The paradox of risk

Written by PROFIT-Xtra

After performing one of the largest studies ever on the relationship between strategy, performance and firm survival, Deloitte Research consultant and Richard Ivey School of Business professor Michael E. Raynor discovered a “strategy paradox” that could change the way you do business. His findings are published in the new book Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do About it). PROFIT senior editor Kim Shiffman spoke to Raynor about how entrepreneurs can use the surprising findings to their advantage.

What is the “strategy paradox” that you discovered?

The strategy paradox is that precisely the same behaviours that are required to make extreme success even a possibility also expose an organization to increased risk of total failure. Essentially, companies that are the most successful have the same strategic profile of those who fail. The turn of phrase I use in the book is that the opposite of success is not failure, it’s mediocrity, at least when it comes to your strategic behaviour. If you want a safe approach, you’re less likely to go out of business altogether, but you’re also far less likely to achieve anything of note. It’s a classic risk/return tradeoff.

What can entrepreneurs do to mitigate their risk?

The key here is to separate the making and managing of strategic commitments from the identification and management of strategic uncertainty.

In the same way we divide finance from production from HR from sales and marketing, it makes sense to divide making strategic commitments from managing strategic uncertainty. So, if you are responsible for getting the cinnamon toothpaste out the door, you are delivering on a strategic commitment. You should not be worried about strategic uncertainties associated with it—you know, “Gee, what if we move from mechanical brushing of teeth to ultrasonic?” That would be a profound shift. But if you ask the same person to do those two things, they will end up pursuing very timid, uninspired, middle-of-the-road strategies, because they are trying to do two very different things at the same time. This is not walking and chewing gum at the same time; this is very, very hard to do.

Individual operating units, when they are forced to do both at the same time, end up pursing uninspired, low-risk, low-return strategies. The problem is that until now, the only option has been to take a high-risk, high-return strategy. You can actually blunt that problem by separating commitments from uncertainty—and you don’t need to be a big company to do that.

Is this basically a leadership issue?

At some level, everything is a leadership issue. But what leadership means here is different than the mythology of the heroic CEO who puts a pin in the map and leads the corporation relentlessly towards realizing this compelling vision. Instead, turn it around and say, when you’re at the top of the hierarchy and responsible for thinking about the long-term, the only thing I know for sure is that you have no idea what’s going to happen. So the consequence is, rather than thinking of strategy as these bold commitments, think about strategy in terms of the uncertainties you face. And think about creating options for your organization rather than creating commitments. Leave it to the people who actually have to deliver the goods to keep the lights on; leave it to them to make commitments, because they’re dealing with a shorter term. It’s far less likely they’ll make the wrong choices because they’re dealing with a shorter time horizon.

Most organizations think of strategy the top in terms of making commitments, and then adaptability at the operational level, people kind of shucking and jiving, trying to figure out a way to make the strategy work as best they can. I think that’s exactly backwards. Strategy begins with an acceptance of our ignorance, an embrace of what we don’t know, then making all and only those kinds of commitments that make sense given that ignorance. And it’s the people closest to the coal face who are in the best position to make those commitments.

Your approach seems like it would require a full overhaul. What can entrepreneurs do today?

The first step would be to try to determine what are the strategic risks that your organization faces right now, and how are you managing them, even if just implicitly right now. What bold steps could you make that look like they make sense, but you’re not making simply because of the uncertainties around them? Where are you just sitting on your hands or staying on the sidelines? And why is that? Usually that’s a great place to start looking for opportunities to create strategic options. When you’re afraid to make a commitment because of the uncertainty, that’s when you should start asking questions about how can we create an option rather than making a commitment.

The data from our statistical analysis is unequivocal: the vast majority of companies in the survey pursue very lacklustre strategies. They have no other way to deal with uncertainty, so they avoid it. There are very few companies that are willing to put their head on the chopping block and run the risk of total failure in the pursuit of extreme success—those are the folks who live at the edge. Most people are in the middle. Be honest about that—it’s a critical first step. And if you’re in the middle, that’s okay. It’s a perfectly rational trade-off between risk and return. But wouldn’t it be great if we could get the returns that are usually reserved for the daredevils at the level of risk reserved for the homebodies?

Originally appeared on PROFITguide.com