There is an inherent paradox in risk management today. On the one hand, the world that we do business in today seems full of risk – it has been described as a Volatile, Uncertain, Complex, Ambiguous and increasingly Global (VUCA-G) operating environment and markets notoriously hate uncertainty. Moreover, mistakes are now publicised globally via social media within minutes of coming to light, particularly if the failure was both visual and entertaining!
At the same time, in such a fast-moving world, coming up with innovative ways of doing things is essential. We need to not only ensure that our products and services don’t become obsolete, but neither do our ways of delivering them. And innovation – doing something we have not done before – inevitably involves a degree of risk. A risky world, it seems, needs to be met with further risk-taking.
So how should we respond appropriately and gauge the right level of risk? We can get a step closer to finding out by dealing first with two mythical strategies, each at the extremes that entrepreneurs would do well to dismiss straight away!
Myth 1: Risk little and stay safe
A myth of risk management is that doing nothing risky is the least risky option. Unfortunately, the resultant inaction and passivity carries its own risk, one that is heightened in a fast-moving world where obsolescence is only a strategic doze away.
It has been said, ‘if you do what you’ve always done, you’ll get what you’ve always got’. But the situation isn’t that rosy I’m afraid. Doing what you’ve always done is likely to render you obsolete as the world moves on apace. You won’t stand still, you’ll slip backwards. Passivity allows space for that competitor, new technology, or new channel to market to render you irrelevant and out-of-touch.
Myth 2: Risk much to gain much
The other myth that sometimes pervades entrepreneurial thinking is that ‘the one that risks much, gains much’. It seems brave, a bit macho and certainly appeals to the adrenalin junkies. Unfortunately, there are many attending gamblers anonymous groups across the globe that are trying to pick up the pieces of shattered lives having lived out the consequences of that mantra.
In contrast, as we will see shortly, businesses that thrive in volatile and uncertain conditions are not the biggest risk-takers. Anyone who has seen the film ‘Everest’, based on the disastrous true story of three expeditions attempting the summit in May 1996, will recognise what can happen when too much is risked for too little. The only risks worth taking are the ones you will survive.
Getting the balance right
So how do we get the balance right? How do you encourage the degree of risk-taking needed to remain relevant in a fast-moving world without putting the whole business at risk?
Steady steps in crazy conditions
Successful companies survive volatility and uncertainty in their external environment by limiting the uncertainty and volatility in their internal environment. You may frequently have to change the way you do things and how you organise your business, but there needs to be a long-term strategic intent that doesn’t change with the fluctuations of volatile market conditions.
Having a clear sense of purpose as an organisation and a vision for the unique value you want to offer your customers or the impact you want to have in the world, can give you a bedrock on which to make wise strategic decisions. Disciplined action, based on this bedrock stops you being unhelpfully distracted by short-term opportunities that may over-diversify your offering or spread your resources too thinly.
Jim Collins brings this powerfully to light in his ‘Great by Choice’ study (2011). He looked for businesses that had started small in the previous 30 years and seemed to thrive in particularly turbulent market conditions, while competitors of a similar age and in similar markets did not. Bythe end of the study he concluded that:
“Whether you prevail or fail, endure or die, depends more on what you do yourself than on what the world does to you.”
So what were these ‘Great by Choice’ companies doing differently? Collins said that it was down to three paradoxical qualities:
- Fanatical discipline – they didn’t just leap at every opportunity that presented itself, but grew steadily in line with their long-term goals rather than over-stretching themselves in response to short-term opportunities. A classic example of this was Southwest Airlines, who in 1996 had over 100 cities clamouring for their services. They invested in just four. Rare amongst airlines, Southwest generated a profit for 30 consecutive years by sure and steady growth.
- Empirical Creativity – the most successful companies did their homework before doing anything. This aligns with Warren Buffet’s approach to investment summarised by his mantra: “Risk comes from not knowing what you’re doing”. ‘Great by Choice’ companies invested in lots of low-risk, low-distraction experiments, extracted maximum learning from them and then committed their resources to the ones that worked. During the study, innovative biotech company Genentech delivered twice as many patents as their rival, Amgen. Yet Amgen were 30x as profitable in the same period. Innovation in itself is not the secret to long-term success, but targeted innovation, backing fewer, tried and tested ideas might be.
- Productive Paranoia – successful companies in volatile conditions shunned complacency and were forever asking the ‘what if?’ question. Here they did three crucial things:
- They built cash reserves and buffers to prepare for unexpected events before they happened. Southwest Airlines’ financially conservative approach meant they were able to cope when 9/11 hit the American airline industry and were the only airline to turn in a profit in both 2001 and 2002.
- They bounded risks, so compared to their competitors, they took far fewer:
- ‘death-line’ risks – that could kill or severely damage the enterprise
- ‘asymmetric’ risks – for which the potential downsides outweighed the potential upsides
- ‘uncontrollable’ risks –that exposed the enterprise to forces or events that it has little ability to manage or control.
- They kept their eye on long-term trends in their operating environments – engaging in regular scenario planning, preparing in advance for any eventuality that might result if those trends continued. They didn’t always respond with great speed to oncoming threats, but their scenario planning enabled them to begin their response early. They went ‘as slow as they could but as fast as they must’.
Through fanatical discipline, empirical creativity and productive paranoia, businesses can learn to surf the waves of uncertainty, minimising unnecessary risks. But another challenge that can hamper an enterprise’s strategic agility and an appropriate attitude towards risk is the tension between those who have a large appetite and those that have almost no appetite for risk within their organisations. In the most successfully innovative companies, both voices are heard and incorporated.
Building an innovative culture with an appropriate risk appetite
The culture of your business will probably have a propensity towards risk-taking that reflects the key personalities that lead it. The entrepreneurial personality is classically action-oriented and more comfortable with risks than most, but as a business grows it will increasingly need the balancing voices of other personalities to be heard.
The University of Michigan’s Jeff DeGraff’s version of the Competing Values Framework (CVF) can be a useful model here. It highlights the important tensions that must exist within a team or culture if successful innovation is to see the light of day, without risking everything. Based on a model previously developed by Quinn and Rohrbaugh (1983), DeGraff describes four classic people profiles that are needed but are often in conflict within our organisations. There are people that:
- COMPETE – that love to do things NOW;
- CREATE – that love do things NEW;
- CONTROL – that love to do things RIGHT and
- COLLBORATE – that love to do things that will LAST.
The COMPETE and CREATE profiles are likely to lead the way in innovative risk-taking. COMPETEs are ambitious, opportunistic and decisive; they like to be fast and first to market, before the competition gets there. CREATEs like radical new-ness – no incremental changes for them. They are imaginative, experimental and comfortable with failure, seeing it as a route to finding what really does work. But both these profiles need the balancing values of the CONTROL and COLLABORATE profiles.
The CONTROL profile balances the CREATEs, limiting their risk-taking to manageable levels, helping to ensure that a new product or service going to market can be delivered consistently and to a high standard. COLLABORATEs help slow COMPETEs down long enough to take the team with them, making sure that ideas are refined and developed by the application of diverse perspectives.
Collins hints at this need for creative tension and for these different voices to be heard in ‘Great by Choice’: “More important than being first or the most creative is figuring out what works in practice, doing it better than anyone else, and then making the most of it with slow but sure growth”.
As a new business grows to a more mature enterprise, the skills and aptitudes that have got the business off the ground will need to be complimented by different voices that will help keep it going. The art is to ensure that a range of voices are heard in proper proportion, keeping the creative tensions, creative; preventing the destructive extremes of overly risky or risk-averse strategic positions.
Ultimately, a balanced, measured response to risk is likely to be the most effective – one that honours and utilises the wisdom from many perspectives. Perhaps the old tortoise and the hare fable still applies – the race is not always to the swift (nor to the stagnant) but to the steady? Risks must be taken in order to survive, learn and thrive in an uncertain and unpredictable world but can be taken in a measured and disciplined way.
Adrian Lock is the Strategic Leadership Programme Director at Roffey Park – see more at www.roffeypark.com.