What do you do when your business is successful, but you don’t really know why? How about when the world around you is changing, and customers are getting squiggly and trying out new delivery models? What then?
For many businesses, the answer is to rejig their strategy and change with the times. But what does this do to the very risks that initiated this whole process? On the whole, not a heck of a lot.
Strategy by itself may consider various business risks, but ‘doing strategy’ is a process that is fraught with risk, and having a strategy is not the same as being a success.
So risk is always a part of strategy, and success is never guaranteed. OK, and what can we do to manage that risk?
For this I look to portfolio and gambling theory,and schools suggest a few things that might be interesting. Specifically,
1) A balanced portfolio of investments is key to risk management. Put slightly differently, this is the old adage to not put all of your bet in one place.
In investments, this is often thought of as sizing the value of your individual portfolio positions, so your portfolio and net worth can survive an upset in any one position.
In business, this is akin to running small experiments to test, reject or refine a proposed strategy in a manner that won’t break the business if it is not working. Retail and product companies do this all the time.
An important corollary to this is a reminder to not wait until your business is in bind before your start trying new things. It is always good practice to be running alternative bets that may not be correlated to your core business (or may even be inversely correlated), so when the imperative of change comes, you may have experimented with things that can reveal your next desirable strategic position.
2) Be explicit about what you are trying to do – and hold yourself accountable.
There is no worse sin in investing than sliding into a position you don’t well understand, and do not have a plan for what to do if it starts working against you. Just about every investor that manages their own book (and many professionals), will have a story on when they did this and got wiped out. It’s the type of event that can be an expensive, but ultimately very valuable educational experience.
The same dynamic exists in more traditional business – As you take steps to launch your new strategy in a test market, be sure to do so in a meaningful and well articulated way.
Make your assumptions and beliefs explicit, as creeping commitment is a bitch and otherwise you will won’t be able to spot the moment they turn out to be wrong.
Understand as best you can the tradeoffs your new strategy requires, and make sure they are being incurred, as without these tradeoffs, it is unlikely you are truly doing anything meaningfully different from your existing approach to business.
3) Know and manage your odds
Look for situations or strategic alternatives that offer attractive odds, ie 10 dollars wagered for a potential 30 dollar payoff.
It may sound like common sense, but this is where you want to be, and if the baseline approach doesn’t offer this kind of payoff structure, take a hint from private equity and start value engineering relentlessly. If value engineering doesn’t work, follow the gamblers approach and recognize when it doesn’t make sense to play.
4) Have an escape plan if things go ugly.
I’ve always been told that success is being 51% right. So that means you need to be able to successfully navigate what happens the other 49% of the time.
In investing, this means cutting loser positons quickly and protecting your core capital. Business is pretty much the same.
The best thing here is to have pre-established quitting points, and firmly established success criteria to guide your decisions to double down or expand your commitment to the strategy.
Just a few ideas…. Feel free to share back any more that strike you thought the comments section.