The 3 big risk management mistakes executives make
If you’re an executive, in charge of outlining the business strategy, read on to learn what the 3 big common risk management mistakes are and how to avoid them.
Risk Management Mistake #1 Thinking we can manage risk by predicting extreme events
Energy companies have gone from predicting the moment a nuclear power plant will explode to preparing for the consequences of such an event.
Like these companies, we’re very good in our day-to-day lives at thinking about how we’re going to deal with the repercussions of a Black Swan event (low probability, high impact) instead of worrying that it might happen.
For this reason, we get insurance for health, home, or car, but to a lesser extent, we do this in business, which is more seen as an optional thing.
How to avoid this risk: Adopt strategic foresight.
What is strategic foresight? It’s the Waze of business; it’s strategy, tool, process and mindset combined.
By using strategic foresight, companies can identify vital early signs of change that could influence or disrupt their industry. It is a contribution to the mitigation of risks explicitly related to external events — changes in the competitive environment.
Further on, strategic foresight allows them to think in alternative scenarios and turn change and uncertainty into opportunities. If you were a decision-maker, wouldn’t you like to have an early warning capability?
Foresight also helps companies build relevance: understanding future trends allows companies to anticipate what consumers/employees want next and create relevance for them. Ask yourself, is the industry changing, but your company is not?
Learn more on business foresight.
Risk Management Mistake #2 Being convinced that studying the past will help us manage risk
Until the late 1980s, the worst drop in stock prices in a single day had been about 10%. However, prices fell by 23% on October 19, 1987.
Risk managers believe that they can find precedents for all events that happen and that they can predict everything that will happen based on previous events. But Black Swan events are unprecedented, and the interdependence and non-linearity of events increases.
How to avoid this risk: Be aware of any change in your customers’ behaviour.
Studying the past doesn’t help us predict the future. But studying our customers’ behaviours can help us better prepare for any change the future might bring.
We don’t need to be aware of the latest development in technology in every market; just the tech our customers use or switch to. Look closely at your customers’ moves and preferences and create strategies to meet their needs accordingly.
Risk Management Mistake #3 We don’t listen to advice about what we shouldn’t do
Almost every business section in all bookstores is full of titles showcasing success stories and just a few with a negative connotation that teaches you what you should not do. This is why economists are framed to create success stories.
If there’s one lesson we should learn from chess, it’s this: grandmasters win games by focusing on avoiding errors while inexperienced chess players play to win and invariably make fatal mistakes.
Likewise in the economy, most of the time risk managers act like risk investors trying to win, but a dollar saved is a dollar earned, so saving money for your company is just as important as bringing in additional profits.
This is why corporations should integrate risk-management activities into profit centres and treat them as profit-generating activities, particularly if the companies are susceptible to Black Swan events.
How to avoid this risk: Listen to your frontline workers.
Whether they are in customer experience or sales, workers who are in direct contact with your customers are extremely valuable and their input should not be taken lightly. They are your company’s proverbial finger on the pulse and if allowed, will share their insights and prevent you from making bad decisions.
Afraid of making the wrong decisions?
Attend the BUSINESS STRATEGY MASTERCLASS, on October 27 and learn how to make the best decisions for your organization from Costas Markides, Professor of Strategy & Entrepreneurship at London Business School.
Ansoff Matrix allows you to plan your company’s growth
Looking to plan your company’s growth and don’t know which way to go? Use the Ansoff Matrix to opt for the right growth strategy for your business!
- What is the Ansoff Matrix useful?
- What are Ansoff Matrix’s 4 growth strategies?
- Who created the Ansoff Matrix?
- Why is the Ansoff Matrix useful?
What is the Ansoff Matrix?
The Ansoff Matrix is a strategic planning tool that provides a framework to help executives and managers devise strategies for future growth.
What are Ansoff Matrix’s 4 growth strategies?
The Ansoff Matrix also called the Product/Market Expansion Grid, is a method for measuring the profit potential of alternative product-market strategies.
Here are the 4 growth strategies: market penetration, market development, product development, diversification.
The Ansoff Matrix – Market penetration
Market penetration is an effort to increase company sales without departing from an original
product-market strategy.
The company seeks to improve business performance either by increasing the volume of sales to its present customers or by finding new customers for present products.
This growth strategy presents the least risk to a company because it focuses on existing products in existing markets.
The Ansoff Matrix – Market development
Market development is a strategy in which the company attempts to adapt its present product line (generally with some modification in the product characteristics) to new missions.
The market development growth strategy is somewhat less risky since it refers to existing products in new markets.
The Ansoff Matrix – Product development
A product development strategy, on the other hand, retains the present mission and develops
products that have new and different characteristics. These products will improve the performance of the mission.
This growth strategy is not as risky as diversification because it is easier to develop new products in a market the company already has.
The Ansoff Matrix – Diversification
Diversification is the fourth growth strategy and the riskiest. It calls for a simultaneous departure from the present product line and the present market structure.
Developing new products in new markets requires extensive research conducted by the company: market research, customer research, buying behaviour analysis, external influences on the market, business environment analysis etc.
A healthy company can take any of the above growth strategy paths to survive and thrive.
Or it can choose to pursue three of them simultaneously: market penetration, market development and product development.
Diversification is the most difficult growth strategy a company can implement.
While the other three require the same technical, financial and operational resources used for the original product line, diversification requires a distinct break with past business practices.
New skills, new technologies, new resources are needed in order to diversify. Diversification basically means starting a new business which entails organizational changes and other unforeseen challenges that management needs to address.
Two types of diversification
There are two types of diversification: related diversification and unrelated diversification.
In related diversification, the company develops a new line of products but remains in the same industry.
Toyota Company is a car manufacturer and a humanoid robots developer. The company has the knowledge and the resources in place (automated assembly lines) to develop both lines of products.
In unrelated diversification, the company develops products that are outside its original industry.
A good example is Tesla, the leading electric car manufacturer, which moved into spirits with the launch of Tesla Tequila, an exclusive, premium beverage.
Who created the Ansoff Matrix?
The tool was developed by Igor Ansoff known as the father of Strategic management.
Igor Ansoff was an applied mathematician and business manager who worked at Lockheed Aircraft Corporation where he became Vice President of Planning and Director of Diversification.
Following his tenure at Lockheed, Igor went into academia and was a Professor of Management at Owen Graduate School of Management.
In 1983 he joined the U.S. International University (USIU, now Alliant International University) where he created the school’s strategic management program.
He has consulted with hundreds of multinational corporations including, Philips, General Electric, and IBM.
To honour his body of work, the prestigious Igor Ansoff Award was established in 1981 in the Netherlands. The award is given for research and management in the study of Strategic Planning and Management.
Igor first described the matrix in Strategies for diversification, an article published in 1957 in the Harvard Business Review. The strategic planning tool was subsequently published by Igor in his book Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion (1965).
Why is the Ansoff Matrix useful?
The Ansoff Matrix is a highly useful strategic tool that allows executives, business developers and managers to make the right decision for the company growth-wise.
Here are the benefits of using the Ansoff Matrix:
- It helps executives analyse the risk involved while moving in a particular direction;
- It provides managers with a clear map of possible strategies for growth;
- This tool provides different options that managers can go with according to two variables: products and market;
- It helps marketers determine marketing strategies, planning activities and opportunity costs.
Sources: Strategies of Diversification (1957), AnsoffMatrix.com
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