A Corporation Is A Living Organism It Has To Continue To Shed Its Skin

Just as human beings are organisms that grow, change, and adapt, so do successful businesses. In 1970, the US futurist Alvin Toffler published Future Shock, a book that predicted  the coming phenomenon of “a perception of too much change  in too short a period of time.” The pace of change, he said, would also spread to the world of business, as companies were forced to adapt their products and processes to maintain advantage in an increasingly competitive market.

Toffler’s ideas of the effects of rapid technological change were viewed at the time as far-fetched, but with the invention of computers and the Internet, change has accelerated even more rapidly than he predicted. Toffler presciently claimed that we would live in a state of “high transience,” in which we would give ideas, organizations, and even relationships an evershorter amount of our time. Social media websites are witness to this idea in action, providing a platform for the new ways we have begun relating to one another; they also demonstrate new ways of starting, growing, and building businesses. 

In 1989, US computer scientist  Alan Kay claimed that it took 10 years for an innovation to go from the laboratory to everyday life, but by 2006 Twitter had managed to cut this down to just four years. Products can now be bought online from anywhere in the world, and customer feedback is instant and global. The challenge for companies to adapt and reinvent is huge.

Products and processes

The personal and business landscape has changed so radically since the 1960s that no industry or corporation has proved immune to its effects. Consider, for example, the music and movie industries. New technology has completely, and very rapidly, changed the  way that movies and music are purchased and consumed. For the big movie and music businesses (and all their associated suppliers and producers), survival has required a high level of reinvention and adaptation. 

This reinvention has come in the form of both new products and new processes. Product adaptation involves updates and redesign essentially, innovation and invention. The movie industry has undergone many transformations since the early days of black-andwhite moving pictures, or “movies.” It has reinvented itself through technology (from adding sound to creating “impossible” computergenerated images); marketing devices, such as monthly access cards; events, such as outdoor screenings; and the growth of the multiplex to multiply visitor numbers and reduce turnaround times. The newest product aimed  at luring viewers away from illegal downloads and back into movie houses is Stereoscopic 3D itself a reinvention of an older idea. 

Around the turn of the 21st century, the music industry was also struggling because of the drop in sales of CDs, and began to refocus on live music and merchandise. However, both the music and movie industries found new life through digitization, such as Apple’s iPod and iTunes. This revolutionary combination of product and process Apple’s hardware and software made legal downloads of music and movies more attractive than illegal versions. In 2013 the Apple iTunes store offered 60,000 movies across 119 countries, and  35 million songs.

Innovative methods 

Process adaptation involves finding new ways to do things; it involves introducing or removing processes. Competition from online sales and pirate streaming continue to affect movie distribution companies such as Netflix. The response of this highly popular video streaming service was to make all the episodes of one television series (House  of Cards) available for download simultaneously; the rationale being that the risk of piracy would be lower if consumers were able to legally buy all episodes at once.

For Netflix this bold strategy was not just a radical new process; it was also an adaptation of the company’s entire business model. Still in the adolescent stages of growth, in 2012 Netflix was primarily an online streaming service, but for House of Cards it entered the world of production. By producing and distributing, Netflix was able to capture more profit and gain more control over content. Netflix did not 

Product adaptation in the music industry demonstrates the steady use of new technology from gramophone to vinyl, cassette, CD, minidisc, and MP3 digital music file as companies have sought to broaden the market for music.

know if the House of Cards experiment would work. It did know, however, that in order to maintain the momentum of early growth, it needed to adapt and reinvent—in this case reinvention as television producers as well as distributors.

Internal changes 

Reinvention and adaptation can also be internally focused on systems, recurrent tasks, or operational activities. Whether improvement of this type is based on data from formal process improvement frameworks (such as Total Quality Management) or simply on the experience and intuition of managers, internal process adaptation allows companies to maximize revenue while also reducing costs. 

The McDonalds McSnack Wrap, for example, takes staff only 21 seconds to make the shorter the preparation time, the greater the number of customers that can be served by the fewest staff. At R Griggs Group Ltd, manufacturer of Dr. Martens shoes, a reinvention of  internal systems allowed the company to exploit global sales opportunities. In 1994, due to the brand’s growing popularity, demand far exceeded manufacturing capability. Poor planning and coordination led to delayed production and lost sales. The solution was a reinvention of internal systems based around an integrated IT system. The product itself the classic “1460” eight-laced leather boot changed very little, although more designs were later added to the product range. The key change was the adaptation of internal processes, which ensured supply could match demand.

Adapting in a recession 

Internal process adaptation is even more important in markets where demand is static or falling. Operational efficiencies, rather  than revenue growth, are the key  to profit. For insurance companies,  for example, scope for new product adaptation is limited, so competition is price-based especially in a recession, when customers are particularly price sensitive. The key to maintaining profitability while remaining price competitive is continual process improvement the reinvention of internal systems that deliver the same product to customers, but at a lower cost and, therefore, increased profitability. The days of the door to door insurance salesperson have long since been replaced by telesales and an e commerce approach.

Reinventing the company 

A notable company that has successfully reinvented itself is Samsung Electronics. Established in 1969, Samsung Electronics is a subsidiary of the Samsung Group, which aimed to exploit opportunities in the emerging technology industry. The company began with black-and-white televisions and moved into home appliances during the 1970s. In the 1980s, production grew to PCs and semiconductors. 

In 1986, Samsung released its first car phone, the SC-100. The product was a disaster the quality was so poor that many customers complained. This reputation for poor quality blighted Samsung for much of its early life, since consumers regarded its goods as inferior to premium Japanese products.

On June 7, 1993, chairman Lee Kun-Hee gathered senior Samsung executives and declared that the company needed to reinvent itself. His famous instruction “Change everything except your wife and children” shows how seriously he took the situation. Lee also recognized shifting market dynamics, telling colleagues that the company needed to “produce cell phones comparable to Motorola’s by 1994 or Samsung will disengage itself from the cell-phone business.” The “new management” initiative that followed, supported by product and process innovation, put the emphasis on the quality and innovation that Samsung is now renowned for, and galvanized Those its foundation for future growth. Samsung’s transformation was not yet complete, however the Asian financial crisis of the late 1990s forced the company to reinvent itself yet again. Adapting its process turned Samsung into a more market-focused and consumerfriendly brand. Since then the company’s efforts, particularly in the cell-phone industry, have been based on constant attrition, reinvention, and adaptation.

Long term survival

Few businesses survive without adaptation or reinvention. Products such as Kellogg’s Cornflakes and Heinz Beans products that have not changed in decades are rare. Even when a product has not changed, many of the processes used in its manufacture, distribution, and marketing have altered dramatically. The factories of 100 or 50 years ago were very different than today’s, where many tasks are automated and fulfilled by computers and robots. Promotions have also adapted to fit changed consumer demographics, globalized markets, and customer preferences. Even established brands cannot avoid reinvention. 

Truly successful business transformation is rarely due solely to discovering and commercializing bold new ideas, technologies, and products. The most successful businesses know that reinvention is a continual process. Social media, for example, has created a market shift that has required businesses of all types to adapt; even record labels now embrace the promotional value of websites such as YouTube. 

The ecosystem in which a business operates is rarely, if ever, static. Corporations exist in these ecosystems as living organisms that must adapt to survive; great leaders know that failure to adapt leads to extinction.

Lee Kun Hee

Born on January 9, 1942, Lee Kun-Hee is Chairman of the South Korean conglomerate Samsung. Holding an economics degree from Waseda University in Tokyo, Japan, and an MBA from George Washington University in the US, Lee Kun-Hee joined the Samsung Group in 1968 and succeeded  his father as Chairman on December 1, 1987. 

Samsung is the quintessential example of a chaebol, a uniquely Korean conglomerate that mixes Confucian values with family ties and government influence. Under Lee’s stewardship, the company.

Has been transformed from a  Korean budget brand into a major international force and, alongside Sony, is one of the world’s most prominent  Asian businesses. Samsung Electronics, the conglomerate’s most famous subsidiary,  is a leading developer of semiconductors, TV screens,  and cell phones—with its smartphones even outselling  the iPhone in many markets.

The Forbes 2013 Rich List recorded Lee as the world’s  69th richest billionaire, and  the richest Korean. 

Chains Of Habit Are Too Light To Be Felt Until They Are Too Heavy To Be Broken

 

People are important in organizational life. Whether it is the initiative of a single entrepreneur or the combined energy of thousands of employees, it is people who get things done. However, that energy and initiative would count for little without managers to foster it. The creation, implementation, and management of organizational processes is what molds individual energies into a coherent whole and as a company evolves, it is the experience of management that is essential in redefining those processes. 

While management experience can liberate a business, it can also enslave it. Experience quickly gives way to the comfort of habit, and  in ever dynamic markets habit  can too easily lead to stasis and stagnation. The danger for management is that, as US investor Warren Buffet warned, “chains of habit are too light to be felt until they are too heavy to be broken.” 

Middle management 

The importance of middle management was described by business historian Alfred Chandler in his 1977 text, The Visible Hand, a play on economist Adam Smith’s “invisible hand” metaphor, which explains the self regulating forces of the market. Chandler noted that before 1850, family firms dominated business in the USA. These firms had poor communication networks and limited access to educated staff, so rarely grew beyond groups of family and friends who could be educated, trained, and trusted to manage the business. 

However, with the growth of national railroad networks in the 1850s, the management landscape began to change. Improvements in transportation and communication allowed firms to grow beyond the immediate gaze of friends or family, and beyond the immediate locale. But to prosper in this new environment, companies needed more rigorous processes and structures. The increasing geographic scope and size of businesses required new levels of coordination and communication. Businesses had grown too unwieldy for one person to manage; they required the oversight of a team of people. This marked the emergence and rise of the professional manager As standardization and mass production emerged in the early 20th century, the role of management grew. Business was taking place on an increasingly global scale. Even before mechanization, coordination from managers enabled mass production. Standardization turned management into a science, and managers into a vital cog in the organizational machine.

Enablers and enterprise 

In a 2007 Harvard Business Review article “The Process Audit,” US businessman Michael Hammer summarized the science of management (which is essentially the management of business process) into two factors: enablers and enterprise capabilities. Enterprise capabilities stem from senior management, and include culture, tight governance mechanisms, and strategic vision. Enablers, however, are the task of middle management. They include design, infrastructure, process, protocol, responsibilities, and performance management. The enablers turn vision into reality. 

Realizing the vision 

Hammer claimed that while the aspiration for business growth might come out of the boardroom,  it is a company’s infrastructure designed and implemented by middle management that makes growth possible. Vision without infrastructure is just a dream it cannot become a reality. Leaders  of growing companies know that, regardless of their own aspirations, the building blocks of growth are laid by middle management. 

At the Japanese brewer Asahi, for example, it was a team of middle managers who developed Super Dry Beer, starting a craze in Japan for dry beer and allowing the company to capture more market share. Similarly, a group of Motorola middle managers was lauded for successfully developing a new wireless digital system for a client in under one year (the process usually takes two to three years). 

Sitting between senior leaders and operational staff, middle managers are the communications conduit through which executives remain attuned to day to day business and personnel issues. Middle managers, as the Asahi and Motorola examples show, are often at the heart of corporate inspiration and perspiration they generate ideas and they work to realize ideas in practice. Middle management  is also the driver of functional efficiency : improvements in cost, quality, speed, and reliability are delivered by middle management and the processes it introduces.

Growing the business 

As a business evolves, so must the management processes that enable it. Whereas initial stages of growth rely on individual initiative and entrepreneurial spirit, evolving ad hoc practices into sustainable growth needs to be based on lessons learned through business experience. The true science of management is the conversion of experience into repeatable and reliable process today’s problems become tomorrow’s processes and next year’s capabilities. 

Process is the “stuff” of management. Business processes are essential to maintaining order; like a country’s rail system and the rules that accompany it, processes are the infrastructure around which a company organizes. Business practice must evolve as the business grows from a single outlet to a chain, from one staff member to many, and from national to multinational.  

The development of infrastructure and the strength of a new layer of middle management were key factors in the evolution of UK retailer Cath Kidston from a single store  in 1993 to more than 120 global branches and concessions by 2013, with stores throughout Europe and Asia, and plans to expand into North America. Widely renowned for its vintage fabrics, wallpapers, and brightly painted junk furniture, Kidston’s initial growth, as is common with many single founder start ups, was slow. In the early days, monthly accounts took six weeks to prepare and clashes between IT systems caused issues with cash flow projections and supply chain management. It took nine years to open a second branch, and another two before the third.

Following a buy out in 2010, Cath Kidston became partly owned by a US private equity group, with Kidston herself retaining about 20 percent of stock. As expansion took hold, the company started to move from ad hoc processes to a more planned approach. Specialized managers and consultants were brought in to help build capacity for growth. New departments were added, including design, buying, and merchandising, and systems were introduced. Most importantly, middle management gained experience of what it takes to open and run a new store. The lessons from earlier mistakes were integrated into procedures and policies by building on experience, every new store opening became easier than the last.

Excess and habit 

The dangers of processes and of hierarchy (if it becomes excessive) are that they may begin to grip the organization too tightly. Protocol and bureaucracy can wear people down, stifling innovation and hindering growth. As markets and technology move ever faster, process must not blind managers to opportunity, and systems must not restrict strategic agility. For example, Motorola continued to invest in satellite technology throughout the 1990s even after competitors had switched to cheaper, more effective groundbased cell towers.

Habit can also twist logic. So habitual, for example, were the claims of ethical behavior from Dennis Kozlowski, CEO of Swiss security company Tyco International, that he seemed able to divorce the reality of his own behavior from his rhetoric in 2005 he was convicted of corporate fraud. Habit can also lead to hubris. Buoyed by his business’s accomplishment in electronics, in 1994 Samsung CEO Lee Kun Hee believed that the same approach would lead to success in the car market, but the venture struggled and was rescued in 2000 by Renault. The experience (and habits) of Renault’s managers have since helped Renault Samsung Motors gain a footing within the South Korean automotive market. 

Business leaders dismiss the value of middle management, and the value of process, at their peril. Without middle managers who are able to evolve a leader’s vision into reality, many businesses would be stuck like those of the pre railroad era, destined to remain small, local,  and family run. It is the science of management that enables business evolution and growth.

The Role Of The CEO Is To Enable People To Excel

 

In the early days of a new business the most valuable skill a founder can have is entrepreneurship the vision to identify opportunities, and the willingness to take risks. But as the business grows, demands change. Disciplined management skills and corporate expertise are required to coordinate a growing enterprise. Some entrepreneurs are able to make the transition to leadership successfully, while others struggle.

An Ernst & Young report in 2011 identified entrepreneurs as people who are nonconformist, driven and tenacious, passionate and focused, with an opportunist mind set Other studies report entrepreneurs as mavericks, unafraid of failure and driven by a passion for success. While there is some overlap, absent from these findings are the traits that define good leaders and managers: organization, an eye for detail, communication, emotional intelligence, and the ability to delegate. And as Indian executive Vineet Nayar advised, effective leadership involves encouraging others within the company to realize their potential, and excel.

Making the transition 

Canadian business guru Professor Henry Mintzberg proposed that management can be broken down into three categories: managing  by information, through people, and through action. Many entrepreneurs have difficulty managing through information they often lack the skills to build the systems and communication networks on which large businesses are built. 

Cyprus born Stelios HajiIoannou, entrepreneur and founder of easy Group, is known for rarely staying still. His company launched in 1998 with a low-cost airline, easyJet, and now includes more than 20 “easy” businesses that operate on a similar low-cost model. Haji-Ioannou has shown an aptitude for strategy, and an eye for detail; but he has also been criticized for lacking leadership skills, for micromanaging, and, common  to entrepreneurs, for an inability to delegate and let managers manage.

US professor Larry Greiner identified leadership the ability  of a start-up founder to transition from entrepreneur to leader as one of the major crises that businesses face as they grow. Greiner suggests that successful growth often requires the employment of professional managers who bring  to the business an understanding of the requirements of financial markets, banks, and most importantly have the leadership skills needed to manage complex organizations. Entrepreneurs may possess bountiful ideas, but it takes management discipline to turn those ideas into successful 

US professor Larry Greiner identified leadership the ability  of a start-up founder to transition from entrepreneur to leader as one of the major crises that businesses face as they grow. Greiner suggests that successful growth often requires the employment of professional managers who bring  to the business an understanding of the requirements of financial markets, banks, and most importantly have the leadership skills needed to manage complex organizations. Entrepreneurs may possess bountiful ideas, but it takes management discipline to turn those ideas into successful ventures, and leadership skills  to move the start up beyond its entrepreneurial roots. 

Start-ups require the spark  of entrepreneurship; but growth requires a different set of skills: a founder must transition from being sole decision maker to being a disciplined manager and a successful leader. Those who are unable to make this transition  often need to step aside and let the professionals take over. But this is often easier said than done. 

Zhang Yin

Chinese entrepreneur and paperrecycling tycoon Zhang Yin was born in Guangdong in 1957. Recognizing that the Chinese export sector faced a shortage of paper-packaging materials, Zhang (her Cantonese name is Cheung Yan) opened a paper-trading business in Hong Kong in 1985. 

Quickly moving from entrepreneur to established business leader, Zhang moved  to Los Angeles, US, where she co-founded the paper exporting company America Chung Nam in 1990. The business quickly became the leading paper exporter in the USA, and the largest overall exporter to China. In 1995, after returning to Hong Kong, Zhang cofounded Nine Dragons Paper with her husband and her brother. The company went on to become the world’s largest maker of packaging paper. 

In 2006, at the age of 49, Zhang became the first woman to top the list of richest people in China, according to the magazine Hurun Report. The following year, Ernst & Young awarded her “Entrepreneur of the Year in China 2007.”

Nothing Great Is Created Suddenly

One reason many new businesses fail is, perhaps surprisingly, because they grow too fast. Excessively rapid growth can cause companies to overreach their ability to fund growth: they simply run out of cash to pay for day to day operations.  A major challenge for any manager is o balance income with expenditure, ensuring that there  is sufficient cash to meet the rising costs of the business.

In 2001, business professors Neil Churchill and John Mullins created a formula for calculating the pace at which a company can expand from internal financing alone. Known as the self-financeable growth  rate (SFG), it helps managers to strike the right balance between consuming and generating cash.  It does this by measuring three things: the amount of time a company’s money is tied up in inventory before the company has paid for its goods or services; the amount of money needed to finance each dollar of sales; and the amount of cash that is generated by each dollar of sales. 

Sustainable growth 

When accurately applied, the  SFG formula determines the rate  at which a company can sustain growth through only the revenues  it generates without needing to approach external funding agencies for more cash. Essentially, it predicts a sustainable growth rate and helps to avoid overtrading. When a market is growing faster than a company’s SFG, Churchill and Mullins identified three ways for managers to exploit the growth opportunity: speed up cash flow; reduce costs; or raise prices.

Each of these “levers” helps to generate the cash needed to fuel faster growth. 

As a young start-up business, the fashion brand Superdry enjoyed phenomenal growth. From its inception in the UK in 2004, the company rapidly added new stores throughout the world. In 2012, however, after several profit warnings, it became clear that Superdry had become a victim of its own success. Critics suggested that the brand was so focused on growth that it had forgotten its fashion roots, failing to update products on a seasonal basis. Other reasons for the decline included supply issues, accounting mistakes, and an inability to react quickly enough to fierce competition. In  a tacit acknowledgement that excessive growth was to blame, the company announced plans to review its new store openings. 

Business growth expert Edward Hess suggests that growth can add value to a company, but if it is not properly managed, it can “stress a business’s culture, controls, processes and people, eventually destroying its value and even leading the company to grow  and die.” Growth is not a strategy,  he claims, but a complex change process, which requires the right mindset, the right procedures, experimentation, and an enabling environment.

Edward Hess

A graduate of the universities of Florida, Virginia, and New York, Edward Hess has been teaching and working in the world of business for more than 30 years. He began his career at the oil company Atlantic Richfield Company, and later became  a senior executive at several other leading US organizations, including Arthur Andersen. 

Hess specializes in business growth, and especially in debunking the “myths” that growth is always good and always linear. Contrary to the dictum that companies must “grow or die,” he suggests that they are likely to “grow and die.

Broaden Your Vision, And Maintain Stability While Advancing Forward

The business landscape may appear to be dominated by corporate goliaths, but the reality is that small businesses outnumber large companies by a significant margin. In fact, most businesses never grow beyond the scope of the owner they start small and stay small. In the US, more than 99 percent of companies employ fewer than 500 people. In 2012,  there were almost 5 million small businesses (with fewer than 49 employees), but only 6,000 companies employing more than 250 people. 

Aspiration, or its lack, is a key factor for small-scale companies. Many small-business owners are content with the lifestyle the business allows them, and have  no desire for growth. But he biggest reason for a lack of growth is finance. Growth requires access to capital, which is difficult and expensive  to access for small companies. Moreover, unlimited liability means that an owner’s personal assets (such as the family home) are at  risk if the business fails a risk that many are unwilling to take.

Nothing Great  Is Created Suddenly

 

One reason many new businesses fail is, perhaps surprisingly, because they grow too fast. Excessively rapid growth can cause companies to overreach their ability to fund growth: they simply run out of cash to pay for day to day operations.  A major challenge for any manager  is to balance income with expenditure, ensuring that there  is sufficient cash to meet the rising costs of the business. 

In 2001, business professors Neil Churchill and John Mullins created a formula for calculating the pace at which a company can expand from internal financing alone. Known  as the self-financeable growth  rate (SFG), it helps managers to strike the right balance between consuming and generating cash.  It does this by measuring three things: the amount of time a company’s money is tied up in inventory before the company has paid for its goods or services; the amount of money needed to finance each dollar of sales; and the amount of cash that is generated by each dollar of sales.

Sustainable growth 

When accurately applied, the  SFG formula determines the rate  at which a company can sustain growth through only the revenues  it generates without needing to approach external funding agencies for more cash. Essentially, it predicts a sustainable growth rate and helps to avoid overtrading. When a market is growing faster than a company’s SFG, Churchill and Mullins identified three ways for managers to exploit the growth opportunity: speed up cash flow; reduce costs; or raise prices.  

Each of these “levers” helps to generate the cash needed to fuel faster growth. 

As a young start-up business, the fashion brand Superdry enjoyed phenomenal growth. From its inception in the UK in 2004, the company rapidly added new stores throughout the world. In 2012, however, after several profit warnings, it became clear that Superdry had become a victim of its own success. Critics suggested that the brand was so focused on growth that it had forgotten its fashion roots, failing to update products on a seasonal basis. Other reasons for the decline included supply issues, accounting mistakes, and an inability to react quickly enough to fierce competition. In  a tacit acknowledgement that excessive growth was to blame, the company announced plans to review its new store openings. 

Business growth expert Edward Hess suggests that growth can add value to a company, but if it is not properly managed, it can “stress a business’s culture, controls, processes and people, eventually destroying its value and even leading the company to grow  and die.” Growth is not a strategy,  he claims, but a complex change process, which requires the right mindset, the right procedures, experimentation, and an enabling environment.

Edward Hess

A graduate of the universities of Florida, Virginia, and New York, Edward Hess has been teaching and working in the world of business for more than 30 years. He began his career at the oil company Atlantic Richfield Company, and later became  a senior executive at several other leading US organizations, including Arthur Andersen. 

Hess specializes in business growth, and especially in debunking the “myths” that growth is always good and always linear Contrary to the dictum that companies must “grow or die,” he suggests that they are likely to “grow and die.”

Hess is the author of ten books and more than 100 practitioner articles and case studies. He is currently professor of business administration at the University of Virginia, US.

Luck Is A Dividend Of Sweat The More You Sweat, The Luckier You Get

Luck is usually regarded as something over which businesses have no control. Yet, as McDonald’s CEO Ray Kroc said, “the more you sweat, the luckier you get,” suggesting that luck can be created. The reality is that both are true. As global markets become more volatile and less predictable, luck plays an inevitable part in business success. Launch a start-up at the same time as a rival and it may be luck that determines who succeeds, and who fails.

Making your own luck 

A well-considered business plan is designed to dispense with reliance on luck. A good idea, underpinned by detailed market research and solid financial planning, may help a start-up to ride the whims of the market. A good plan charts a course of action in turbulent markets, protects against the unknown, and prepares the company for contingencies. 

In addition, a well-conceived plan can ensure that a company is in a position to benefit from favorable market conditions. In other words, what might seem like luck is often the result of planning. Take the famous example of 3M Post-it Notes. The invention of a reusable glue was accidental, but it was business insight that turned the lucky discovery into a commercial success.

With so many variables, luck is likely to play a part in the survival of a start-up. But a good plan reduces how much luck a company needs.

Put All Your Eggs In One Basket, And Then Watch That Bask

Entrepreneurs are defined by their willingness to bear risk particularly the risk of business failure. This is especially true for those starting new companies, because more than half of start-ups fail within the first five years. Lesser risks in established businesses include the possible failure of new products, or damage to the brand or a manager’s reputation. Whatever the level or type, however, risk is something that all businesses need to be aware of and manage carefully. US businessman Andrew Carnegie was pondering these issues when he suggested that in terms of managing risk, it might be best to put all your eggs in one basket, then watch that basket.

From the collapse of Lehman Brothers (2008), to BP’s Deepwater Horizon disaster (2010), events of the early 21st century fundamentally changed how organizations perceive risk. Companies now think in terms of two factors: oversight and management. “Risk oversight” is how a company’s owners govern the processes for identifying, prioritizing, and managing critical risks, and for ensuring that these processes are continually reviewed. “Risk management” refers to the detailed procedures and policies for avoiding or reducing risks..

Inherent risks

Risk is inherent in all business activity. Start-ups, for example, face the risk of too few customers, and therefore insufficient revenue to cover costs. There is also the risk that a competitor will copy the company’s idea, and perhaps offer a better alternative. When a company has borrowed money from a bank  there is a risk that interest rates will rise, and repayments will become too burdensome to afford. Start-ups that rely on overseas trade are also exposed to exchange rate risk. 

Moreover, new businesses in particular may be exposed to the risk of operating in only one market. Whereas large companies often diversify their operations to spread risk, the success of small companies is often linked to the success of one idea (the original genesis for the start-up) or one geographic region, such as the local area. A decline in that market or area can lead to failure. It is essential that new businesses are mindful of market changes, and position themselves to adapt to those changes.

The Instagram image-sharing social-media application, for example, started life as a location-based service called Burbn. Faced with competition, the business changed track into image-sharing. Had Instagram not reacted to the risks, and been savvy enough to diversify its offering (regularly adding new features), it may not have survived.

At its heart, risk is a strategic issue. Business owners must carefully weigh the operational risk of start-up, or the risks of a new product or new project, against potential profits or losses—in other words, the strategic consequences of action vs. inaction. Risk must be quantified and managed; and it poses a constant strategic challenge. Fortune favors the brave, but with people’s lives and the success of the business at stake, caution cannot simply be thrown to the wind.

In deep water

Even large and diverse organizations can find it hard to successfully balance risk against potential financial reward. On April 20, 2010, Deepwater Horizon, an offshore oil rig chartered by British Petroleum (BP), exploded, killing 11 workers and spilling tens of thousands of barrels of crude oil into the Gulf of Mexico.  

The incident was blamed on management failure to adequately quantify and manage risk; the official hearing cited a culture of “every dollar counts.” Analysts  who examined the disaster claimed that BP had prioritized financial return over operational risk. Chief executive Tony Hayward, who took the post in 2007, had suggested that the organization’s poor performance at the time was due to excessive caution. Coupled with increasing pressure from shareholders for better returns, the bullish approach that followed led to significant cost cutting and, eventually, riskmanagement failures. 

BP’s Deepwater Horizon incident led to huge fines and US government monitoring of its safety practices and ethics for four years.