Balancing the Risk Equation

How the smartest decision makers are overcoming challenges 

Boldness and innovation defined

Boldness

What we measured …

Company growth in proportion to size as a proxy for daring companywide changes (percentile change in revenues per employee over five-year and ten-year intervals).

Innovation

What we measured …

Depth and breadth of transformative thinking across four opportunity areas: purpose, product, people and performance, taken from a comprehensive media audit.

Analysis of The Crowe 100 Decision-Making Index indicates that risk can be a driver for bold decisions and innovation.

The findings suggest that bolder companies (i.e., those that take courageous steps to differentiate themselves and make themselves more effective) often operate in more challenging business conditions, for instance, due to macroeconomic regional conditions, market factors in their sectors or the potential for scalability in particular business models or industries.

Separately, innovative operations and outputs (i.e., where employees are empowered to be creative and pioneer new ideas) tend to be more prevalent in sectors where growth is sluggish.

This article looks at the factors that inspire organizations to make bold decisions that push them out of their comfort zones; whether younger (i.e., less long-established) companies are necessarily more innovative and groundbreaking, as some might expect; and how companies can maintain risk compliance while making those “outside the box” choices that they believe will benefit their businesses.

Crowe Art of Smart 2019 Risk Equation Insights

Most innovation comes from adversity
Wayne Clarke

Do something, do nothing?

Doing the same thing as everyone else is easy. Doing something different is hard.

Prof. Michael Roberto

There are many good reasons not to make bold decisions or support innovation. Successful companies are often very comfortable with the status quo and see no need to change. That’s understandable — they’re doing well, after all. Sometimes sticking to the established formula is the best course of action. However, it pays to question whether things can be done better and keep looking out for threats and opportunities. Inaction due to complacency or inertia can be as risky a strategy as decisive action.

Then there is the perceived payoff derived from the “safety in the herd” mentality. Fear of making mistakes is a major barrier to taking bold actions or supporting innovative ideas. Market leaders may be more risk-averse because they have more to lose, and moderately successful rivals can be prone to follow in their wake, reluctant to be the “odd one out.”

As Gary Klein, President and founder of cognitive training consultancy Shadowbox, and author of 'Sources of Power: How People Make Decisions' and other books on the science of decision-making and cognitive processes, says: “People think: If I make a mistake, people will see it. If I fail to come up with an idea, nobody will ever know.”

There are also cultural and practical deterrents. Change can disrupt the direction of travel, throw schedules and budgets into disarray, divert focus and resources, alter strategy and goals, and upset staff who want predictability. There are customers to keep happy and shareholders to convince. “Leaders talk a good game about boldness and innovation, but in reality, it can be hard to achieve, and most people are naturally cautious,” says Michael Roberto, Trustee Professor of Management at Bryant University and author of 'The Art of Critical Decision Making'.

For those who do want to be more creative and utilize their skills in different ways outside of what may be a narrow job description, the inability to do so can be a source of extreme frustration, according to Wayne Clarke, Founding Partner of the Global Growth Institute, a leading adviser on driving growth through human capital strategies. Wayne is also former Managing Partner at Best Companies (producer of the UK’s Sunday Times Top 100 Companies list).

“Individuals get hired for all the many skills and interests they put on display in the interview process, as well as their specific role-related expertise,” he says. “But few of them ever get to use most of these assets in their jobs: they’re confined to the role they were recruited for and that’s it. That’s turning off graduate talent big time, as today’s young people want more scope to be creative in their careers and have control over what path that might take.”

“But it also means that, in fact, there’s vast pool of opportunity for innovation that organizations could tap into if they only had the will and means to do so,” Clarke continues. “If you recruit smart people, you’ve got to find ways to create opportunities to use their various skills, by matching them to what the organization needs.”

The case for doing things differently

While businesses in any sector could benefit from daring themselves to think differently or make tough choices, in challenging environments where growth is slow or the pace of change is rapid, being bold and innovative is a way to get ahead. For example, Japanese manufacturer Midea Group (Crowe 100 Index ranking 6, boldness score 98/100, innovation score 75/100) has carved out a prominent position in the fast-moving smart home appliances market, using artificial intelligence (AI) to develop cutting-edge “microclimate” air conditioning units that it believes will revolutionize the industry1.

Both boldness and innovation help companies overcome challenges: Those that do nothing increase their likelihood of business failure; those that are proactive increase their chances of survival and success. In difficult scenarios, companies that make bold moves such as entering new markets or developing new products and services may still fail, but they’re unlikely to be successful without making those big decisions. It’s all about changing the balance of probabilities.

When it comes to taking risky decisions, people are often more concerned with losses than gains.
Gary Klein

Robert Pearl, MD, Professor at the Stanford Graduate Schools of Business and Medicine, has written about “the science of regrettable decisions.”2 He explains that human attitudes about — and perceptions of — risk and reward are much the same as they were thousands of years ago, when our ancestors would have pitted the dangers of hunting a large animal against the rewards of being able to eat and survive. It’s when our perceptions of risk change, and gains rather than losses become uppermost in our minds, that we’re able to make those brave moves.

Being both bold and innovative, Chinese real estate company Country Garden Holdings (Crowe 100 Index ranking 2, boldness score 82/100, innovation score 100/100) is taking the lead in sustainable, “green” development by investing in an industrialized manufacturing base for the construction industry at a major new purpose-built facility. This is said to comprise facilities for construction engineering, prefabrication, logistics and transportation, part assembly and construction as well as R&D3. Prefabricating buildings (or parts of them) is an innovative approach that many in the industry see as a major potential driver of productivity, with the ability to increase capacity and underpin new standards in construction4.

Disruptive vs. incremental innovation

The idea of a favorable risk/reward ratio also resonates with Chengwei Liu, Associate Professor of Strategy and Behavioral Science at the European School of Management and Technology. He points to the well-known “Moneyball”5 example, where a struggling baseball team deployed a radical new strategy (analyzing team data) to great success. Prof. Liu argues that it was the team’s underdog status — the fact it had more to gain than lose, rather than the data — that enabled it to make its bold moves.

Given all these arguments, one might assume that younger companies are more innovative, but the Crowe 100 Index rankings suggest that this is not necessarily the case. Despite the hype, disruptive innovation is not the only kind. Large, established corporates with big budgets for R&D are often better at incremental innovation — however, they typically focus on “doing what we do better” rather than on radical, risky change.

The finding that established companies are as likely, or more so, to be innovative (and successful) as startups does not surprise Ann Latham, President and founder of strategic clarity consultant Uncommon Clarity, author of four books on business effectiveness and regular Forbes contributor. She makes the point that boldness has much to do with personality and an entrepreneurial mindset, which can be found in large corporates as well as smaller firms. Some of the world’s biggest companies, such as Facebook, Apple, Amazon and Google, continue to be the most innovative.

“When you look at a lot of the entrepreneurs who are successful, they might fail nine times before they finally found a business that takes off. They just keep going at it,” Latham says. “It does become harder to be agile in bigger companies, however.”

For Wayne Clarke, “Innovation is one of the biggest tell-tale signs that a company has got employee engagement right. It’s the result of having space to think and caring enough to go the extra mile for the business, as well as feeling sufficiently safe and secure to air ideas that may or may not work.”

Crowe Art of Smart 2019 Risk Equation Top Companies

Lighting the spark

The factors that will determine success (or failure) when organizations make bold decisions or seek to spur innovation differ by company and industry; there is no one-size-fits-all solution. However, experts highlight a range of factors businesses should consider to light the spark. These include:
  • Present strong leaders who listen and learn. High-performing CEOs are highly visible within their organizations, listening to staff at all levels and even going back to the floor regularly — not in an orchestrated “state visit,” but on an informal basis, even getting their hands dirty by doing some of the lowest-paid jobs to see the business from all angles. Leadership teams should also be strong enough to challenge their own thinking to make better decisions.
  • Identify who cares and give them something to care about. Not everyone is motivated to go above and beyond their job description, not even the high performers or those who have reached a senior level in the business. Find ways to identify those that are — line managers may be able to help here — and speak to their personal desires and interests. Simply asking them to get behind a growth plan is unlikely to set the creative juices flowing, so give them a vision or goal they can get excited about.
  • Create headspace. It’s unrealistic to expect 100% productivity all the time, and rigid processes and rules can be confining. Staff at every level, from leadership down, could benefit from having some space set aside each week to think, either strategically or creatively. Give direction and channel blue-sky thinking by posing different questions for them to consider, or inviting them to give some suggestions (e.g. for shaping strategy).
Innovation by committee doesn’t work that well: it can become boring and pressurized. But there can be a huge amount to learn from what your company is already doing well, and lots to gain from identifying ‘champions’ and giving them the space and opportunity to be creative.
Wayne Clarke
  • Tap into corporate culture — but not as you know it. In many companies, overall organizational culture is too big a behemoth to work with from an innovation standpoint. But within an organization there may be many subcultures, perhaps regionally or within service areas, that can be tapped into where individuals or teams can take ownership of new ideas or drive change.
  • Find an effective knowledge-capture process. In every organization there will be teams doing great things. Learning from these highly performing parts of the business can be far more beneficial than merely constantly fixating on what the competition is doing, and easier and cheaper than trying to engineer internal innovation hubs.
  • Temper boldness with discipline. Mistakes come from not managing risks carefully, so good corporate governance is essential. Preparation gives comfort that risks are mitigated, for instance, by providing processes to test new ideas, or using evidence-based analysis. If companies must move quickly, they should still anticipate the what-ifs: what could go wrong, what’s serious and what’s likely.
If you have bold leadership, [employees] are more willing to invest, they’re more willing to let go of what’s been done in the past and they are more willing to take risks. But it’s also important to take time to examine those risks and decide how to mitigate them.
Ann Latham

Key points to consider

Being bold or innovative does not have to mean changing the world. It’s not necessarily about making radical structural or strategic changes or coming up with the next iPhone or Alexa — it’s as much about making businesses better, improving the customer experience, and taking calculated risks to stay ahead of the competition and drive success.

That said, by definition, boldness and innovation both mean difficult choices must be made, and there can often be a huge amount at stake — for businesses and individuals personally. It’s in daring to be different and shaking off the shackles of convention that the value of smart decision-making is really put to the test. But for the those who get these tough calls right, the rewards should be well worth it.

[1] IFA International https://ifa-international.org/2018/09/03/midea-group-wins-brace-of-gold-awards-at-pti-award/

[2]Vox https://www.vox.com/2019/7/23/20702987/brain-psychology-making-hard-decisions

[3] https://www.prnewswire.com/news-releases/country-garden-forest-city-wins-the-scahsa-award-for-the-second-consecutive-year-300557656.html

[4]Planning, BIM & Construction Today https://www.pbctoday.co.uk/news/modular-construction-news/future-modular-techniques/56403/; Clyde & Co. https://www.clydeco.com/insight/reports/innovation-in-construction-report-2018

[5]https://en.wikipedia.org/wiki/Moneyball_(film)