07 Jan Searching for Risk
Acts contrary to self-preservation might be the key to differentiation through innovation
In the 1947 film Miracle on 34th Street, a frustrated Macy's customer is stunned when the store Santa tells her the toy she can't find is available across town at another company. She later tells the store manager:
Listen, I want to congratulate you and Macy's on this wonderful new stunt you're pulling. Imagine sending people to other stores. I don't get it...Imagine a big outfit like Macy's putting the spirit of Christmas ahead of the commercial. It's wonderful. Well, I'll tell ya. I never done much shopping here before, but I'll tell ya one thing. From now on I'm going to be a regular Macy's customer.
Competition between department stores in New York City was fierce in the 1940s. A strategy that would seemingly help a competitor was not only fraught with significance risk to the employee, but also wholly counterintuitive to the organizational culture, given the significance of holiday revenue to a retailer's annual bottom line. Not surprisingly, no such strategy was ever proposed. It emerged through an independent, selfless act without regard for risk, strategy, bottom line, or competition. Unexpectedly, Macy's found itself differentiated. And Mr. Macy noticed.
Imagine Macy's Santa Claus sending customers to Gimbels. But gentlemen, you cannot argue with success. Look at this: telegrams, messages, telephone calls -- the governor's wife, the mayor's wife. Over 500 thankful parents expressing undying gratitude to Macy's. Never in my entire career have I seen such a tremendous and immediate response to a merchandising policy...And I'm positive, Frank, that if we expand our policy we'll expand our results as well.
Therefore, from now on, not only will our Santa Claus continue in this manner, but I want every salesperson in this store to do precisely the same thing. If we haven't got exactly what the customer wants, we'll send him where he can get it. No high-pressuring and forcing a customer to take something he doesn't really want...We'll be known as 'The Helpful Store.' 'The Friendly Store.' 'The Store With a Heart.' The store that places public service ahead of profits. And consequently we'll make more profits than ever before.
Of course, all that goodwill wasn't lost on archrival Gimbels. Just a few movie moments later, its CEO thundered that it too would put the customer's interests first, and not just in New York, but across the country. And what might have been considered an unimaginable corporate risk just a month earlier became a sensible and strategic innovation.
Self-preservation is at the heart of responsible corporate governance. Hence, when it comes to innovation, the rule of thumb is to never take a risk that jeopardizes survival.
To this end, mature organizations have refined a wide range of controls to protect themselves from harm. Controls that limit funding, brand dilution, disruption to operations, and exposure to liability are all well-established organizational mechanisms for mitigating potential innovation risk. Structural protections (or stage-gates) are also deployed to slow down ideas that may not be prudent or strategically aligned.
And even if you can navigate around these barriers to risk-taking, cultural conservation (meaning protecting the status quo) is quicksand to innovations with no C-suite champions to help them leap over the perils of groupthink, confirmation bias or comforting traditions.
Even so, organizations are well aware of the need to innovate. If repeating what works is crucial to current survival, finding new things that work is crucial to ongoing advancement, or future survival. Few dispute this. And doing new things -- exploring the unknown -- always carries an element of risk (hazard, loss, harm).
So, how do companies respond to this paradox of innovating without risking their survival? The easy answer is to do incremental innovation, or continuous improvement. Make things better than last year. Stick with what you know. Slightly more difficult is innovating in adjacent domains, like investigating how an Oreo cookie might appeal as an ice cream sandwich, or adapting your products to fit consumers when they were originally designed for professionals or employers.
But most challenging is what corporate strategists love to call disruptive innovation. Disruptive innovation changes the way business is done by creating new value. New technologies (cell phones, endoscopic surgery) and new business models (E-Bay, Southwest Airlines) are common examples of disruptive innovations.
Since established organizations are not commonly structured for developing disruptive innovations, they must stay alert to their emergence elsewhere and monitor them closely to decide when to shift from competing with them to cooperating with them, such as licensing their technology (see http://techcrunch.com/2014/08/08/taking-a-wait-and-see-approach-with-disruptive-innovations/). And because jumping into a disruptive space can affect operating expenses, market share and reputation (not to mention the internal culture), this decision is crucial. To protect themselves against potential harm, companies follow a mainstream model from risk management theory: de-risking.
Traditional de-risking tools include SWOT analysis, scenario planning, independent review boards or even war games. You may be familiar with them. Such tools provide armchair analysis and judgment based on research or experience. Very little is risked, though good value can be created by thinking through potential outcomes, both good and bad.
Also well established as de-risking mechanisms are (1) the legal, financial, operational and cultural due diligence that typically precede a partnering or acquisition target, and (2) tools that strategically balance an organization's innovation portfolio (e.g., https://hbr.org/2012/05/a-simple-tool-you-need-to-mana) so that investments across incremental, adjacent and disruptive innovations are all proportionally represented.
De-risking is so reliable today that its methodologies have migrated to domains formally laden with risk -- such as new product or company formation -- and mitigated them sufficiently to attract the participation of organizations desiring the upside of entrepreneurship without significant risk exposure:
- Lean startup (http://theleanstartup.com/principles), Launchpad for Enterprise (http://www.lp4esignup.com) and Agile methodology (http://agilemethodology.org) provide efficient pathways to early stage business validation, intrapreneurship or new software development;
- Incubators provide critical infrastructure that allow entrepreneurs to focus on developing a concept without distraction;
- Accelerators bring seed funding, teams, peer feedback and industry connections to rapidly advance high potential young businesses (http://www.chcf.org/publications/2014/10/survival-fittest-accelerators);
- Consortiums bring member organizations together to share risk across a wide range of innovation initiatives.
Under the watchful guidance of the mechanisms above, downside risk from early stage innovation is unlikely to bring serious jeopardy to an organization. Emphasis on "fast fail" and business model validation also offer strong protections. Even the most formidable risks -- the ones so crazy that to the untrained eye survival is not only jeopardized but cheerfully jumps off the cliff of sobriety -- can be de-risked over time by small measured steps, not unlike this description (emphasis in bold is mine) penned in National Geographic Magazine (The Mystery of Risk, June 2013):
By practicing an activity, humans can become used to the risk and manage the fear that arises in those situations, says Kruger. “Tightrope walkers start by learning to walk on a beam on the ground and then move to a rope just off the ground, until finally they graduate to the high wire. It appears more dangerous to an audience that has never walked a tightrope than it does to the tightrope walker.”
Last October former Austrian paratrooper Felix Baumgartner took this principle to the extreme when he rode a helium balloon into the stratosphere and leaped out, descending 22.6 miles to the Earth. His record-setting parachute jump included a four-and-a-half-minute free fall that exceeded 843 miles per hour.
In preparation for such an epic feat, he and his team had spent five years refining his equipment, using an altitude chamber to simulate the temperatures and pressures he would encounter, and practicing jumps from various altitudes.
“To people on the outside, the jump looks like an extraordinary risk,” Baumgartner says. “But if you look carefully at the details, you find out the risk is minimized as much as possible.”
The minimization of risk has grown as a corporate discipline over decades to help organizations safely experiment with uncertainty. Best practices in risk management, early stage business de-risking, and internal rules, restrictions, and gatekeepers, all safeguard the company from immediate or long term harm. Even when real harm happens -- the metaphorical breach in the bottom of the ship -- organizations are so honeycombed with watertight compartments that damage from innovation can quickly be contained.
Given the need for self-preservation, it should be no surprise that risk-taking innovation initiatives meet their match against corporate risk mitigation controls. This truth goes beyond organizations. Risk taking in humans and other animals, which is helped along by the feel-good neurotransmitter dopamine, is mitigated by dopamine inhibitors on the surface of the brain (see http://content.time.com/time/health/article/0,8599,1869106,00.html).
Also, across a broad population, having a balance of bold individuals to cautious ones is a strong species survival strategy (see http://www.cavemenworld.com/explore/what-can-animals-teach-us-about-risk-taking). Researchers even have shown that for multiple types of emergent human groups (like "science"), traditional/convergent thinking and innovation/divergent thinking remain in balance over a long period of time, at least until upended by something completely different (Thomas Kuhn, The Essential Tension, 1977).
Simply put, risk is no longer a key variable in the innovation equation. It's been declawed, neutralized and behaviorally conditioned. Knowing we have organizational tools to control it, risk has become an almost fearless adventure on a short leash. What may appear to be differentiated risks by individual corporations are instead widely copied activities within the same risk-taking paradigm. Companies are trapped from doing things differently because they are all try to learn from one another and normalize deviance as they go. They risk the same things in the same way.
It may be strange to hear this, but risk is ripe for innovation.
To understand how we might innovate around risk, its helpful to ask why organizations take risks in the first place. One well-traveled answer comes from Lewis Carroll's Through the Looking-Glass (1871), where young Alice is shocked to discover that despite running as hard as she can, she isn't moving forward at all.
"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else — if you run very fast for a long time, as we've been doing."
"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
The Queen's reply (known sometimes as the Red Queen Hypothesis) has been used by naturalists and economic theorists alike over the past century to explain the evolutionary arms race that engages both organisms and organizations. Like organisms, organizations must put a great deal of effort into simply surviving. They must adapt to changes in the environment. They must compete against others for similar resources. And they must protect themselves from predators, who are also improving generation after generation. It takes all the running they can do to stay alive.
Running at least twice as fast as that is almost too difficult to comprehend. One scary approach is to pay less attention to competitors. The book Blue Ocean Strategy (2005) makes a compelling case that, over the past century or so, corporate winners are the ones that found uncontested new markets (the blue oceans). The story behind the apparel company Patagonia seems to fit this mold.
Success for them came when they reframed their strategy to address the growing environmental crisis (see http://business.financialpost.com/2014/05/05/how-patagonia-went-from-turmoil-to-wildly-successful-by-making-counter-intuitive-moves). Most interesting was that they encouraged their customer to buy less. This would seem to jeopardize survival, akin to Macy's sending customers to competitors. But they are thriving.
Another highly doubtful strategy came from General Motors in the 1990s, when it financed the development of a new car company (Saturn) destined to compete against itself. Guessing that maybe its corporate dopamine inhibitors were too strong for innovative people and technologies to flourish, GE invested in developing a completely new organization and then stepped away. Once again, the end result was a thriving company.
The consumer goods organization P&G also went against the grain when, on the advice of the computer simulation firm BiosGroup (purchased in 2003 by NuTech Solutions), it began to send out trucks with less than full loads from its warehouse to its customers. It was always naturally assumed that transportation costs would negate any gains in efficiency.
What the BiosGroup showed through its complex, agent-based modeling software was that P&G would make millions more by keeping store shelves full of their products. The advice proved prudent in practice, and the differentiated risk led to enormous financial gains (see http://www.itworldcanada.com/article/pg-saves-millions-with-supply-network/20112).
Strategies that jeopardize IP (like Open Innovation), continuous growth, planned profits, competitive secrets, market share, employee loyalty and operational efficiencies all represent risks that are rarely pursued because they would seem to run counter to the self-preservation ethos that's well nurtured within companies. But the irony is that these risks may be the safest to pursue in the quest to run twice as fast and truly get ahead, instead of simply keeping up day after day.
As the Roman playwright Terence put it, “Fortes fortuna adiuvat” … “Fortune favors the brave.”