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Master Taking the Affordable Risks to Reduce or Eliminate the Big Risks

Aug 19, 2008
Almost every successful business model innovator I have studied told me that their company nurtured an environment in which there is great latitude to take small risks on personal initiative, and great care in avoiding big risks that could set the company back. A major benefit of such cultures was to stimulate large amounts of innovation occurring without explicit direction, encouraged by people simply following their curiosity.

You can jump start the process of business model innovation by stimulating curiosity. As helpful as that jump start approach is for making progress and providing perspective, you want to make your organization's continuing focus on business model innovation as natural and free-flowing as possible. Encouraging affordable risks that reduce or eliminate big risks is essential to that transition toward enjoying the rewards of everyday business model innovation.

Let's look at how this shift in risk-taking perspective has been created by business model innovators:

(1) Each company seemed to have identified its biggest risks as the first step. Here's how they usually did it.

(a) Start by mentally doubling or tripling your sales while increasing your profits more rapidly.

(b) Then, ask yourself what the company would have to succeed at doing in order to reach those higher levels of performance. In most cases, new products and services will be part of the picture. In many circumstances, achieving a much higher level of performance along some dimensions for customers will be part of the opportunity. Combining these new activities in ways that build on the company's effectiveness, with little likelihood of detracting from it, seems to be important.

(c) Next, ask what risks could cause poor performance in accomplishing those key tasks. In doing this thinking, start from the customer's perspective rather than a financial viewpoint or spreadsheet.

What you may find is that the customer has problems that aren't being addressed. For example, Allmerica Financial had been a traditional full-line mutual insurance company based on Worcester, Massachusetts. When John F. O'Brien arrived from Fidelity Investments in 1989, he saw that the company's customer-owners weren't getting the best deal.

The company refocused itself on providing equity-based insurance products, operating more efficiently, and demutualizing the company. While that focus initially meant helping build retirement stakes for variable annuity owners, the vision behind the change has led the company today to explore how to become a superb low-investment risk resource as retiring Baby Boomers start to spend their savings in retirement.

In the case of Allmerica, the company initially lacked the skills, cost-base, and licensing to pursue what customers needed most. The gap was so wide that the company did not attempt to plan where it wanted to go initially.

Instead, it began by reducing the biggest risks (such as providing obsolete services with high cost structures) while encouraging skill development and innovation (to get experience with call center management necessary for equity-based financial products, for example, Allmerica began by providing the 800 number call center service for 1-800-FLOWERS for a time).

(2) Invariably, the second step (often almost simultaneous with the first) was to examine how to instill more, faster, more focused, and better innovation and decision-making in the company. Often, this direction dovetailed nicely with an observed need for more innovation. The primary reason that most big companies grow slowly is too little experimentation with new ideas. Experts, such as Gary Hamel in Leading the Revolution, argue that every successful innovation begins with 1000 ideas, which are turned into 100 innovation proposals, that become 10 tests, which should yield one implemented success.

By contrast, many companies try to get one innovation out of one idea. While there's a slim chance that approach will work, it's highly unlikely. The best way to get more innovations is to be sure that there are lots of ideas in the pipeline and that low risk and low cost ideas proceed rapidly towards experimentation and testing. Top management's job is to enable and encourage this kind of more wide-open experimentation to become natural and easily lead to the next step in turning the successful experiments into reality.

A good example of this approach is to tell people who work in the company that they will be evaluated in part on the ideas they generate and appropriately develop and test. The measurement will be on the appropriateness of their activity, rather than the ultimate success of their efforts.

(3) A typical final step was locating what low cost and low risk activities would reduce or eliminate the big, unaffordable risks. For example, if part of the company was not profitable enough and losses could snowball, what did the company's choices look like for improving that area short of shutting down or selling the operation?
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through and receive tips by e-mail through registering for free at

http://www.fastforward400.com .
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