Part 3 in the Growth Readiness blog series | Read Part 2 here.
Many strategists shy away from risk when pitching opportunities to senior leaders, but in an era of weak growth forecasts and economic uncertainty, embracing risk is actually helping strategists win executives over. See how two leading companies have capitalized on what we call a “risk readiness” approach.
Growth is Always Risky…
“Our business is under incredible pressure from lower demand, cost cutting to compete on margin. No one on our executive team is ready to put the rest of our business at risk,” one strategist recently told us.
Our clients have been saying this kind of thing for the past several years with very little change. And while the pressure on companies is high, risk is really just the flip side of opportunity. Many strategists shy away from risk when pitching opportunities to senior leaders, but in an era of weak growth forecasts and economic uncertainty, embracing risk is actually helping strategists win executives over.
After all, our colleague didn’t say that risks were insurmountable; he merely said that his executive team wasn’t ready to put the business at risk. But what if it were? And how could his company use risk readiness to its advantage?
“Risk readiness” refers to a company’s ability to use risk to identify and prioritize promising investment opportunities as well as secure executive commitment for those opportunities—a tactic we’ve seen several leading strategists employ in our growth readiness research.
As we’ve mentioned previously, strategists who succeed in securing commitment from their executive teams produce up to 40% better returns on those investments.
In this article, we’ll discuss how two leading strategy teams have capitalized on a risk readiness approach.
Growth Platforms – the Scaffolding for Great Risk
Over the past few years, Platform Inc. (a pseudonym) has faced increasing competition in the transportation services industry. In an attempt to capture a bigger share of the market, it placed a major bet on an emerging customer base. After the initiative showed initial signs of success, Platform’s executives became more open to investing in new futures they had never before considered, and created a new “innovation council” to explore this kind of forward-looking investment opportunities.
The problem was that the council members didn’t know how to think about possible investment pathways while simultaneously mitigating the associated risks. Many had a hard time envisioning what the future looked like, and even those who could (or thought they could) had trouble understanding what those futures meant in terms of current investment priorities.
To address these issues, Platform’s CSO started thinking about ways to build or rather define a growth platform—an explicitly defined singular opportunity composed of a cluster or group of related business investments—for a simplified analysis of the future. He implemented a four-step process:
- The strategy team and executives plot all the company’s current and potential investments in two different dimensions: distance from the core and time to maturity (image 1.)
- The strategy team and executives identify interdependencies between all current and potential investments.
- The strategy team and executives test the platforms against the risks and opportunities of different future states.
- Executives choose the combination of initiatives, or growth platform, that best positions the company for the widest range of possible futures.
The first thing everyone noticed was that the exercise sparked more fruitful discussions about the company’s long-term growth strategy as it related to existing investments. Most companies discuss new opportunities in a vacuum, but this approach helped executives identify ways to leverage existing capabilities for future projects (thus proving the company’s readiness to pursue them) and understand how future opportunities could support existing initiatives (which pushed executives to commit.)
Moreover, each investment is supported by the rest of the portfolio—that is, the likelihood that any one investment will fail is slim because it can leverage the synergies of other, similar bets. If it does fail, it’s much easier to diagnose the root cause and incorporate the lessons learned into future decisions.
A Game Called “Risk” (But Not the One You’re Thinking of)
Johnson Controls (JCI) faced a different challenge. As a multinational conglomerate with a portfolio as diverse as its 1,300 global locations, its strategy team felt it wasn’t using all of its resources and capabilities as effectively as it could to manage the risks associated with investment opportunities.
Most companies assess the impact and likelihood of a particular risk (and in some cases, the velocity) to evaluate growth bets, but these assessments generally don’t drive executive commitment because they don’t explain the company’s capability to manage risk. A risky growth opportunity could be a lucrative option, as long as a company is equipped to manage the associated threats.
JCI’s strategy team recognized this and developed a “net risk” approach in which it subtracts a “mitigation effectiveness” number from the perceived risks of large investments to arrive at a net risk score.
So how does JCI calculate the mitigation effectiveness number? Each time the company considers a large-scale bet, it gets up to seven experts (generally individuals in operational roles) to play a game in which they discuss the risks associated with the opportunity. The experts place pieces of different shapes (which signify velocity) and colors (which indicate the effectiveness of existing resources to mitigate a given risk) on a game board based on a typical risk matrix (impact versus likelihood.)
As the experts play, they discuss the resources and capabilities JCI has to offset the risks of the investment. The goal is not to achieve analytical precision, but to tap into the company’s collective knowledge about resources and capabilities that could be brought to bear in response to perceived risk. The approach lets JCI get real leverage on risk, rather than letting potential risks freeze executive decision making.
Two Approaches, One Idea
Most of the time, risks tell companies what not to do. Platform found a way to use future risks to identify its best group of investment options today. As a result, it is able to both check the high-level risks of its long-term growth strategy and offset operational-level risks (because each bet is bolstered by the rest of the portfolio.) Meanwhile, JCI uses the company’s risk expertise to evaluate each major growth opportunity in the context of its associated risks, helping it identify and prioritize opportunities that many of its competitors are afraid to touch.
While the approaches are slightly different, the idea is the same—by demonstrating risk readiness, strategists can prioritize opportunities more effectively and win commitment to growth.
The next installment focuses on capability readiness. You can also download an excerpt from our full Growth Readiness study here.