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Rotman Insights Hub | University of Toronto - Rotman School of Management

The rise of risk-mitigating technologies

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Alberto Galasso

You have said the global pandemic is forcing firms to rethink their innovation strategies. Why is that?

A major event like the pandemic changes consumers priorities, their preferences and their needs. As a result of COVID-19, people care a lot more about their safety and avoiding the spread of the virus. Understanding these new preferences and responding to the changes in consumer risk perception should be a priority for every organization as it designs and develops new products and services.

You have studied one type of innovation in particular. How do you define a risk-mitigating technology (RMT)?

RMTs are technologies that reduce the probability of negative events or the severity of their consequences. For example, windshield wipers reduce the likelihood of car accidents, while seatbelts and airbags mitigate their severity. RMTs can take a wide variety of forms, depending on the nature of the hazard, the demand involved, and the technological possibilities. They can range from incremental innovations that refine an existing technology to radical innovations that establish something entirely new. RMTs are widespread and increasingly important in an uncertain world. They create value for businesses because the health and safety of customers and employees are of first-order importance, and because the adoption of RMTs reduces the risk of product liability litigation. However, despite their relevance, RMTs are often neglected in MBA courses on technology strategy. They are not discussed as much as technologies related to other dimensions of product quality, such as the size of a mobile phone or the performance of a computer. In joint work with my Harvard Business School professor Hong Luo, we aim to change this through our research and the development of new teaching material.

Along with professor Luo, you recently studied the impact of consumer risk perception on firm innovation. Please summarize your findings.

On October 8, 2009, a medical centre in Los Angeles disclosed that it had made mistakes in scanner settings and administered up to eight times the normal radiation dose to more than 200 patients undergoing CT brain perfusion. The story was reported by both local and national media outlets. Most prominently, the New York Times published more than 20 articles about it and similar radiation accidents.

Not surprisingly, the widespread media coverage increased the perceived risk of CT and other medical technologies involving radiation among both patients and medical providers. Luo and I wanted to understand whether this significant change in risk perception had any impact on firms innovations strategies — whether it changed their investments or the type of new products they developed.

RMTs are technologies that reduce the probability of negative events or the severity of their consequences.

To do this, we assembled a detailed dataset of patent applications from the United States Patent and Trademark Office and new medical device applications to the U.S. Food and Drug Administration (FDA). Our statistical analysis showed that the over-radiation shock led to a substantial increase in patenting and commercialization of radiation diagnostic devices. More importantly, the increase in patenting activity appeared to be driven by patent applications related to radiation safety — that is, protection against radiation, control of the level of radiation exposure, and detection of device malfunctions.

Pre-market notification data showed that the total number of new product introductions of radiation diagnostic devices after the shock increased by about 30 per cent relative to devices that do not use radiation. Based on industry and clinical publications as well as data from the FDA, we were able to characterize RMTs developed after the over-radiation shock into two categories. We called the first group lowhanging fruit. These were marginal improvements to the technologies that helped prevent overdose accidents. These types of RMTs — such as dose display, notification systems for doses exceeding pre-assigned thresholds, standardized dose-recording software, and redesigned use protocols for certain procedures — were mostly implemented through new standards set by the industry association.

The second type of RMT we identified included more radical technologies that required a substantial departure from existing products. In particular, we observed a change in the technique to reconstruct image data that had been dominant for 30 years. The industry invested heavily to improve and exploit a long-shelved technique that sacrificed speed and image quality, but reduced radiation doses by 80

to 90 per cent — a level that could not be achieved by simply tweaking the dominant method. Ultimately, our study confirmed that changes in risk perception are an important driver of innovation and can shape the direction of technological progress.

With respect to COVID-19, low-hanging fruit in terms of RMTs might include plexiglass shields and floor distance stickers. What would high-hanging fruit look like?

We have been witnessing firms experimenting with a lot of radical risk-mitigating technologies. For example, in China, robots have been designed to deliver medicine and meals and collect bedsheets and garbage in hospitals; and e-commerce giant JD developed a drone program to drop parcels and spray disinfectant. Elsewhere, retailers have considered the use of Amazon’s Just Walk Out technology, which combines computer vision and AI to bill customers directly as they walk out of a store, with no checkout required. Warehousing companies have explored the use of new advanced robotic technologies such as a fleet of drones to effect automated scans of pallet barcodes, reducing the need for human interaction. And some companies have substantially and permanently altered their business model. Shopify, for example, moved the majority of its employees to permanent remote work and radically shifted its view of the value and use of real estate.

Lots of new innovative start-ups have emerged in recent months, and we have seen many of them in the Creative Destruction Lab’s Recovery Program, which focuses on solutions to accelerate the world’s recovery from the COVID-19 crisis. For example, the British start-up Crowdless launched a mobile app that helps people avoid queues and crowds. It provides real-time data on how crowded particular supermarkets are, so that people can avoid crowds and choose the least busy place and best time to visit.

For those who aren’t familiar with it, what is the Creative Destruction Lab?

CDL is a non-profit organization that delivers an objectives-based program for massively scalable, seed-stage, science and technology-based companies. It was founded at the Rotman School by professor Ajay Agrawal and is now running at nine academic locations around the world, from Atlanta to Halifax to Paris. This past summer, CDL launched a new stream called CDL Recovery, which is focused on information-based solutions to accelerate recovery from the global pandemic. This focus complements the expertise of the CDL in areas like artificial intelligence and machine learning, both of which involve collecting and processing data. Some of the start-ups in the CDL Recovery Program were related to medical devices that could help with testing and potential treatment of the disease, while others were targeted at creating business solutions to deal with the changes brought on by the pandemic.

An increase in risk perception makes consumers more willing to pay for safety features.

What is your role at the Creative Destruction Lab?

I am the Lab’s intellectual property economist, which means I meet with start-ups and provide guidance when they have issues related to the management of intellectual property. They might need to decide, for instance, whether to apply for a patent or not, or how to share their intellectual property. I collaborate with the Innovations & Partnerships Office (IPO) at the University of Toronto to support CDL start-ups that originate at the University and want to build on technology developed by our medicine or engineering faculties. I also co-teach the Creative Destruction Lab Introduction course.

Describe how consumers willingness to pay for safety fits into the RMT picture.

An increase in risk perception makes consumers more willing to pay for safety features, which, in turn, provides producers with greater incentives to develop and commercialize technologies that address consumer demands for safety. Increased risk perception, in principle, has ambiguous effects on the demand for a product. On one hand, higher risk perception may suppress demand for a product class, reduce market size and thereby chill R&D investments. On the other hand, a higher willingness to pay for safer products may increase the incentive to innovate, serving as a demand-pull force for the development of risk-mitigating technologies.

In settings such as the radiation diagnostic devices we studied — in which there were sufficient and economically-viable possibilities to develop safer technologies and regulatory and legal uncertainty was relatively contained — the positive effect of a higher willingness to pay for safety superseded the chilling effect that higher risk can have on innovation.

A key question that many leaders currently face is how to go about investing in risk-mitigating technologies. What is your advice to them?

My main advice is that there is no universal best strategy. The link between risk perception and innovation is complex and nuanced. To a great extent, the right investment strategy depends on how long this crisis lasts and in what form the risk (and the fear) of contagion persists. These factors will likely vary greatly across businesses, markets, and geographic locations.

This aricle was originally published in the Winter 2021 issue of Rotman Management magazine.

Alberto Galasso is the Rotman chair in Life Sciences Commercialization and professor of strategic management at the Rotman School of Management and intellectual property economist at the Creative Destruction Lab.