Innovation projects are inherently risky. For project teams, it’s beneficial to be aware of the risks in their projects so that mitigation strategies can be developed that reduce the impact or likelihood of risk factors. Project plans can also be set up with embedded options that can increase their net present value. The present value of a project can be seen as a stochastic variable with a range of possible outcomes in different scenarios and the standard deviation of the project as a measure of risk. Following Modern Portfolio Theory, the maximum possible project values at each level of risk form a curve similar to the efficient frontier in financial portfolio management.
Introduction to project risk
All product development practitioners are aware of project risks. Risks refer to the possibility of something happening that affects the project in some way. Examples of project outcomes that the project team wants to avoid are delays in product shipping, customers returning defective product, or insufficient production capacity to meet unexpectedly high demand. All of these lead to lower profits than would be possible in the best scenario. There are also risk factors that have a positive effect, such as a competitor exiting the market.
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