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Copyright Pearson Education LTD 2015 (print and electronic)

Taking risks (jump your


uncertainty gaps)
All decisions are about the future. Since the future is uncertain,
all your decisions will have an uncertain outcome. But because
youre trying to shape the future you still need to decide. Part of
this is assessing levels of uncertainty. The other part is making
decisions that can give you the best chance of succeeding despite
uncertainty.
Frequency: When slowed by indecision.
Key participants: You and the team.
Strategy rating: ****

Facing multi-million dollar losses, Lego took the risky decision


to hire its new CEO from outside the family. And the new
CEO decided to scrap many of the most imaginative projects
launched in recent years risking the innovation culture
that had made Lego famous. He increased strategic focus by
returning to the essence of Lego a unified system for creative
problem solving. And then took the risky decision to return
the power for delivering this strategic vision to his talented
team. Working with half the colours, and half the number of
components, designers were encouraged to create new toys with
what they had and to work more closely with Lego enthusiasts
outside the company. Successfully jumping the uncertainty gap,
often by reducing complexity, has transformed Lego into the
worlds biggest toy company.

Objective
Uncertainty can only be reduced by committed decisions and
actions. You cant wait for uncertainty to disappear but you can
choose to create certainty of purpose and direction. You cant

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Taking risks (jump your uncertainty gaps)

33

remove risk but you can think about how to create a culture and
processes to adapt to unexpected problems.
How high are levels of uncertainty in your industry?
What uncertainty surrounds a particular decision?
What are the risks in making (or not making) certain

decisions?
How could things go wrong? What would you do next?

People think differently about risk and uncertainty. Managers


tend to take fewer gambles than entrepreneurs because of differences between how they view the relative benefits of winning and losing. Small groups tend to take bigger gambles than
individuals because they get to share the benefits while also
avoiding the blame. But large groups may seek to avoid risks
because they get stuck in habitual, traditional ways of doing
business.
Avoiding risk is not the main aim of a business. The aim of a
business is to take risks and benefit from the higher returns of
taking those risks. Thats why the entrepreneurial approach to
making investments is attractive to growth strategy. And its
why large organisations try to recapture small-group risk taking. They understand doing nothing is often as risky as doing
something.

Context
Some risk comes from outside the organisation, but most risk is
about the ability of an organisation to complete its plan. The risky
part is adapting successfully to the needs and demands of the market. The risk is dealing with competitor moves while managing to
deliver products and services that customers will buy. And keeping
your shareholders satisfied.
Strategy involves completion of goals, and the risk is the difference
between those goals and the ability of the organisation to achieve
them. So part of the risk is created by the strategy. That means

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Thinking like a strategist

your ability to think about the way various parts of your plan fit
together with what your company can do.
Which risks are outside your direct control?
Which risks are within your direct control?
How can you deal with changes outside your control?
How can you anticipate external changes?

Your task as strategist is to recognise the costs and benefits of risks.


The benefits are just as important as the costs. Your strategy will
have uncertain outcomes but you can try to assess the rewards and
how to gain them.
The next task comes from comparing what you want to accomplish
with the abilities and resources available to you. Some of this will be
money and equipment but most of it will be the skills, commitment,
processes and culture of your company. Part of this will be about the
ability to do what is necessary, and part will be the willingness of
the organisation to take action that has an uncertain outcome.

Challenge
The first challenge is to look clearly at different sources of risk. As
already discussed, some are inside and some of them are outside
the organisation.
Outside the organisation

Is your market complex or


simple?

Are the rules of the market


stable, dynamic or chaotic?

Are resources scarce or plentiful?

Is the market growing or


shrinking? How is the general
economy doing?

Are there shocks beyond your


market?

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Inside the organisation

How demanding are aspirations?

How high are performance levels?

Is there a performance/
aspiration gap?

How similar is the top team?

Does the top team have a stake


in the business?

What levels of slack resources


exist?

What skills does the organisation


have?

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Taking risks (jump your uncertainty gaps)

35

If the gap is large between aspirations and performance levels the


risk of not succeeding is increased. If the top team is very similar
they may avoid risks because they are comfortable with the status quo. Yet similarity may also increase willingness to take risks
if they feel overconfident in their own view of the world. This is
not necessarily a good or a bad thing, it depends on the needs of
the situation. You should just be aware of team dynamics related
to uncertainty so you can respond to it as useful to your objectives.
If the skills are high enough then the capability gap is reduced.
This may reduce risk by increasing performance, but it may also
increase aspirations to unattainable levels. All of this will affect
the risk inherent in the strategy. It is the gap between aspiration
and ability that is ultimately the source of risk.
There are various methods some organisations use to analyse risk.
These include Net Present Value (NPV) (not covered in this book)
where subjective judgements about risk are given numerical values that are subject to a simulation method. Yet the basis of the
method is still subjective and does not deal with complex choices.
For complex choices, decision trees have been used. Alternative
options and change events are identified alongside likely performance and outcomes. Like NPV these can either be too simple to
be accurate or too complex to be useful. They can fool managers
into believing they have control over the future. Just as importantly they can stop managers feeling they can intuitively manage
the gap between capability and aspiration.
Another approach is scenario planning (see page 183) whereby
the strategist uses imagination to see into the future and design
actions that can be taken to shape the future. This is about reducing
uncertainty by taking certain actions that are under the control of
the organisation.

Success
The strategist is attempting to find a course of action that leads to
activities which bring attractive results for the organisation and
its stakeholders. You are succeeding if you can think your way

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Thinking like a strategist

forward from the current position to a new position that is better.


Move from where you are with what you have to where you want
to be.
You need to recognise what is in your control and what is outside
of your control. You need to get a good understanding of any gap
between aspiration and performance. And you need to bridge that
gap either by increasing aspiration to the point that people are
willing to try to achieve more, or by increasing performance to the
point that it can achieve what is desired.

Strategists measures of success


You have identified attractive destinations and objectives.
A credible strategy for attaining objectives is created.
Level of outside uncertainty is understood.
Size of performance/aspiration gap is identified.
The capability/uncertainty gap is managed effectively.

Pitfalls
Taking on too much risk happens when you dont have the ability
to do what you set out to achieve. People may be overconfident
because of past successes or excessively high optimism in world
markets. People may take on too much because they either overestimate the ability of colleagues or underestimate the difficulty
of the task. This is made worse if a lack of openness or excessive
politeness stops people voicing concerns. Defensiveness can lead
to ignorance that increases risk.
It is just as much of a problem if ambitious projects and goals are
not attempted. The returns to the business will be low and may be
too low to keep the business safe. Shareholders may find this unacceptable and the business will not survive if excessive caution
loses market share and profit. The task of the strategist and leadership team is to reduce uncertainty in the areas that they can directly influence in order to pursue attractively difficult objectives.

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Taking risks (jump your uncertainty gaps)

37

Strategists checklist
Identify the areas inside and outside your control.
Assess levels of uncertainty inside and outside the organisation.

Look at the list of questions in this section. Talk about them


with your team and think about the likely direction of change.
Think about how the organisation can cope with unexpected
and expected problems.
Compare performance aspirations and expectations. If

aspirations are greater than expectations consider how to


reduce the gap by increasing performance or by reducing
aspirations in the short term. If expectations are higher than
aspirations then consider how to raise aspirations.
Use scenario planning tools (see page 183) to consider how

strategies may increase or decrease risk in the future. Use the 5


forces model (see page 169) to identify forces that may increase
or decrease risks to your competitive position.
Explore the use of risk analysis and decision-making tools (NPV

and Decision Trees). Are they stopping appropriate levels of risk


taking? Would they be helpful in improving understanding of
risk?
Think about the capability of the company to do what is

required by the strategy. Consider also the ability of culture


and skills to adapt to unforeseen problems, particularly if the
strategy is ambitious.

Related ideas
Nassim Taleb, in his book The Black Swan, argues that people have
an inaccurate view of risk. This means that they take on risk that
they underestimate and avoid risk that they overestimate. This
is exacerbated by lack of information, personal fears and group
dynamics.

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Thinking like a strategist

Being aware of these tendencies can help you to take the kind of
actions that your competitors fear to attempt while in fact not
taking foolish risks. This is what entrepreneurs do instinctively as
they demonstrate a form of functional impulsiveness along with
superior pattern-recognition skills.
Unfortunately, many organisations find it easier to be managerial
than entrepreneurial. Managers may keep investing in continual
improvement efforts that continually fail. They may also abandon
investments in more radical innovation, even when there is more
risk in moving slowly than moving too quickly.
Yet, according to research led by Sucheta Nadkarni at Cambridge
Judge Business School, when new opportunities are appearing,
and disappearing at high speed, you will often be rewarded for
competitive aggressiveness. In such environments, strategic
urgency helps you to adapt so that you get to the future in time.

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