When companies set out to design a radically new product or service, they take risks that can't necessarily be measured with standard financial models. But David Apgar, a managing director of the Corporate Executive Board, believes that such risks—the danger of alienating consumers with a daring brand extension, for example—can still be managed efficiently to avoid spectacular flops.
In his new book, Risk Intelligence: Learning to Manage What We Don't Know (Harvard Business School Press), Apgar lays out guidelines for entrepreneurs, designers, managers, R&D engineers, and, he argues, nearly anyone to follow to better assess and control risk when pursuing a fresh and adventurous idea.
He presents brief case studies of corporate risk-taking (of the nonfinancial kind) that worked, such as Toyota's turn toward a low-inventory strategy, which seemed risky in the 1980s but later paid off in low capital costs as well as a more efficient manufacturing process. And he offers concise examples of failed risk-taking, such as AT&T's too-cautious approach to broadband Internet services in the early '90s.
POOR OUTCOME. Apgar writes that AT&T's inability to provide those services in a timely manner led to the company's subsequent failure to become a leader in that area. In both cases, Apgar writes, the key factor was the ability of a company to understand its capacity for risk-taking and its preparedness to cope with the fallout if the outcome was poor.
While some of the case studies could be fleshed out more, the examples illustrate the relevance of his common-sense principles to a range of industries. The book presents practical advice and a basic plan of action for efficient risk management. It also categorizes styles of risk assessment to help managers identify their staffers' abilities to deal with the unknown.
The idea is to offer advice for assembling teams of risk-takers who can check and balance each other when launching a new product, service, or marketing campaign. Apgar recently spoke with BusinessWeek.com's Reena Jana to discuss how companies can better cope with risks and develop "risk intelligence" as a competitive advantage. Edited excerpts of their conversation follow.
First of all, how do you define "risk"?
Risk is any uncertainty that can affect our results above or below what we're expecting.
Most people think of "risk" as random. If the uncertainty behind the risk depends on price in a competitively traded open market, it is random. Of course, when people think of "risk," they associate it with financial risks. My book is about nonfinancial risk, not the type that can be measured with existing numbers-based risk-management programs.
I believe we can treat nonfinancial risk as something that can be learned and understood. Think of the weather. We don't know enough to tell exactly what it will be. But our predictions get better each year. Weather scientists run computations and make educated projections. Now, we don't think of weather as completely random.
And how do you define "risk intelligence"?
Risk intelligence is our ability compared to competitors to assess a risk. It depends on informational advantages and how these are applied.
The term evokes the concept of "emotional intelligence," once a buzz word in the management world. Was this intentional?
Emotional intelligence is related. But risk intelligence is more like market intelligence.
Ideally, readers will walk away from this book and better use the info their companies already have before they launch an innovative new product or service. I want them to be able to see that they're already good at risks that they never dreamt they could handle. The real goal is not only learning to pick and choose innovations appropriately but also analyzing and assessing what you're already good at. Or not so good at.
It seems like one of the goals, then, is to avoid failures. What do you make of the popular idea of learning by failing fast?
I agree with fast-to-fail philosophies. We learn only from our mistakes. Risk assessment assumes that. But I also suggest pulling in a network of risk partners to help cope with failures that can be predicted. Say you're developing a new product or service that runs the risk of really failing. I suggest acknowledging this and planning ahead for the failure. Maybe one perceived risk is supply issues; so, at week one, you make a plan of action with the supplier before the risk turns into a failure.
Sometimes your risk network can't help you, though. If you're worried about this risk, then think of a way to enlist your customer base to pick up more risk—before it's too late. Or at least have a plan ready. You could develop strategies to compensate for risks, like conducting surveys on whether customers would respond to special promotions if a product fails to sell, like offering a discount on future purchases from your company if they don't switch brands if your product fails to be popular.
In the book, you outline three risk assessment styles: Impressionists, Encyclopedists, and Amnesiacs. Why is it important for companies to identify these types to enhance the innovation process?
I came up with these types to try to help people cultivate an intuitive feel when dealing with risk. I want them to realize how much info they already have among their staff members, and how diverse their sources might already be when embarking on the design of a risky new product or service, or venturing into a whole new market.
So, for instance, Impressionists focus on a strong experience and then apply it very broadly—perhaps to unrelated situations. They might look at the Harry Potter book series' phenomenal sales and use an improbable example like this to base the launch of a totally unrelated product.
I give clear and sharp definitions of each, because it can be helpful to clarify the styles of people on your team—or when building a team with complementary styles of risk assessment. Each has faults, but these can be strengths. For example, Impressionists are decisive. Impulsive, maybe, but decisive. Balanced with an Encyclopedist with a lot of experiences and an Amnesiac who can easily encourage others to stop dwelling on a mistake and move on—you've got a good team.
Can you summarize your suggested process for developing risk intelligence?
Start by looking at risks that keep recurring—I think a list of five is good. Don't be disappointed with this information, because it's your goal to figure out what your challenges are.
Say you're in the IT business, maybe you start realizing your R&D staff consistently has problems gauging new tech functionality. Or maybe you're not great at assessing the complexity of the innovation and how much customers really need the new technology. Seeing these patterns is important so you can fix them. This is what I call recognizing what risks are learnable.
Then you need to figure out which of these risks you can learn about fastest. How much information have you gathered on this problem? Tackle that risk first. And figure out how easy it might be for your competitors to deal with this risk, and assess if you're able to keep up or if your competition will beat you to the solution. Then create what I call a "risk pipeline"—a list of sequenced priorities. Finally, compile and contact a list of risk-management partners.