Risks and Returns Jri Innovation

Innovation can be very risky for a number of reasons:

1. New-product development is an expensive affair - it cost Tate & Lyle around £150 million to develop a new sugar substitute; pharmaceutical firms spend an average of .£100-50 million to develop a new drug; while developing a super-jumbo project could cost billions.

2. New-product development takes time. Although companies can dramatically shorten their development time, in many industries, such as Pharmaceuticals, biotechnology, aerospace and food, new-product development cycles can be as long as 10-15 years. The uncertainty and unpredictability of market environments further raise the risks of commercialization. Roots had to withdraw Manoplex, a heart drug, less than a year after its launch in the United Kingdom, after a trial on 3,000 patients in the United States and Scandinavia suggested an adverse effect on patient survival. The pharmaeeudeals division lost about £200 million on the drug, which cost nearly £100 million to develop over a period of 12 years, and about S20 million was spent on promoting and marketing it.J

3. Unexpected delays in development are also a problem. History is littered with grand pioneering engineering projects which have failed to satisfy the original expectations of bankers, investors and politicians. The Seikan rail tunnel, connecting the island of Hokkaido to mainland Japan, was completed 14 years late and billions of pounds over budget; the S10 billion cost of the Channel tunnel, which opened on 6 May ] 994, a year later than originally planned, is more than double the £4,8 billion forecast in 1987,

4. The new-product success record is not encouraging either. New products continue to fail at a disturbing rate. One recent study estimated that new consumer packaged goods (consisting mostly of line extensions) fail at a rate of 80 per cent. The same high failure rate appears to afflict new financial products and services, such as credit cards, insurance plans and brokerage services. Another study found that about 33 per cent of new industrial products fail at launch.3

Despite the risks, firms that learn to innovate well become less vulnerable to attacks by new entrants which discover new ways of delivering added values, benefits and solutions to customers' problems.

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