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Strategy and Risk in Business

dreamstime_xs_50082776Risk is an element of much of what we do in life and is usually considered to be a negative thing. This is also true of developing strategies for business, and many who develop these types of strategies firmly believe that one of their major goals should be to avoid or eliminate risk. That is understandable, but it is also impossible. Trying to eliminate risks completely would be a mistake, and failing to address and leverage risk in a strategy is a recipe for an incomplete product.

As you go about building or refining a strategy, it is important to see that developing these tools is largely about picking between alternatives; deciding what the organization will do what it will not do. In business there is never enough time, money or skilled people to do all of the good and potentially beneficial things that are in the realm of the possible. This means that tough choices will have to be made, and that, while some areas will benefit, some avenues of possible development will not be resourced or actively investigated.

Strategies should be useful to the mid-level managers in a company – it should allow them to quickly make smart decisions about the tens or even hundreds of issues that may pop up over any given week. The agility that results is increasingly critical in today’s agile marketplace. A good strategy, therefore, should inform decisions, and one of the key ways to help that happen is to articulate not only where emphasis will be placed, but to identify explicitly where the company leadership is willing to accept risk.

Sam is a mid-level executive responsible for managing and resourcing product development efforts in one of four sectors of a company that creates software products for the insurance industry. His team has been working on a number of projects, including a partnership with a company that makes hardware. This effort is intended to result in a hand-held device that meets specific insurance adjuster’s needs, reducing the time necessary to process a claim significantly. The market assessment for this product indicates that it has the clear potential to be in high demand and that it will not only be very profitable upon the initial sale, but that it will provide an ongoing platform for the company’s software products. The company Sam works for is still in a favored market position for this product, but is facing increasing competition as a number of software companies that support Defense have been moving into this line of business.

The company publishes a new strategy, recognizing that the market is shifting and that there will not be sufficient resources to complete all the projects that have been in development in the past. This new strategy makes it clear that the company’s main concentration for the next year will be on specific software projects and that they will accept risk on non-software efforts like hardware and services. Sam has to make hard choices, but the company has made it clear that it is willing to accept risk on hardware efforts to allow essential software projects to be accelerated. Given reduced funding to his sector, Sam decides to provide enough funding to allow the project to survive, but that it cannot receive resources necessary to progress significantly until the company leadership changes their priorities. In quarterly reviews Sam makes the case for the resumption of funding for the hardware effort, and, once conditions are right, his leadership modifies their strategy to support the effort. The company has lost much of its technological lead, but there is agreement that the hand-held technology is important and should be pursued.

These are necessarily hard decisions, but with every decision to commit funding to a specific effort the management is also deciding that money will not be committed to other projects. Without a clear discussion of where the company is willing to accept risk, a manager cannot make informed decision that are the most effective for the organization.

As you both build strategies or are in a position to execute them, make sure you understand where the company will accept risk and that these risk areas are articulated in the document. This will enable leaders at all levels to make solid decisions that maximize the overall effectiveness of the company. It will also ensure available resources are focused on the efforts that the company leadership has decided are essential for future success. Without it, you run the risk of chipping away at the ground under your own feet.

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