role of directors in helping New Zealand address its productivity gap.

According to the Productivity Commission report, New Zealand has a low level and growth rate of productivity which is holding back its standard of living and wellbeing. It says that or the past 25 years or more, “New Zealand’s GDP per head has remained around 70% of the GDP per head that prevails in countries in the top half of the OECD” and that we are only keeping up through “high labour-force participation and long hours worked rather than growth in labour productivity”.

Unlike other similar small advanced economies (SAEs), New Zealand does not have many large exporting firms that have overcome being from a small, remote economy. So the onus is on these firms to lead the way and generate diverse ecosystems that enable the next generation of growth. To address this issue, innovation is fundamental. Innovation is about new or better ways of creating value for society, business and individuals. And it is directors that need to be asking the hard questions about innovation focus, innovation investment and innovation risk.

Having worked in the emerging discipline of innovation over the past 10 years and advised many organisations in Australia and New Zealand about best practice innovation process, it is clear there is lots of work to do in ensuring New Zealand boards and leadership teams are leveraging the knowledge, expertise and processes that have emerged overseas in how to minimise the risk of what is an inherently risky organisational function.

There are four areas of risk worth noting for which there are best practice risk mitigation strategies available:

• Moving beyond the incremental
• Understanding customer choice
• Not betting the house on an unproven idea
• Avoiding the ‘build it and they will come’ trap

Moving beyond the incremental

Human beings struggle to think beyond ‘what is’ and to consider the ‘what could be’. Following some work Dr George Land, a US research scientist, did in helping NASA recruit exceptionally creative thinkers, he went on to prove that we’re all born creative geniuses and then ‘learn’ to become uncreative as we become adults. This significantly limits people’s capabilities to think beyond the incremental and to get to what Professor Tina Seelik of Stamford University calls the ‘third third’ of creative ideas – the radical, new ideas that are well beyond the incremental.

Rediscovering peoples’ creative capability and getting to the ‘third third’ does not happen by accident. There are robust methods and techniques to help organisations move beyond the incremental and uncover radical ideas that can be developed and tested.

Understanding customer choice

Professor Clayton Christensen, the godfather of modern innovation theory, from Harvard University identified that most innovations fail not because they don’t work, but because customers don’t choose them over the competing alternatives. Understanding customer choice is at the heart of any successful innovation because if you don’t understand why customers choose product A over B in any given sector, it is entirely down to luck as to whether your innovation is creating value that will impact customer choice.

Professor Christensen went on to develop a whole methodology called Jobs To Be Done to help uncover customers’ causal drivers of choice and this is now the core building block of a best-practice innovation process and has been adopted by the likes of Meta, Google and many other high-growth organisations.

Not betting the house on an unproven idea

Ten years ago Eric Ries, a serial startup entrepreneur in the US, launched the Lean Startup Methodology – a methodology which has since been adopted by the world’s most innovative organisations as a way of de-risking innovation. It works on the principle of uncovering the key hypotheses that underpin an innovation that, if proved to be false, would result in the likely failure of the product or service when launched into the market. It stipulates that these key hypotheses should be tested by running fast, cheap experiments that either prove or disprove the hypotheses. The learnings from these experiments enable organisations to pivot, persevere or stop and hence be far more precise in investing in validated innovations.

Avoiding the ‘build it and they will come’ trap

Many innovations don’t start with a customer opportunity but instead with an emerging technology – we’ve all seen the myriad of innovation ideas that have come out of drone technology as an example. But just because the technology enables organisations to create new value, it doesn’t mean that customers will buy it.

As stated before, it’s easy for organisations to create something that is ‘better’ but much harder for organisations to create something that will impact customer choice and get customers to ‘fire’ their existing solution and ‘hire’ the new one. De-risking technology innovation requires organisations to identify the target customers for the new value creation as early as possible. They then have to uncover the drivers of choice for these customers and ensure that the technology solution will create new value on these driver dimensions. If not, superfluous value will be created and there is a big risk that the new product or service will be built and the customer won’t come.

The role of the board

A key role of any board in driving productivity is to help develop strategy and encourage innovation while minimising risk. Managing innovation effort and investment is not simple. Innovation is inherently risky but if New Zealand is going to close its productivity gap it has to do it through innovations that will generate growth both here and overseas.

For boards to become more effective in their ability to drive effective innovation, they have to become more familiar with emerging best practice. These practices can be learnt, mastered and implemented by any New Zealand organisation so that they become sources of genuine competitive advantage. It is up to boards to make this happen and play their vital role in helping New Zealand close its productivity gap. 

About the author

Chris Green leads the strategy and innovation practice of Purple Shirt, a New Zealand management consultancy. Having led strategy teams in the UK, NZ and Australia, he moved into the emerging discipline of innovation, got trained at Harvard and led an innovation consultancy in Australia before returning to NZ in 2022. Chris works with organisations who are looking to become more innovative and has started to explore board positions where he can leverage his strategy and innovation expertise.