Risk Management

Mercer director Adrian Slywotsky is the coauthor of The Upside: The 7 Strategies for Turning Big Threats into Growth Breakthroughs (Crown Business, May 2007). He says that companies should be on the lookout for big risks that can kill their business model.

CM: What are the biggest risks facing business models today?

Slywotzky: What we’ve discovered in the book is that precisely the same types of strategic behaviors that maximize an organization’s probability of extreme achievement also maximize its probability of total collapse. The strategies that offer up the greatest possibility of success are typically based on bold commitments and bold visions of the future that are based on beliefs about how the future will turn out. Unfortunately, the future is often irreducibly unpredictable. So companies are forced to make commitments that sometimes turn out to be the wrong commitments. As a consequence, commitment-based strategy maximizes your probability of maximizing return, but maximizes your probability of failure as well. As a consequence, we’ve been led to conclude that everything we know about strategy is true but dangerously incomplete. And what’s been missing is a discussion of strategic risk.

CM: You write that most companies are structured to avoid risk and uncertainty, which doesn’t allow them to develop strategic options. What should they be doing?

Slywotzky: Once you’ve accepted the notion that it’s all about making long-term commitments, most organizations then end up actually avoiding precisely the kind of bold commitments that make greatness possible.

What we suggest is essentially turning things around. Rather than trying to manage strategic commitment from the top, manage strategic uncertainty at the top and leave making and delivering on strategy commitments to those closer to the action.

CM: What companies are getting it right?

Slywotzky: Johnson & Johnson, I think, is doing a great job of applying these principles and managing risk very effectively. This is an organization that gives a great deal of autonomy to its divisions. But that autonomy is not absolute. What we’ve learned is that operating divisions that are forced to manage both risk and return invariably sacrifice returns in the interest of reducing risk. J&J separates the management of uncertainty from the making of and delivering on commitments.

The operating divisions make commitments and deliver against them to deliver returns, but it falls to the corporate office to identify and manage the strategic uncertainties. This is critical because the corporate office is creating value by reducing risk.