Every business area has its own “best practices” (are they really the best?) and a whole group of paradigms that are shared by everybody in this particular area. The consequence is being caught in a status-quo, where the performance of the organization is stuck and goes slowly down due to the increase in the efforts of every competitor to steal customers from others.
This day-to-day constant fighting to preserve the current state without any leap in performance is the reality of the vast majority of the organizations. It causes them to be satisfied with relatively small profit, or tolerate limited losses, with the feeling that this is the best they can do. Such businesses succeed to be in a reasonably stable state, but without any hope for better future.
A necessary condition, though far from being sufficient, to get back to good business growth is to be able to challenge one important shared paradigm. Once this is done the organization deviates from the common way all the competitors are going, and by this establish a clear differentiation from the competition. The risk of not challenging such a paradigm is that a competitor might do it first and this would change the false impression of stability.
However, this absolutely necessary step for growth, is very risky as being different does not mean outclassing the competition and it certainly does not mean bringing any new value to customers. Too many times being different from the standard only reduces the perceived value of the customers, who just see the difficulty to get used to something different without any benefit from it. In other cases the new added value seems to be too expensive for the target market.
Another risk is that even if the organization succeeds to create new value to customers, it does not mean the customers are able to recognize and appreciate the new value. The difficulty is that unexpected added value might require a change in habits, and even when the customer sees the new value as something surprisingly nice (“how come we never got such an offer before”) the move raises suspicions that it is too good to be true.
The point with the risk is that it creates FEAR, which sometimes blocks any attempt to challenge a common paradigm that could lead to a breakthrough. The way FEAR should be handled is full acknowledgment that it is legitimate, but the risk can be handled by logically analyzing it, striving to reduce the risk, or its negative impact, and also creating a safe-network of control with immediate corrective actions to neutralize the negative impact on time. When the risk is properly evaluated and controlled it is possible to overcome the fear.
Another, seemingly unrelated effect of a similar fear, is the high number of R&D projects that continue in spite of the fact that the early promise has already vanished. The causal relation of that effect with the reluctance to challenge established paradigms that are shared within a business sector is the fear of failure and its personal impact. The term “failure” has an especially negative connotation in the world of measurements and false accountability, and in itself is a paradigm that should be challenged. An alternative related expression is “taking a calculated risk” that naturally leads to realization that the move might fail, but it is not interpreted with the full connotation of a “failure” because it has been considered ahead of time and the choice has been to go for it. In the high-tech startup world the expectation of failures is so high that the damage to the pride and reputation of the individuals involved is minimal, which opens the way to many worthy efforts to do something exceptional.
Taking a calculated risk should be widely used not just for new technologies, but for every business sector, as the ways to come up with a new significant value to potential clients are diverse and only very few of them require a technological breakthrough.
But, taking a calculated risk has to be based on two necessary elements.
- A culture that endorse taking calculated risks with the full realization that it might fail.
- Using a valid process of analyzing the risk. Such a process should include searching for ways to reduce the potential risk, and eventually producing an analysis of both the potential damage and the potential gain.
The difficulty in the process of calculating the risk is that in the majority of the cases we don’t have good enough probability numbers. Using statistical models to estimate the probability is also frequently misleading.
Yet, the difficulty of estimating the amount of uncertainty should not cause management to ignore the notion of well calculated risks, because the future of every organization simply require taking some risks, and if you have to take risks you should better develop good-enough ways to estimate them. Developing the right culture depends on finding an acceptable way to estimate risks. The term “estimate” is more appropriate to use than “calculate”, which seems to suggest it is the outcome of precise calculations.
There is a need to differentiate between estimating uncertainty and estimating the level of damage that would generate as a result of it. Let’s use the following example to comprehend the full ramifications of the difference.
A food company evaluates an idea to add a high level variant to its popular product line SoupOne. The new line will target the market segment that appreciates true gourmet soups. The line will be called SuperSoupOne and will cost 50% more. This is a kind of a new paradigm, because the usual idea is that the gourmet people shy away from processed food.
Suppose that the management has enough evidence to be convinced that gourmet loving people could be tempted to try such a soup and assuming it is really up to their standard will continue to consume it. The “most likely” estimation, based on a certain market survey, is that SuperSoupOne will gain market demand of 10% of the current demand for SoupOne, but only 5% of SoupOne buyers would switch to the new product, the rest are going to be new customers.
However, one of the senior executives has raised another potential risk:
“What would SuperSoupOne do to the reputation of our most popular product line? It would radiate the message that it is a rather poor product and even the producer is now selling a much better version of it? What would the buyers do when they cannot afford the better product? I’m concerned that some of them will try the competitors’ products.”
The risk is losing part of the sales of the key product of the company. How much might be the impact of SuperSoupOne on the sales of SoupOne? Actually the impact might be positive. Do we really know? We need to evaluate the possibility of having a negative effect and how it impacts the bottom-line.
Note, the risk to be evaluated is the impact of the new line on the old line – not whether the new line would generate high enough throughput to cover for all the delta-operating-expenses of launching the new line.
How such a risk could be evaluated? Suppose the current throughput generated by SoupOne is $5M. According to the forecast for SuperSoupOne the quantity to be sold of the new line will be 10% of the current quantity sold by SoupOne. Suppose that such sales would generate 20% of the current throughput due to the higher unit price. So, we get additional throughput of $1M from the new line, while losing only $250K (5%) from the old line.
But, the drop of 5% of the old line is only a forecast described vaguely as “most likely” and those 5% are now buying the new line. But, if the reputation will be truly harmed it might cause up to 30% less sales of the old line. In this case the loss of $1.5M of throughput from the old line will not be compensated by the $1M “most likely” estimation of the new throughput.
The above rough calculations help management to realize the potential risk of losing up to $.5M as a kind of reasonable worst case. Other reasonable possibilities seem much more optimistic for overall additional profit from the move.
Can the risk be reduced? How about giving the new line of product a totally different brand name, which does not refer at all to the current popular product? It’s probably not eliminating the full negative impact, but will significantly reduce it.
The detailed example objective was not to reach a firm clear decision. There is no claim the existing paradigm is not valid and thus can be challenged. We also don’t know whether the idea of coming up with higher level product is a good idea and what’s the actual impact on the current market is going to be. The example has been used to demonstrate a need for getting better idea about the risk and its potential impact on the bottom line, using the intuition of the relevant people. A certain direction of solution for estimating a risky move has been briefly demonstrated.
Such an analysis is a necessary condition for the bigger need of opening the door to a constant search for a breakthrough that has to be based on challenging an existing shared paradigm. This is the objective of this post: to claim that challenging widely shared paradigms is truly required for every organization. You might say it also about your own desire to make a personal breakthrough -> it passes through a challenge of a common paradigm.
Eli Schragenheim 