How to Build Risk into Your Business Model Smart companies design their innovations around managing risk.

By Karan Girotra and Serguei Netessine

SUMMARY: MyFab is an internet-based furniture retailer. Instead of building large stocks of furniture, as its competitors do, MyFab provides a catalog of potential designs. Customers vote on them, and the most popular ones are put into production and shipped to buyers directly from the manufacturing siteswith no retail outlets, inventories, complicated distribution, or logistics networks.

By simplifying its supply chain and producing only what customers wanted, MyFab was able to offer products at significantly lower cost than established furniture retailers could. In just two years the company has grown to more than 100 employees; it now sells furniture and other products in four markets, including the United States. In designing their value chains, companies typically focus on three things: revenue (price, market size, and ancillary sales), cost structure (direct and indirect costs, economies of scale and scope), and resource velocity (the rate at which value is created from the applied resources, typically captured through lead times, throughput, inventory turns, and asset utilization).

Reducing Risks:
Often companies that have lowered their business model risk have done so by 1. Delaying production commitments, 2. Transferring risk to other parties, or 3. Improving the quality of their information.

Adding Risk:
Robert Merton has pointed out that companies create value by being better at managing risk than their competitors are. The implication is that if you are better than others at managing a particular risk, you should take on more of that risk.

Sometimes trying to avoid a risk actually increases it, and you can better manage it by being willing to own more of it. Take the car rental business. The risk in this industry lies in underutilizing fixed assetscars. Traditional companies rent in daily increments, so the customer has to pay for a day even if he needs the car for only a few hours. He must assume the risk of underutilized assets.

Advantages and Challenges:

1. Its much cheaper. 2. Risk-driven innovation, however, can be approached in a systematic way and with little expenditure, and relatively clear and credible estimates can be made of the potential benefits and costs. 3. You dont need extensive experimentation and prototyping to identify very powerful innovations, because some of them have already been done and others can be quantified.

I Think of My Failures as a Gift - Former Procter & Gamble CEO A.G. Lafley
SUMMARY: Failure is equivalent to a stepping stone. A person has to get past the disappointment and the blame and really understand what happened and why it happened. And then, more important, decide what he has learned and what he is going to do differently next time. Failures are a part of growth and development. Whats the single biggest reason that leaders stop developing and growing is they stop becoming adaptable; they stop becoming agile. Its Darwins theory. When you stop learning, you stop developing and you stop growing. Thats the end of a leader. Leaders learn much more from failure than they do from success. Look at great politicians and successful sports teams. Their biggest lessons come from their toughest losses. The same is true for any kind of leader.

Five fundamental root causes of failure: 1. The absence of a winning strategy for the combination. 2. Not integrating quickly or well. 3. Expecting synergies that dont materialize. 4. Cultures those arent compatible. 5. Leadership that wouldnt play together in the same sandbox.

Many CEOs meuse innovation and acquisition to grow organically and inorganically in a balanced and sustained way. Both innovation and acquisition are risky and have high failure rates: 80% plus for new product innovation in our industry; 70% plus for acquisition.

How did that analysis alter things?

1. Identify the problems 2. How to organize for each phase of the acquisition? 3. What processes to be put in place? 4. What interim measures would indicate whether we were on track or off track?

Sometimes the deal is not only about strategies, economics and finance; it can be about human motivators, human behavior and different personalities. In such a case the leader has to think more about who is going to be more influential in the decision and how the leader could manage that individual and not ever be caught off guard again.

Advices about learning from failure:

1. Some of the most important and insightful learning is far more likely to come from failures than from successes. 2. The learning has to be institutionalized to endure. Otherwise you keep making the same mistakes over and over, and you dont learn from them.

Balanced Scorecard Report

-A Platform for Strategy Management By David P. Norton

SUMMARY:

In recent years, strategy management as a discipline has become decidedly professionalized. A 2006 Palladium survey showed that 54% of organizations reported having a formal management process for executing strategy. Of those organizations, 70% claimed to outperform their peer group. Similarly, a more recent survey by IDC found that 75% of organizations that rate themselves as most competitive in their industry use a formal performance management methodology. The IDC report further stressed the importance of a formal performance management methodology such as the Balanced Scorecard (BSC) in creating a systems perspective. The antithesis of the systems approach, they are the result of decades of evolution in which different frameworks, approaches, and technologies have been introduced without any master plan. Today, they constitute a veritable Tower of Babel that frustrates integration and communication. These barriers include:

1. The strategy framework barrier, 2. The management process barrier, 3. The technology barrier, 4. The people barrier.

Descriptive frameworks are used in all forms of organized endeavor, from income statements and balance sheets in finance to the Dewey Decimal System in libraries; from industry classification for macroeconomics to the census framework for demographics. Such frameworks establish a language, definitions, and conventions that allow a common treatment across organizations, geographies, and cultures. A descriptive framework is a necessary foundation for the systems approach.

To successfully execute strategy, organizations need a management process to translate the strategy described by the strategy map into action which led to the development of six stage management process which is: 1. Develop the Strategy. 2. Translate the Strategy 3. Align the Organization 4. Plan Operations 5. Monitor and Learn 6. Test and Adapt

Strategy management is a new process. It is also holistic and multidisciplinary. The competencies it requires do not exist in most organizations and must be developed. The Strategy Management Process model provides a road map for introducing technologyenabled approaches. Each of the six stages of the management process has a unique structure that demands a unique technology approach. There are four distinct opportunities for using technology. 1. The Balanced Scorecard 2. Operational Analytics 3. Strategy Analytics 4. Alignment

The purpose of a strategy management process is to activate specific change in the organization. A strategy defines the agenda for change by identifying the relevant objectives, measures, targets, initiatives, and funding. Managing strategy execution is all about managing change.