A recent Harvard Business Review article “ManagingRisks: A New Framework” (June 2012) states “risk events are fatal to a company’s strategy and even to its survival.” The article categorizes risk into three categories:
- Preventable risks (internal risks that should be eliminated or avoided)
- Strategy risks (high risk/high reward; a key driver in capturing significant gains)
- External risks (macro-environmental events outside the company beyond its influence or control).
Preventable risks are managed with internal controls and operational processes. Strategic risks often leverage scenario-planning tools for measuring probabilities of various outcomes via risk management systems. External risks are not preventable but they can be identified with proper monitoring of the macro-environment. Establishing early warning indicators are key to adjusting and responding to what is happening in the marketplace. As we know “hindsight is 20/20” but prevention and avoidance of potentially fatal events because you could prepare for their impact, needs to be part of an organization’s day-to-day operations.
As the HBR article aptly points out “...people overestimate their ability to influence events that, in fact, are heavily determined by chance. We tend to be overconfident about the accuracy of our forecasts and risk assessments and far too narrow in our assessment of the range of outcomes that may occur.”
I agree that often times executive management tends to have a bias that supports their preconceived notions about the future state of their particular industry. Information that proves to be contradictory is either ignored or used to hasten their course of action down the wrong path. I’ve seen this occur throughout my entire career, and now studies have proven this risk aversion exists and companies continue to “throw good money after bad.”
I believe by hiring experts within an organization to monitor, analyze and provide insights back to management, is essential for company, marketing and product strategies. Collaboration and communication with various departments or functions within the organization is key. The insights need to be communicated in order for informed decision making to occur.
As I look back at major brands that are no longer in existence today, I wonder if they had the right people on board and processes in place to identify risk events and establish early warning indicators, so they could create a plan of attack to mitigate the risks and keep the organization on the path to profitability and sustainability. Brands such as Pam Am (1991), Wang Labs (1992) Lehman Bros. (2008), Blockbuster (2010), etc., were market leaders in their industry yet their demise came anyway. If we look at “Porter’s 5 Forces” you can see that competitive assessments need to go far beyond the cursory SWOT analysis and feature-to-feature comparisons. It’s about understanding the competitive rivalry in the industry; look at existing competitors, identify threats of new entrants or substitute products, as well as the bargaining power of suppliers and customers.
Porter’s 5 Forces uncovers just one piece of the puzzle. The other pieces of the puzzle include political, technological, sociological, environmental and economic forces, just to name a few. However, this is just the beginning to understand and view the entire picture of what is occurring within your industry, and with your direct and indirect competition. Navigating your way through the marketing environment isn’t rocket science, but it does require the right level of expertise. It also takes empowerment from the executive team to report and share insights across the entire organization for making informed decisions. Today, companies cannot afford to throw good money after bad. They need to be strategic and mitigate risk as much as possible. Otherwise, their brand may be added to the “brands that no longer exist” list.