RISK   ASSESSMENT ON INTRODUCTION OF INNOVATION PROJECTS THROUGH AHP APPLYING

RISK ASSESSMENT ON INTRODUCTION OF INNOVATION PROJECTS THROUGH AHP APPLYING

Tanja Pentcheva Panajotova

Technical University - Varna, 1 “Studentska” str., 9010, Varna, Bulgaria

department " Economics and management", tagea@abv.bg

Abstract. No one of company can allow standing still if it wishes to survive in intensive competitive environment. In the modern world, moved on the knowledge, the new technologies are appeared at more and more short intervals. The life cycle of the technologies, measured with years and decades earlier, today is shortened to 2-3 months. In this way, innovations must be continuous answer of the steadily changing conditions. The steady innovation management system not only helps for problem decision, but creates also a new potential, opening up in this way a chance for future innovations.

Key words: innovations, enterprise, innovation management, innovation project, risk, risk management, AHP, DSM.

I. Introduction

Innovations are a process of knowledge and ideas transformation into commodities and services. They lead to creating of consumer value and increasing of productiveness and therefore to business development too. Without innovations new commodities, services and business models have never been appeared, and the companies have been gone on to produce old commodities with old methods. Innovations are connected with radical and step-by-step changes in the products, processes and strategies of organizations. As evolutional, as well as the radical innovations start with adjustment that things are not perfect and everything can be improved. In case of step-by-step innovations there is an ambition to improve the current condition of things. In case of radical innovations the current situation is called in question and it is crated something quite new. Individed part of innovations, are the terms: novelty, invention, discovery, which are products of creativity. If under creativity is understood introducing of new ideas, the distinctive sign of innovations, is their applying in practice.

Proceeding from the assumption that the goal of all novelty is increasing of effectiveness, economy, quality and costumer satisfaction, tendency to introduce innovations can identify with enterprise or search for new opportunities of improving the work of organizations.

ІІ. Exposition

1. Innovations and enterprise

In spite of that the scientific researches and inventions are a start point of innovations, without enterprise activity and spirit of inventions no costumer value to be created. The secret of success is no just in ideas as in the way in which they are transformed into profitable business. It means that the enterprise skill and fighting spirit of the contractor, his ability to create new innovative business models, the risk management methods knowing, the managing work, enterprise leadership, as well as other tools for ideas transformation into successful business, are important on the first place. Enterprise is a manner of thinking. This is also an art to find the gainful solution for given problem.

People generate many new ideas and invent more than ever before, but they only an insignificant part of these ideas and inventions are realized in practice. People like to invent, but they are not enough enterprise to transform their ideas in practice. The key into success of innovations is no only the creativeness but the enterprise creativeness. The enterprise creativeness contains a creativeness, as well as the quick transformation the products of this creativeness into innovation strategy, creating costumer value.

2. Risky nature of innovation projects, implementing in companies

The innovation projects are typically risky projects. The uncertainty concerning the future by them is vastly larger in comparison with much other kind of projects. The necessity of managing may be argued with the special feature of these kinds of projects and connected with them considerable risks. It means that there is a long odds that the project goals not to achieve the project purposes in given time and resource frameworks. Risk management is possible because of this that by means of applying of some methods it is able to decrease the negative effect of the rise potential risk events.

The implementation of innovation project keeps considerable risks, as some of most significant causes of that are:

1. Development and introducing activities are directed to scientific products transforming into real object. Risk arises out of availability of series of barriers in the process realizing and as result – possibility of not activing the real implementation of the production process.

2. The innovation project is realized on the borderline of two disparate a sphere of human activity – the sphere of science and material production, which are substantially distinguished one from another (by nature of knowledge and attitude of mind of the working specialists in both spheres, by nature of activities, which are implemented etc.). Risk in this direction is determined of presence of probability the innovation team members to find common ground or to fail in co-ordinating their actions for implementation of common purposes in enough degree.

3. In execution of innovation project it is necessary a combination of activities with creative nature as a whole and activities, by which need of fully pragmatic thinking.

4. The innovation project requires significant investment expenses. A large part of expenses of innovation process is realized by the new idea introducing. These expenses have a risk nature and slow returning. Risks can arise because of impossibility to provide enough resources for investment expenses covering, possible high cost of financing sources, and difficulties by credit services etc.

5. Different organizations usually take part in performance of innovation project. Risks in this direction are caused by reason of possibility to not achieve a coordination between participants, talking at cross-purposes in their interests, change in primary intentions of some participants.

3. AHP applying for the risk assessment by introducing of innovation projects

The project risk management includes: identification, quantity, determination of activities response to the risks and control of these activities (T. Saaty 1996), [6]. The purpose of identification is to determine the list of accidental events, which can prevent of project purposes achievement (risk events identification). The risk events are connected with a certain project element, have accidental nature and if they happen, they can influence on the project purposes achievement with certain force, delay of project implementation and increase of determined expenses in advance. Quantitatively the risk events are analyzed from the point of view of the probability of their happening, the rate of consequences of this and their relationship with other risk areas. The basic task by innovation projects introducing is connected with determination of the possible and advisable actions on risk management includes specific methods implementation concerning of the known risks, directed to providing of an opportunity to overcome the eventual negative consequences. The concrete methods of risk management can be: risk control, risk prevention, risk acceptation and risk transfer. More often the used methods in project risk management are the expert methods. They afford an opportunity for creating thinking stimulation of participants, for decisions motivation in absence of enough reliable quantitative information.

One of the most suitable expert oriented methods is the known as Analytic Hierarchy Process - AHP, formulated and described by T. Saaty and K. Kearns in 1985, [7]. In this research is offered a model, which analyses the dependences of all risk factors in the whole innovation project process. The methodology is as follows:

1. Risk factors presentation in binary matrix (Design Structured Matrix - DSM).

2. Rearrangement of the binary matrix DSM through using of the partitioning algorithm.

3. Risk factors coordination.

DSM is used for presentation of relationships between the risk factors and AHP – as a multi-criteria analytic decision for quantity expression of DSM.

This is a systematic procedure for expression of problem elements in hierarchical mode. Originally the problem is decomposed consecutively into its more and more small compound elements; next the decision maker has an opportunity on the base of series comparison in couples between separate elements to present the influence intensity between elements in the hierarchy. The hierarchical level can be for example: the basic company’s aim, the aims grounded on the innovation strategy of the company, the criteria of aims achievement, the alternatives of innovation project implementation. The coupling comparisons are made through a generalization of individual opinions of different experts. Process allows a documentation and iteration. The purposes of this investigation are two. First is to carry out a relatively objective arrangement of the elements of every hierarchical level in comparison scale depending on their importance for elements on higer hierarchical level. Second purpose is to ascertain whether and how far an agreement exists in individual assessments and an agreement between the experts’ opinions concerning the investigated problem. By pairwise comparison experts use 9-position degree, as for every comparison part criterion „1” means, that they are equally important аnd „9” – that one of criteria is in highest degree more important than other.

Method of analytic hierarchy affords an opportunity for arrangement of the variants assessment criteria on priority. Action like this leads to risk decrease the project does not correspond in enough degree with the aims of company. This method can also be used of collecting and generalization the opinions of experts concerning their assessment of risk intensity in reference to the possible risk events. The suitable chosen group of experts is able to estimate the risk events in reference to their probability for happening and negative effect. Method can be also applied by choice of action alternatives in risk management for concrete events.

By innovation projects management it is possible to determine also quantity values on the risk level for every one of the developed variants for project implementation. This can be realized through calculation of the dispersing indexes of the adopted estimate parameters toward their expected value. The project estimate parameter can be for example the current net value and the dispersing indexes – the standard diversion or the estimate parameter disperse.

In generally the situation of decision finding in innovation project management can be described as follows:

· To make the most successful choice of being of interest quantity alternatives;

· The taking into consideration of the fixed criteria can be really important for decision choicing, but not always it is known whether all related with the given problem criteria are definable and in which way they can be changed within the whole assessment in reference to: correlation; relative weight (degree of importance);coordination.

The aim is the optimal choice of all possible alternatives. The shortness way for given problem solving is AHP applying.

In case of risk assessment in innovation project, in which the choice must be made from fixed number of alternative decisions, the most often met problems have to consider:

· What does look like the arisen situation?

· Are the aims satisfied?

· Can the criteria be rearranged according to importance?

· Is there dependence between the possible decisions?

The possible decisions are subordinated to the criteria, i.e. the criteria are estimated with two way comparison scheme.

Let with Х_iand Х_j К are denoted the comparing pairs on given level. The following table is used (Table 1) for comparison in 9-position degree scale, which is characteristic of AHP:

Таблица 1

Comparing Х_iand Х_j	Value v_ij of the comparing (Х_iи Х_j )
Х_iand Х_j are equal weighty	1
Х_iis a bit more weighty than Х_j	3
Х_iis significant more weighty than Х_j	5
Х_iis much more weighty than Х_j	7
Х_iis dominantly more weighty than Х_j	9
Intermediate values for gradation	2, 4, 6, 8
Comparing Х_jand Х_I,whenthe value v_ij of the comparing Х_iand Х_j can be obtained

Many discussions are carried on about correctness of the comparison 9-position degree scale, which is on the base of the AHP and which includes only and it continues to be disputable. The comparison 9-position degree scale is based on the idea that the relatively weighties of the matrix elements must disperse in interval [ 0,1; 0,9 ].

In AHP the word descriptions of the weight coefficients are transformed into numerical values, expressed through the comparison 9-position degree scale. Theoretically there is not a reason these constrains to be enforced through these numbers, but in practice they are used most often. This approach was introduced by (1980), [1].

Two basic characteristics of the two way comparison scheme by level are most important:

I. Reciprocation

(1)

In keeping with the assessment of the two way comparison for example by the assessment of Х_i, two times smaller than Х_j, it have to notice that the reciprocal value confirms that Х_jis only in half smaller important than Х_i .

All elements v_ii on the diagonal of the matrix V have value 1.

II. Consistence

, k (2)

When Х_i is two times smaller than Х_k and Х_kthreetimes smaller than Х_j, it follows from this that Х_iis six times smaller than Х_j .

When the matrix of the comparing pairs , situated on the level s with Ms criteria are performed condition I (Reciprocation) and condition ІІ (Consistence) there is a weight vector , with , then:

(3)

There exist another norm value ; committed with the components of by means of dependence:

i (4)

and

= (5)

Then there is the multiplication of V with :

(6)

This shows that is a eigen vector of V for dimension M_s,in casethatthe reciprocation and consistence of the matrix V are executed. By Rang ( V ) =1, M_s is the maximum eigen dimension.

These simple processes are on the base of the values of comparison scale and requirements of reciprocation and consistence.

In practice there are constraints of human abilities of diversion toward definite requirements analyzing. They doubtless lead to a certain instability appearance and often this is accepted as admissible.

If V^’isthe matrix of comparing pairs with diversions and it is described so that to come in the area of vector , for which:

(7)

is valid a formula (4) for comparing of mean quantities:

(8)

And to the maximum eigen value from a formula (7) corresponds:

(9)

Even a small diversion of the elements of the matrix V causes similarly small change of the matrix V^’ by maximum dimension M_sand it make the matrix as more consistent as nearer is to M_s.

The value:

(10)

is called CI – consistency index of the comparative matrix with z rows and z columns. This index is expressed through z-1 subtractions (z-1 two-dimensional comparisons of consistency norms of the comparative matrix) between the obtained eigen value and the maximum value z, of the consistent matrix with z rows.

As standard criterion of comparison of CI ( z ) serves the consistency index of the reverse accidental matrix with index RI ( z ) (RI – random index), obtained by accidental choice between 100 ¸500 matrix and shown in Table 2:

Table 2

z	1	2	3	4	5	6	7	8	9	10
RI(z)	0.00	0.00	0.58	0.90	1.12	1.24	1.32	1.41	1.45	1.49

The results are CI ( z ) £ 0.1 RI ( z ) for comparative matrix with z rows, so it is obtained enough consistency. The reverse matrix with two rows is always consistant.

It can be counted approximately that: CI ( z ) £ 0.1

AHP method has two important advantages:

· Eigen-function evolution;

· quantitative information.

With the advantages of eigen-function evolution and prioritization of quantitative information AHP can be a qualified approach in assessing the binary coupling strength in DSM:

1. Double comparison using, by which the innovation specialists are concentrated on comparison of two elements, competing each other in the time by a simple criterion without relationships with other criteria or elements;

2. AHP affords an opportunity for coordinated double comparison;

3. AHP does not allow clearly formulated measure units as criteria. This is a special advantage, if they are considered the risk factors as criteria.

The complex structure of the risk factors must be well understood in the beginning in order to effective management of innovation projects on a large scale. The algorithmic sequence of risk factors management in innovation projects is shown in Figure 1, and in Figures 2а, 2b and 3 are shown respectively: unpartitioned, partitioned and coordinated DSM matrixes of the risk factors .

Figure 1. Coordination model of the risk factors in innovation projects.

Figure 2а. Unpartitioned DSM Fifure 2b. Partitioned DSM