High levels of risk are associated with high potential returns and vice versa

Part 20

By now, after reading the previous instalments, you would have realised how the renewal exercises are important to your company’s development. However, a word of caution needs to be offered. Before venturing into renewal efforts, you must answer yourself one important question – How critical is it compared to other company priorities? Unless you are absolutely certain that the renewal effort is more important than the others, your effort will be doomed from the very beginning.
During the past few weeks, we have introduced a number of tools to use as you rethink the staying power of your business unit. Today, let us recap those points.  
First, take some time to consider your product lines and businesses and see if any of them are candidates for renewal. 

Use radar screen
By using radar screen, you can list and examine the factors that you should anticipate or to which you have to adapt. Consider your present business and ask, “What’s in the middle and moving out?” as well as, “What’s on the edge and moving in? 

Use assumptions testing 
By doing this, you can examine the foundation beneath your existing business strategy. Do you see any weaknesses or holes in the way you make money? Look at your current business and identify the assumptions that underlie your revenue and profit generation capabilities. Likewise decide if there are better ways to gain new customers or build new assets. 

Prepare a life-cycle curve
Plot all of your product lines or business units on the life- cycle curve. Which are in late maturity? How fast are units moving to the right? Can you keep these alive with product line extensions or easy moves into adjacent areas? If not, how much time do you have before you either renew or accept decline? 

More to answer
After completing these three exercises, take a careful look at the components of your business model and see if your total offering meets or exceeds the needs of your target customers. Do you know what they really want or are you offering them what you gave them in the past? Have their expectations drifted away from your products and services over the years? Can you fulfil your value promise and still make a profit? Should you spend the money and the management effort to renew your capabilities?
This is what is known as the ‘Rethink phase’. It is the time to think big, hold strong thoughts and play out plenty of what-if-scenarios. It is very important but relatively stress free. You will have plenty of time to stress when you commit to the effort to renew. 
At the end of the Rethink phase, you will identify a short list of business units that were strong renewal candidates.

Reinvention phase
From this phase, we move into the Reinvention phase. In Reinvention, you will be investing resources to create and evaluate renewal possibilities. 
This is a major step for your company. It is easy to talk about the need for renewal, but it is much harder to make time for it in the corporate calendar. In doing so, you are choosing to invest your company’s time, attention and resources to reinvent your approach to one or more of your products, services or businesses. It is unlike other major decisions in several crucial ways. 
Reinvention entails more risk and uncertainty than other decisions. 
Reinvention raises the question of the viability of your business. 
Reinvention requires different measurements than day-to-day decisions.
Let us discuss few of those issues. 

Risk and uncertainty 
Companies are designed to deliver excellence in day-to- day operations. Their measurements, rewards, systems and procedures are designed to deal with normal operations. Predictability is central to running a mature business but it is not even peripheral to renewing one. What works for typical operations may destroy any chance of successfully renewing your business. 
Among the questions raised by renewal are: Will you be able to find an attractive and feasible renewal alternative? What are the consequences of choosing poorly? What will the risk and return profile look like for the renewed business? What is the probability you can successfully execute your renewal plan? How will the employees react when they hear of the renewal effort and its implications? What will happen if word of your plan leaks out to your customers, partners and workforce before you are ready to communicate and execute it?

Viability issue
When you are running a business, you typically don’t question its viability. When things get tough, people redouble their efforts and do their best to meet their targets. But they seldom address the question of whether the business has a future, and if so, what it might look like. 
Committing to renewal changes that. No matter how attractive the renewed business might be, there will be members of your team who do not want to, or who are not capable of, making the transition from current operations. 
When individual leaders decide to renew part of their business, they expose their careers to possible harm. For an ambitious leader with a desire to create a positive future, renewal is a career-accelerating opportunity. But for many managers, taking a chance at losing is something to be avoided rather than embraced. Different qualities will be on display in renewal than are shown when running a business. People’s creativity, imagination, boldness and vision come to the front in renewal. These are characteristics not ordinarily prominent while running a business. 
Committing to renewal effort requires a leap of faith since the alternatives that will be developed and the choice that will eventually be made are not yet known. 

Renewal requires different measurements 
How do companies judge the quality of their decisions? Normally, based on their outcomes. If the results you realize are better than your targets, you have done well. If they are worse, you have done poorly. This is simple and straightforward. 
For a manager with hundreds or even thousands of daily decisions, this makes perfect sense. If you are making a sufficient number of similar-sized decisions, some decisions will get great results and some will get poor results. But on average, if someone is making good decisions, he will deliver good results at the end of the year. 
But what if this same approach of judging decisions by their results is applied to major decisions that do not balance out over the course of a year? Since managers are judged and rewarded based on outcomes, people will hesitate before proposing a renewal alternative that has significant risk associated with its return. And since there is no way to renew a business without taking risks, this is a problem. 

What is ‘risk-return trade-off’?
The risk-return trade-off is the principle that potential return rises with an increase in risk. Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns. According to the risk-return trade-off, invested money can render higher profits only if the investor is willing to accept the possibility of losses.
(Lionel Wijesiri is a retired corporate director counting three decades of senior management experience. He is now an independent consultant and a freelance journalist. He may be contacted on [email protected])