Innovation: A Risk Management Option

Risk management means exploiting opportunities and not just controlling the damaging impact of the risks. Risk management is not about mitigating every risk identified rather it is about achieving the optimum. Innovation can bring the greatest value to the business, but it is probably the least understood risk management option.

Now look at the risk map below for a global confectionery company named balbury's that manufactures chocolate and sells it through its company and franchised outlets around the world. Balbury's mission is to be first thought in minds of people for gifting and celebrating.

The management sees a loss of appetite for its product range to be the major risk to its business success. After that, they see breakdown in quality control at franchises to be a major risk. Balbury's loose product has to be maintained at a set temperature and hygiene is a crucial factor for customer confidence.

After the risk assessment, the companies have various options to manage a particular risk. However, a lot of companies simply think of what they will physically do to manage the risk, or else they allocate it to the risk owner to think it over. Thus, the marketing director of Balbury's might have been told to come back with a strategy for dealing with loss of appetite for the product.

Rather than the marketing director to think it over alone, the choices should be discussed openly in a strategy meeting. Choices can be as follows:

Avoid: get out of the business or get out of a line of business or out of a country. Outsource: transfer the operation to an expert in that field. Accept: live with it and do nothing. Monitor: keep a weather eye on the situation. Measure: work out a key performance indicator to track. Control: put a new or improved control in place. Insure: cover the potential loss with a policy. Hedge: reduce risk by covering several options. Innovate: grab opportunity out of consideration of risk.

One of the high risk issues for Balbury's is quality breakdown in the franchises. If risk realizes, then it could affect its global brand badly. The company could threaten to withdraw the franchise from any operator who does not meet the standards; in addition, it could send inspectors to tour the franchised operations. Or, it might get franchisees to complete regular quality self-assessments.

The other high risk issue is more difficult to address. Loss of appetite for the product initially seems something that the company may be unable to do anything about. Where risks are deemed "uncontrollable" in this or some other fashion, then there is usually scope for the "innovation" option. The simplest form of exercising innovation option is reversal. Instead of "loss of appetite for the product", the risk is restated as objective - "increased appetite for the product". The team then has to come up with a strategy that could make the new objective statement true.

Increased appetite could come from a high level of new product development leading to the launch of new products: they could produce ice-cream versions of their chocolate products, develop "Diwali ki Mithai" concept to support the "celebrate" concept, make chocolates with messages inside etc. The strategy could be articulated then as something like "achieve 25% of sales from new lines" and this could be measured and reported on.

Let us take some more examples of the innovation option of risk management:

The kirana retailers found "fresh stores" a major risk to their future business. Fresh stores came with strategy of rapid expansion offering better services at reduce prices. The solution could have been, to aggressively change the present state of affairs by integrating small kirana businesses or creating stores for readymade or homemade vegetables or food stuffs or coming up with new ways of making delivery etc. Instead of trying to defend against the apparent risk that "fresh stores will take business away from us", the reverse of this could have been proposed like "Fresh Store will bring business to us".

An agro chemical business looked at its risk map to its utter disappointed that the high risk issues were outside of their control as they were related to regulation of the sector they were in. "We are regulated" was then reversed to "we are not regulated" making expansion into unregulated, but related, sectors as their business priority.

A small web 2.0 consulting firm expressed one of its biggest issues as "business people might not take us seriously". This was the biggest risk to their securing greater business. Reversing the issue as "business people take us seriously" led to development of a balanced scorecard to express their strategy, how they would achieve it, and how they would measure it.

Aren't you ready yet to exercise the innovation option of risk management?