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Innovation: A Risk Management Option by Narayan Mantri

Post a Comment August 23, 2008 – 9:59 am | Permalink |  Print This Post |

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 products, 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 œcelebrate 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.

Contact the author at – narayan.mantri@consultingnetwork.co.in

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