How to Reduce Risks in Product Development

Companies that develop products often take considerable risks that can, for example, jeopardize the continued existence of the company. Developing innovative products in particular is a risky and uncertain process and many products fail, for example, due to feasibility or market acceptance. This uncertainty often leads companies to avoid taking risks—and if they do, they often invest too much time and money and build products that do not meet market requirements based on inadequate data or invalid assumptions. In this article, you will get an overview of the risks you face in product development and how you can minimize these risks. Curious? Then read on immediately.

Most Companies Develop Products

Product development is risky. Many companies have to develop or enhance products that they sell on the market in order to generate sales and profits. This is the only way they can exist and pay wages. A product is not only physical things like a cell phone or a coffee machine but also non-physical things like software, insurance and banking products or service like cab services (Uber or Lyft). Here is a good definition of product.

In a balanced project portfolio of a company, there are not only operation & maintenance projects, which are rather a small risk for the company, but also growth & performance improvement projects, which are already a bigger risk. Then there are the transformation projects, which include new innovative products and services, which often represent a high risk for the company. Such projects are often crucial for companies to survive. Therefore, risk management is extremely important here.

The Risks Involved in Product Development

Developing new products is risky, especially the more innovative they are. But what are typical risks in product development? Off the top of my head, these come to mind:

• Technical risks: The product is too complex and technically not feasible as planned. The technology fails after a certain period of use.
• Market risks: The product is too innovative, does not meet customer needs or is too expensive (50 worst product flops of all time). The competition is faster on the market, perhaps with a better product or the product becomes obsolete in a very short time because the competition has already developed something more innovative. Overestimation of potential sales/margins in the business case.
• Commercial risks: Market risks are often the cause of commercial risks. These include the profitability of a product, but also risks with suppliers, currency rates, contracts, etc.
• Political risks: Products from China, for example, may not be delivered to the USA (e.g. Huawei cell phones with Google Services) or American microchips may not be delivered to China.
• Legal risks: An important point here is, for example, product liability, if products have a defect or are dangerous or otherwise may violate laws (Product Liability: You’re More Exposed Than You Think).
• Health/Environmental Risks: The new product could endanger the environment or health in some way, for example, by releasing toxins or being hazardous. Long-term risks should also be considered here, such as toys that contain toxic substances.

In addition to these risks, there are of course the usual project management risks when developing these products, such as cost overruns, tight deadlines, penalties, uncooperative stakeholders, insufficient communication, etc.

How to Reduce Risks in Product Development

The main reason why product development often fails is a misunderstanding of customer needs. This means that many new products fail not because of technical inadequacies, but because they simply don’t have a market. Not surprisingly, studies show that timely and reliable knowledge of customer preferences and needs is critical to successful product development.

Many companies have therefore moved in recent years to integrate customers directly into the innovation process, for example by soliciting new product concepts and ideas from them or developing new products together with them. These companies also often ask for purchase commitments from customers for a new product before they begin final development and manufacturing. This overall process—called collective customer engagement—can help companies avoid costly product failures and reduce risks accordingly. For more on this topic, read this article: Reducing the Risks of New Product Development.

Every Innovation Starts as a Hypothesis

Every innovation starts as a hypothesis, a set of assumptions and beliefs about how a new or improved product will delight customers and help the company achieve its business goals. Hypotheses, however, are just guesses—and, of course, risks—until they are supported by validated feedback from real customers.

The fastest way to confirm or disprove a product development hypothesis is to experiment by creating a prototype of a product, e.g., in the case of physical products, or a Minimal Viable Product (MVP), e.g., in the case of software. A prototype can be used to test technical feasibility, but also to gather feedback from potential customers and thus reduce market risks. In software, and especially in agile software development, the Minimum Viable Product (MVP) has established itself as a means of obtaining initial feedback from the market.

Every innovation starts as a hypothesis that needs to be confirmed or disproved.”

In the following sections, I briefly discuss the Minimum Viable Product, which you can use to significantly reduce market risks in software development in particular.

The Minimum Viable Product

Agile project management avoids a certain amount of risk in product development through its approach and close collaboration. In this context, the Minimum Viable Product (MVP) has proven itself especially in agile software development—but not only there.

A Minimum Viable Product is the first version of a product that contains enough features of sufficient quality to appeal to an initial group of customers and, crucially, provides valuable feedback and information about how customers use and value that product.

An MVP is the easiest way to test the proposed innovation and determine if it will produce the desired results. MVPs need to be tested. The goal is to get quick feedback, ideally from customers in the target market or from the intended future users of the system. If the feedback is positive, the product is brought to market. If the feedback is negative, a change in direction (pivot) is required. This could be a series of changes to the product followed by additional experimentation for new feedback, or it could be a change in direction to a completely different product or strategy.

The Minimum Viable Product approach significantly reduces the risks for companies, especially at the beginning of an innovative development. An MVP is usually created only to test the market and is often not yet so far that it can be introduced directly to the market. Often the MVP is then further elaborated and a Minimum Marketable Product (MMP) is created, which is then “ready” for the market.

Learn more about the Minimum Viable Product

Learn more about the Minimum Marketable Product

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