Why do executives motivate individuals to take risks in new product development (NPD)? Taking risks is not the primary objective of NPD. The driver for taking risks is the expectation of asymmetric payoffs.
The expectation of the value that results from an asymmetric payoff is greater than that of taking random risks as if the outcomes of development were a game of chance.
Instead of taking random risks, some executives foster a company culture that promotes the formation of hypotheses and conducting experiments. A relatively small amount of time and resources are allocated for experimentation. There are expectations that a set of experiments will produce learning. There are expectations that a set of experiments will improve the capability of the team. There company culture accepts the concept of supporting multiple small initiatives and an associated number of failures for the expectation of an asymmetric payoff.
An asymmetric payoff occurs when the profits from one of these experiments covers more than the combined costs of all the 'failed' experiments. There is an asymmetric payoff when one of the small bets provides a large win.
There is an asymmetric payoff when the value produced from one success exceeds the costs to fund all the failures. This is an adaptation of what Don Reinertsen wrote in Principles of Product Development Flow on Page 90.
How Leaders Manage a Portfolio of Risks
To manage a portfolio of risks, leaders estimate market opportunities and evaluate factors such as execution risks. In part, leaders make assessments based on the presentations of persuasive individual contributors. Decisions are influenced by:
- The way leaders prepare for critical portfolio discussions
- The way individual contributors prepare for critical portfolio discussions
- Other cognitive biases
Preparation goes beyond the apparent 'qualifications' of those involved. It includes factors such as due diligence and deliberative practice. All new projects have unknowns. The more disruptive the idea, the greater the potential that success will be impeded. Can the individuals, the team, the company produce value by committing to a new project before a competitor capitalizes on the opportunity?
The following examples describe individuals that prepared so that they consistently produced the value that results from asymmetric payoffs.
- Sun Tzu described his approach in "The Art of War."
- Miyamoto Mushashi wrote about it in “The Book of Five Rings.” As a swordsman, he was undefeated.
- John Boyd was dubbed "Forty Second Boyd" for his standing offer as instructor that beginning from a position of disadvantage, he could defeat any opposing pilot in simulated air-to-air combat in less than forty seconds. He was never defeated.
What is better than taking audacious risks? Being certain to win.
For more information on John Boyd, I recommend "Certain to Win" by Chet Richards, @FuentesDeOnoro. For more information on asymmetric payoff functions, I recommend "The Principles of Product Development Flow: Second Generation Lean Product Development" by Donald G Reinertsen, @DReinertsen. The book Little Bets by Peter Sims explores the emergence of breakthrough ideas from discoveries.