Risk Component of Innovation Management Strategy

Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

Saint-Petersburg State University, ITMO University, Saint-Petersburg, Russia
on.korableva@gmail.com
gorelov33@inbox.ru
MariaShulha@gmail.com

Abstract: Innovations are driving economic growth of a country, increasing its economic weight and competitiveness on
the international arena. Strategically worked-out and manageable activity of companies in the field of innovations
development and efforts at a state level in creating and supporting an optimal innovation climate will be an optimal
combination on the way to innovative development of each economy. The need to adapt a company to innovative climate
and necessity of potential growth, as well as high uncertainty of innovative activities leads to establish innovative risk
management system. Combination of innovation strategy with innovative activity’s risk management will enable
implementing innovative potential of the company in the most complete, effective and timely manner. The article
describes the diagram of innovation management strategy, which is based on innovative activity risk management system,
details elements of established strategy with highlighted risk components of every stage. The study contains a justification
why innovative way of development of Russian production is required, supported by statistical data, analysis of current
economic situation and forecasts of economic development of Russia. Classification of innovative activity risks, potential
innovation risk management system and approaches to estimation of its efficiency have been described within framework
of the developed strategy.

The article is financed by support of the grant RFFR 16-29-12965.

Keywords: Innovation management strategy, risk of innovation activities, import phase-out, innovation risk management
system, risk appetite.

1. Introduction
The economic situation in Russia is primarily determined by the influence of external factors: conditions of
world commodity and financial markets, growth rates of the world economy and some others. Transition to
compete, consistent and systematic innovation process will enable intensification of economic growth in the
country, and facilitate reducing Russia’s dependence on external economic factors. The state has developed a
program of measures to create fundamentally new markets and conditions for Russia’s global technological
leadership by 2035 (National Technology Initiative), which stipulates, apart from development of new markets,
emergence of key technologies as part of modernization and import phase-out process.

High-risk level inherent for innovative activity is complicated by specifics of existing internal and external
environment of companies’ operation. In the context of current situation, there is a problem of the absence of
controllable strategic process for development and implementation of innovations, which takes into account
risks of innovative activity. A comprehensive risk-oriented approach to strategic innovation management will
make management decisions more valid, feasible and appropriate to existing situation.

2. Methodology
Information of theoretical sources of foreign and Russian authors, periodical press publications, regulatory
legal acts of the Russian Federation, official statistics and reports on the level of economic development
prepared by the Ministry of Economic Development and the Bank of Russia were subject to processing at the
first stage of the study. At this stage, generalization method and systematic approach to the study of strategic
innovation management based on risk-oriented approach were used. The second stage of the study was based
on modeling method, which made it possible to construct a strategic management diagram for innovative
activities taking into account existing and potential risks.

3. Results of the study

Innovation management strategy developed as a result of the study, shown in the figure, can stipulates
maximum possible coverage of significant risks of an innovation project; orientation on innovative risks in

837
 Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

making strategic management decisions; presence of those or other components of risk management system
at all stages of strategic innovation management.

Innovation management strategy based on risk-oriented approach is cyclical process comprising six stages:
information collection, planning, analysis, regulation, monitoring, control and corrective actions. Cyclicity of
the stages of innovation strategic management is caused by constantly changing conditions of external and
internal environment of a company. Enlarged innovation management strategy is comprised of two successive
recurring actions: development and implementation of innovative strategy.

Figure 1: Process of strategic innovation management based on risk-oriented approach

Stages of strategic innovation management identified at the level of strategy development (information
collection and planning) occur consistently. Stages referred to implementation of strategy (analysis, regulation,
monitoring and control) occur simultaneously and continuously in time. The stage Correction of innovation
management strategy is, in fact, a borderline in reverse transition from implementation to finalization of
innovation strategy.

Innovative (in the figure – “I”) and risk (in the figure – “R”) components are conventionally identified within
scope of each stage of the suggested strategy. Such separation has been made to ensure greater visibility of
strategy orientation on innovative activity risks. Interrelated and transparent performance of risk and
innovation management processes is expected in practice. This means that result of every stage of innovation
management strategy will be justified in terms of innovative activity risk.

4. Discussion
The review of Russian and foreign scientific references allowed to formulate definition of strategy as a
combination of conscious process of achieving strategic objectives of the company (controllable strategy
(Clayton, M. Christensen (2004)) and reactions to unforeseen opportunities or problems arising from changes
in internal and/or external environment of a company (non-controlled strategy (Clayton, M. Christensen
(2004)).

It is reasonable to consider both processes through the prism of resource allocation: it is availability of
required resources that determines choice of the initiatives, which will be implemented. At the same time,
controllable strategy is a prerogative of top management and is cascaded to employees in the form of
instructions, directives and so on. Non-controllable strategy is a result of daily participation of middle-level
managers and professionals in establishment the company’s priorities and making investment decisions. Based

838
 Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

on the above definition of the strategy, one may conclude that need for innovative orientation of domestic
companies will require their management to be able to maneuver between controllable and non-controllable
processes in establishing a strategy. Non-controllable strategy leads to emergence of ideas of “breakthrough”
innovations, while controllable strategy facilitates formulation of these initiatives in the form of purposeful
integrated plan and cascading them to performers at all levels.

Risk comprises two opposite contents: “hazard” and “happy end” (Ozhegov’s Dictionary). That is, the objective
of innovative activity risk management should be, on the one hand, limiting “hazard” (inevitable losses), on the
other hand, maintaining optimal combination of risk and return (“happy end”). Non-controllable innovation
management strategy should help to identify new risks in the course of innovative activity, presenting
opportunities and threats. Controllable strategy is designed to build risk management system for innovation
activities, including changes in it that are generated because of timely implementation of non-controllable
strategy. Thus, innovation management strategy is a combination of controllable and non-controllable
strategies striving for the most effective and timely implementation of innovation results. The definition of
“effective” here is considered from two perspectives: cost-effective (“risk-return” ratio) and from the point of
view of innovation itself - they should benefit the company (added value). “Timely” means relevance of an
innovation with regard to today, level of development of innovation application branch and adequacy of
demand for innovation. To assess and monitor effectiveness and timeliness of innovation, risk management
and development of innovation management strategy should become integral and interpenetrating processes.

Risk and innovative components of each of the six phases identified within the framework of developed
innovation management strategy are subject to disclosure within the framework of the discussion.

Collection of information involves analysis and assessment of external (innovation climate) and internal
(innovative potential) environment of the company. Assessment of innovation climate (Korableva et al, 2015)
involves identification and measurement of risks of macro- and meso levels. Assessment of investment
potential is based on identification and measurement of risks inherent for the company as a whole, regardless
of the decision to implement a specific innovation strategy. Accordingly, innovative component of this stage of
developed innovation management strategy based on risk-oriented approach is an estimation of innovative
climate and potential. Identification and measurement of risks of macro- and meso levels and risks inherent for
the company are the risk components.

Factors of macro-environment give rise to pure risks that appear constantly or at a certain frequency. The
company is not able to influence such risks; therefore, they are the main reason for making decision to invest
into innovation projects. Pure risks are classified into the following groups

x political (risks of political instability and deterioration of international relations, regional conflicts,
nationalization, high degree of “bureaucratization”, instability and (or) imperfection of legislation);
x economic (inflation risk, currency, interest rate risks), social (risks related to inadequate education,
cultural characteristics, customs);
x technological (risk of existence or parallel development of similar innovative products, risk of lack of
possibility to master innovative products at current technology level, risk of backwardness of
innovative products at the moment of release due to rapid obsolescence of innovation and change of
strategic priorities of science and society);
x territorial and climate (risk of natural disasters, poor infrastructure, poor communications in the area).

Speaking about the macro-environment of Russian business it is necessary to analyze the primary sources of
the current economic and technological state of the country. Current economic situation in Russia is
conditioned by influence of several factors. Among them, first of all, it is important to mention oil prices which
remain the main aspect determining dynamics of economic growth. Agreement on establishment of individual
quotas of OPEC member states concluded on November 30, 2016 aimed to reduce total oil production,
according to experts’ forecasts, will not have a significant impact on commodity prices. A number of
circumstances contribute to price growth regulation such as uncertainty of implementation of this agreement
in practice, recovery of oil production in shale deposits in the USA, slowdown in the growth of China’s
economy as the main consumer of oil, possible restoration of oil supplies from Libya and Nigeria. Russia’s

839
 Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

dependence on oil markets in terms of uncertain oil quotations led to a significant reduction in revenues from
foreign economic activity.

One more factor, which influences business environment and consequently determines the level of risk is
constrained financial resources. It is connected with problems of foreign investment attraction and high loan
interest rate. Persistence of high real interest rates on domestic market and high level of debt burden limit
access of real economy sector to domestic financial resources offered by banks. Nevertheless, the Bank of
Russia notes that economic activity in 2016 started to stabilize gradually, and a trend of long-term
deterioration of economic conditions and increased uncertainty was overcome. In the third quarter of 2016,
reduction of GDP slowed to 0.4% compared with the same month in 2015 - 3.7% (the Ministry of Economic
Development of the Russian Federation, 2016). However, such stabilization is caused, first of all, by the effect
of low base: investment crisis of the second half of 2015 was characterized by a significant drop in equity
investments of infrastructure companies, transport and communications companies, production and
distribution of electricity, gas and water, manufacturing industries.

Taking into account integration of Russian economy into the world economic community, one cannot deny
influence of external circumstances on results of economic position of the country. However, one should note
internal factors of imbalance. They include low diversification of the economy and exports. Historically, at the
state level support was provided, mainly, for large-scale industries and state enterprises, especially related to
extraction industry. Diversification of directions of intensive development of the economy and, consequently,
exports, will compensate for decline in prices for some goods by growth of the value of others, cancelling raw
material orientation of Russian economy and thereby reducing its dependence on external conditions.
Diversity and sustainability of the economy that are of great importance for achievement of significant
volumes specific for Russia may be ensured if favorable conditions for development of small and medium-sized
businesses are created. It is these enterprises that driving innovations, reacting most quickly and effectively to
changes in external and internal environment. Today contribution of small and medium-sized businesses to
Russian economy is very low (about 15%).

Despite the positive trend, for now import phase-out takes place is due to price factors of competition and
reduced real incomes of the population. Companies follow a conservative investment policy because of
significant debt burden in certain sectors of the economy, persisting high interest rates and uncertainty in the
forecast of demand for products. The policy of import phase-out ensured by the state is impossible to
implement in a short time in terms of current level of technical capabilities. At existing level of development of
domestic technologies, manufacturers will have to purchase imported products, what will result in an increase
of their expenses and, consequently, increase in selling prices for finished products. Intensification of
innovative development and application of new technologies in production will allow Russian enterprises to
become qualitatively competitive at the world level, increasing both consumption of domestic products inside
of the country and its export potential.

Based on performed analysis of current economic position of Russia and problems identified, one may
conclude that it is very important to develop of internal factors of economic growth and improve quality and
variety of products implementing innovations. Increased attractiveness of products of Russian manufacturers
and development of processing industries will naturally lead to reduction of share of raw materials exports,
thus preventing recurrence of existing crisis and creating strong foundation for increase in competitiveness. It
should be noted that such changes in current economic conditions would require patronage and support from
the state.

Thus, at this stage of development, state policy should be moderately conservative: on the one hand,
accommodate manufacturers, stimulating innovation, on the other hand, maintain moderate pace of
transformation and relaxation to limit investor’s choice of “easy ways of gaining money” because artificially
created favorable price conditions and commodity exports. Such policy will fully contribute to activation of
strategic activity of companies aimed to increase competitiveness of national production in domestic and, in
the future, external markets on account its intensification.

Since interaction of business with immediate environment is bilateral, it may influence risks identified by
results of analysis of suppliers, consumers and competitors, by management decision. These risks along with
risks of competition or existence and parallel development of similar innovative products as a result of

840
 Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

industrial espionage .relate to the meso level. Also there is necessary to bear in mind so called inherent risks,
which are connected with inside business processes. They are individual and quite diverse. The list of risks,
determined by the assessment of internal environment of the company and directly affecting implementation
of any type of innovative activity, includes risk of disclosure of confidential information, staff insufficient
qualification, unfair enforcement of established rules and duties, casual, one-time errors and deliberate
actions (internal fraud) of employees, absence or incomplete and unreliable information on the competitors;
incorrect assessment of demand for the products and others.

Thus formulation of objective of innovative activity is the result of comprehensive study of factors of
innovation climate and potential of a company. This objective reflects strategic intentions of the company in
the field of innovation that are a continuation of corporate mission and aims, taking into account current and
constantly changing conditions of external and internal environment of the company.

The innovative component of Planning stage involves formation of innovation (idea) pool that meets
objectives of innovation. Collection of ideas should be performed in accordance with principle of costs
minimizing in the following sequence. First, one needs to analyze existing projects. If they are not available or
they are not suitable for achieving the established innovation goal, employees of the company at all levels
should be involved in generation of ideas. Such free formation of innovation pool will enable adjusting creative
process and circulation of information within the company. In this case non-controllable process of creating
innovation strategy appears. If previous sources of innovative ideas did not produce any results, the company
uses the most costly methods of selecting innovations: study of external or internal developers. The process of
searching for innovation ideas should be controllable. Management analyzes formed pool of innovations and
sorts out options that do not correspond to its strategic priorities (economic, social, environmental efficiency,
etc.).

Selected options of innovative strategic behavior, meeting objectives of innovation and strategic priorities of
management, should be evaluated in terms of their level of risk. The task will fulfill innovation risk
management system, which is important to set up and develop in the company. This system, similar to risk
management system of any type of the company’s activity includes policies, procedures, techniques, that
identify, estimate criteria of evaluation, assess and mitigate risk level associated with innovation activities.
management strategies and policies; organizational structure of risk management; risk management
procedures (facilities): identification, analysis (assessment), monitoring, limitation, control; procedure for
generating risk reporting and using results of risk management. Integration of innovation risk management
system into overall risk management system of the company will significantly increase adaptability of the
company to fast changes in external environment and prevent deployment of unpredictable inside situations.

Also, it is important to mention, that risk components of Planning stage are construction of innovation risk
management system based on assessment of the company’s risk-appetite. Innovation risk management
strategy should establish risk tolerance level acceptable for the company, taking into account its scale, nature
and strategy, as well as financial position of the company. The process of assessing risk-appetite of the
company in the field of innovation involves correlation of its risk-tolerance (ability to accept risk) and risk-
appetite (will to take risk) of units engaged in innovative activity. The result of the second stage of innovation
management strategy based on risk-oriented approach is selection of the best option of innovation strategy
that corresponds to objectives of innovative activity, strategic priorities of management and risk-appetite of
the units involved in this area.

Stages of risk-oriented innovation management strategy as Analysis, Regulation, Monitoring and Control are
ensured during the entire period of implementation of innovation strategy. Analysis assumes assessment of
effectiveness of innovation strategy implementation from different viewpoints such as economic, technical
(new technologies, inventions, know-how, etc.), social (customer satisfaction, creative activity, job satisfaction,
working conditions, etc.), reputational (image of the company, product quality). The assessment includes both
quantitative and qualitative approaches. Qualitative assessment of innovation risk management system is
considered in two aspects:

x The method of integrated qualitative assessment assumes an operative way of studying innovation risk
management system in general, conformity of its structure with best practices (assessment of
management effectiveness, analysis of position of risk management system in the company);

841
 Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

x The method of detailed qualitative assessment implies analysis of availability and compliance of all
components of the risk management system with best practice and finding level of innovation risk
within risk-appetite.

The significant difficulty in qualitative assessment of effectiveness of risk management system is development
of evaluation criteria, so-called best practices. In turn, quantitative methods for assessing risk management
system are very diverse and, like qualitative ones, differ in scope of details of the assessed factors. An example
of such an assessment is analysis of variation in net present value of innovative project, depending on
operation of innovation risk management system.

Stage Regulation stipulates availability of guidance and coordination of innovation strategy implementation,
staff motivation system in the field of innovation, organizational support for implementation of innovation
strategy based on risk-oriented approach, such as distribution of powers and responsibilities, information
resources, software and hardware, qualified specialists, interaction between departments, risk management in
the field with coordination in specialized structural unit. Monitoring and Control stages envisage specific
organizational and technical measures aimed at optimal implementation of the selected innovation strategy,
including regular comprehensive analysis of internal and external environment of the company, study of
operation performance of the company (profitability, liquidity, etc.), monitoring and control of the level of
adopted innovation risks, timely response to the facts of risk realization; detection (identification) of new types
of risks in the process of implementation of innovation strategy, notification of management on the level of
innovation risks and so on. Effective monitoring and control contributes to risk management of innovation
throughout the entire innovation process.

5. Conclusion
The combination of risk management and innovation management is the basis of an integrated strategic
approach to the implementation of innovation.

Overview of statistics of innovative activity of Russian companies showed that the share of actual innovations,
i.e. innovation, first used in the world market, accounts for less than one percent of Russian companies
product. The presence of policies and programmes of the government aimed at innovative development of the
country, does not guarantee realization of processes described in the forecasts and it can be regarded as a
guide and a driver for the development of innovative activity of domestic production.

The economic and political situation of the Russian Federation largely determines the conditions of Russian
companies ' activities. To increase their competitiveness, they should take a strategic approach to the
development and implementation of innovations, taking into account the risks of external and internal
environment. Innovation management strategy based on a risk-based approach is a set of controlled and
uncontrolled processes of creating the way of development defined by resource potential, innovation climate
and the capacity of the company.

Each stage of the innovation strategy includes the elements of risk management system: risk assessment of
macro-, meso - and micro-level leads to formation and updating of objectives of innovation activities. Thus, the
choice of the most appropriate version of the innovation strategy should be based on the risk appetite of the
organization. When planning innovative activities must be a risk management system for innovative activities
with selected the most appropriate available resources, staff skills and technical capabilities of the risk
management procedures. Permanent update of the current risk management system both from the point of
view of advanced developments in the field, and conformity to the current situation of the organization and its
environment is based on the continuous recurring cycle of analysis, regulation, monitoring and control of
strategy innovation.

The created system will allow evaluating from the risk viewpoint selected options of innovative behavior, their
consistent with the objectives of innovation activities and strategic priorities of management. This will largely
enhance the adaptability of the company to the current environment and its sustainability in the long term.

842
 Olga N. Korableva, Nikolay A. Gorelov and Maryia V. Shulha

References
Birkinshaw, J., Hamel, G. and others. (2008) Management innovation Academy of Management Review. Vol. 33, № 4, 825–
845.
Biryukova, N.V., Chikisheva, N.M. (2002) Enterprise innovation strategy formation mechanism. SPb .: Publishing house
SPSUEF, 151.
Brutyan, M.M. (2013) Some features of the strategic management of innovative activity. Creative Economy, 12 (84), 56-60.
Clayton, M. Christensen. (2004) Solving the problem of innovation in business. How to create a growing biznes and
successfully maintain its growth. M .: Alpina Business Books, 290.
Fedotova, G.V. (2010) Risk management in innovative activity of the enterprises. Finance and Сredit, 41 (425), 27-33.
Filin, S.A. (2010) Risk as an element of strategic management in the innovation sphere. Risk management, 3, 38-51.
Gary P. Pisano. (2015) You Need an Innovation Strategy: Harvard Business Review. Issue June, [online]
https://hbr.org/2015/06/you-need-an-innovation-strategy.
Gorobnyak, A.A. (2015). Formation of innovation management strategies. Internet journal "Naukovedenie", Book 7, issue
3, [online] http://naukovedenie.ru/PDF/36EVN315.pdf.
Handbook of Technology and Innovation Management: ed. Sc. Shane. (2008) A John Wiley and Sons, Ltd., Publication, 481.
Wladawsky-Berger Irving, (2012) Principles for Managing Strategy and Innovation: A collection of observations, news and
resources on the changing nature of innovation, technology, leadership, and other subjects. January 23, [online]
http://blog.irvingwb.com/blog/2012/01/principles-for-managing-strategy-and-innovation.html
Korableva O., Iakovleva T. (2015) Organisational climate, employability and innovative work behaviour as drivers of firm
innovation performance. IFKAD 2015: 10th International forum on knowledge asset dynamics: Culture, innovation and
entrepreneurship: Connecting the knowledge dots, 155-163.
Korableva, O., Litun, V. (2014) The potential of transitive economies’ growth based on innovative strategy. WSEAS
Transactions on Business and Economics, Vol. 11, № 1, 725-736.
Korableva, O.N., Kalimullina, O.V. (2016) Strategic approach to the optimization of organization based on BSC-SWOT
matrix. 2016 IEEE International Conference on Knowledge Engineering and Applications, ICKEA, 212-215. Korableva
O.N., Kalimullina O.V. (2014) The formation of a single legal space as a prerequisite for overcoming systemic risk. Asian
Social Science, Vol. 10, № 21, 256-260.
Krylov, S.I. (2014) Balanced Scorecard and strategic analysis applied in the strategic management of innovative activity. The
economic analysis: theory and practice, 16 (367), 29-39.
Maksimenko, L.S. Muzaev, I.R. (2015) The features and the need for strategic management of innovations in modern
conditions. Innovations. Investments, 2, [online] http://uecs.ru/demografiya/item/3345-2015-02-07-07-27-34
Ministry of Economic Development of the Russian Federation. (2016) On the current situation in the Russian economy in
January-October 2016: monitoring, [online] http://economy.gov.ru/minec/activity/sections/macro/2016281101.
Ozhegov’s Dictionary. Thesaurus of the Russian language, [online] http://www.ozhegov.org/words/30743.shtml.
Pakhomov, L.A. (2013) The evolution of the concepts of strategic management of innovative activity of the company.
Problems of modern economy, 4 (48), 152-154.
SB innovative activity. Textbook, [online] http://dist-cons.ru/modules/innova/section4.html.
The Bank of Russia. (2016) Guidelines for the Single State Monetary Policy for 2017 and the period of 2018 and 2019 years,
approved by the Board of Directors of the Bank of Russia, November 10, [online]
http://www.cbr.ru/publ/ondkp/on_2017 (2018-2019).pdf
The Bank of Russia. (2016) Report on Monetary Policy: Information analytical collection, December, No. 1, [online]
https://www.cbr.ru/publ/ddcp/2016_04_ddcp.pdf. - Загл. с экрана.
Titov, A.B. (2001) Marketing and innovation management. St. Petersburg: Peter, 240.
The HSE. (2016) Russian Population in 2016: revenues, expenditures, and social well-being: monitoring, [online]
https://isp.hse.ru/data/2017/01/11/1115545507/09_%D0%9C%D0%BE%D0%BD%D0%B8%D1%82%D0%BE%D1%80%D0%
B8%D0%BD%D0%B3_%D0%92%D0%A8%D0%AD_%D0%98%D1%82%D0%BE%D0%B3%D0%B8.pdf

843
Copyright of Proceedings of the European Conference on Innovation & Entrepreneurship is
the property of Academic Conferences & Publishing International Ltd. and its content may
not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's
express written permission. However, users may print, download, or email articles for
individual use.