In This Issue:
The Overcaution Paradox and Pent-Up Need to Change
Too cautious. Not taking bold enough risks. Yet, research finds that risk should be minimized. Seems like a paradox, but is it?
When companies perform poorly, disappointing results are often attributed to overcaution and not taking bold enough risks. For example, when Boeing fell behind Airbus, it was said that management had been overly risk averse. Not taking enough risks is often cited as the reason firms meet with declining fortunes for failing to go after new opportunities, for not adapting when the market changes, or for being outfoxed by a disrupter in the marketplace.
Yet, according to my research, which is confirmed in related studies by academics and strategy gurus (In Search of Growth Leaders study; Zook's study of the value of pursuing adjacencies), smaller steps that minimize risks bring more impressive corporate growth. In fact, the past two issues of my Winning MovesŪ News Tips, and Insights newsletter both cover material about keeping risks to a minimum. The last issue even discussed how a company like Boeing, whose culture and business model are defined by risk, benefits from minimizing those risks as much as possible. And my special report, Evolution Not Revolution, tells how small evolutionary steps bring successful growth, while huge leaps into the unknown lead to failure.
Additionally, of course, financial crisis in the aftermath of risky investments is a blatant reminder of the downside of excessive risk.
So how do we resolve the overcaution paradox, where research tells us to minimize risks, yet companies are said to fail because they are too risk averse?
The answer lies in the circumstances within a company. Minimizing risks generally works well and excessive risk breeds failure. But in order to grow, companies must evolve. They can't just sit back complacently and do little or nothing. And, punctuating their complacency with bold, ill fitting moves doesn't help. Their steps need to be kept prudently small. However, those steps are an absolute must that have to be taken.
Companies said to be risking too little are often the ones that have been resting on their laurels and have stopped taking those ever so essential small, evolutionary steps. In some cases, their tendency to stick with the status quo, without evolving, may have been there for many years. To combat this level of entrenched inertia, these companies are often encouraged to take much bigger risks. They are told they need bold change. But, what they are really suffering from is a pent-up need to change. And just because that need to change has built up over many years of failing to evolve, that doesn't mean that taking giant leaps into the unknown will be an effective way to catch up for lost time. Giant leaps are fraught with risk and are generally failure-prone.
Companies suffering from a pent-up need to change are often prominent firms that were once at the pinnacle of corporate glory. Years ago, as they evolved to a high level of success, they built the organizational structures and routinized systems required to support ongoing profitable operations. Due to apparent complacency, however, at some point these companies no longer continued to evolve beyond their earlier prominence, and their routines may not have changed all that much. So for these firms, a bold risk may sometimes serve as a mechanism that tries to shake the organization out of complacency. But, it generally will not put the company back on track for strong performance.
Yet, all sorts of bold moves have been made by prominent companies struggling with pent-up need to change. Sometimes, it's bold moves into new markets so distant from where a company should be and knows how to compete. Sometimes, it's a major reorganization where functional expertise is imported from an entirely different industry and is unrealistically expected to revitalize the business. Sometimes, while pursuing new, but uncertain or unrelated directions, the bold moves entail shuttering an entire line of business that had a key role in the firm's heritage--but doing so at a time when that type of business was on the verge of becoming a valuable resource to many companies. Of course, risky bold moves like this rarely produce hoped for results.
Instead, what many of these companies really need if they are to get back on a growth track is to start evolving again. It is not easy. But, they need to once again take steps that are prudently small and based upon reasonable, rather than extreme, risks. They must resist trying to catch up via risky bold leaps, which can be quite tempting when there is pent-up need to change.
Rather than taking drastic risks, companies need to realistically assess where they are, including identifying whether they have pent-up need to change. They must do so without confusing a pent-up need to change with a need for bold risks. Then, they should determine what kinds of small evolutionary steps are right for their situation, and start taking them. Furthermore, they must recognize that merely cutting costs extensively does not get a company evolving again.
In conclusion, it is often not too little risk that holds companies back. Weak results are frequently due to complacency and to no longer taking those prudently small steps required to evolve.
La Grange Park, IL