it's important to pick the right risks and to control them
November 2022 , photo: shutterstock
Risk is usually unavoidable. Drucker found that though risk cannot always be avoided or even reduced, it can be managed. This is important because potential success is frequently dependent on the amount of risk and at times, the higher the risk, the greater the payoff and chance of success. Moreover, the risk may be so obvious that a potential action may seem unlikely and ignored by an adversary or competitor and your strategy will work because of the risk!
During World War II aircraft designer Geoffrey de Havilland suffered because aluminum and steel were in demand. In response, he designed and built a combat bomber using a plentiful but highly unlikely material: wood. This hadn’t been done since WW I. Some thought this was impossible in modern air warfare. In any case, De Havilland eliminated all armor and defensive armament and developed a two-engine bomber that was very light with a crew of only two but had the bomb capacity and range of a heavy but well-armed 4-engine bomber. He named it the “Mosquito.” Capable of 400 mph it was one of the fastest planes of the war and operated effectively at both high and low level which made it highly versatile. Nearly 8000 wooden bombers were built. With its speed losses were not excessive and De Havilland’s risk paid off. Risk acceptance is as important a factor in business as in war.
Gillette’s Safety Razor
Faced with the hazard inherent in self-shaving with an exposed blade, K. C. Gillette developed a razor consisting of a thin double-edged steel blade mounted between two protective plates. This limited potential hazard and made self-shaving safe. To eliminate the need for sharpening, the blade was thrown away when it became dull, and a new blade used. However, the device was more expensive to produce than a straight razor. In fact, Gillette had to practically give away the razors and make money only by selling blades. A significant risk! The first sale was for only 51 razors and 168 blades. However, a year later, Gillette needed 90,000 razors and almost 13,000,000 blades to meet the demand. The risk had been significant, but the product created a profitable industry.
Focusing on Lower Risk Can Be Wrong
Drucker saw that focusing on lower risk, professionals in many professions frequently assumed that existing trends would continue. This was almost never true. A competitor’s action or something in nature or human affairs including a pandemic, war, or the weather could change everything. Even Drucker erred as a journalist when he predicted a continuation of the rising trend of the stock market in a newspaper article he wrote just before the great depression of 1929. After this experience Drucker advised managers not only to expect change but even better to initiate it with planned innovations and to carefully analyze and accept the right risks.
The Need for Risk Controls
Drucker believed that not only was it important to take the right risks, but also to establish controls over the risks taken. However, he cautioned that risk control was difficult due to three important characteristics:
– A lack of objectivity
– Though focused on results, results aren’t always controllable
– Though they must be measurable, the measurements cannot always be exactly calculated
The Objectivity Challenge
The control selected was lighting conditions at the Hawthorne Works, a factory outside of Chicago. One experiment examined the effect of increased lighting. It was simple enough. The control was objectively based on increasing wattage of light bulbs and then noting the change in work productivity. It was assumed that productivity would increase as wattage was increased and lighting got increasingly better, and it did. . . at first.
However, one week, the wrong bulbs were used by mistake, and wattage was decreased instead of increased. Productivity should have declined, instead it improved! It was not a miracle nor an error in measurement, nor were these unique bulbs. What had happened was that workers expected the lighting intensity to increase weekly, and this fact motivated them to work harder to achieve the expected results.
Today this is called the "Hawthorne Effect" from the company in which this phenomenon was first identified. It demonstrates that the novelty of having research conducted along with the increased attention to measured results can by itself cause an observable change in results. Drucker said, “Controls are not applied to a falling stone, but to a social situation with living, breathing, human beings who can be influenced by the controls themselves.”
Focusing on the Real Results
It may be relatively easy to measure effort or efficiency, but much more difficult to measure real results with the control. Drucker pointed out that it was of no value to have the most efficient design department if the department was efficiently designing the wrong products.
Some Results aren’t Measurable
Controls are also difficult because some results, important to the risk, aren’t noted or even measurable. Even if you can predict that eventually an earthquake or a pandemic is inevitable, precise knowledge regarding the date, size, and resulting damage is unknown.
Changes were anticipated with the introduction of the pocket size battery calculator. However, it caused the almost complete disappearance of the ubiquitous slide rule, carried by engineers, and manufactured as the sole product of several established companies. Yet the need for them had disappeared.
DH98 Mosquito bomber: Wikipedia
The 7 Risk Control Requirements
Drucker determined that controls must satisfy seven basic requirements:
– They had to be economical – less the cost of employing the control itself create problems
– They had to be meaningful in important ways
They must be appropriate to what you are measuring – absenteeism of a yearly average of 10 days per employee sounds acceptable, but what if you have only two employees and one was never absent and absences creating the “average” were due solely to the other employee?
Measurements must also be congruent to the phenomenon measured. Victor Kiam, an entrepreneur, bought the failing Remington Electric Razor Company in the 1980s which he made profitable and wrote a book explaining his success which he promoted on television along with the razor. His TV promotions were successful, and the book sold well, but some said the book offered few useful insights explaining Kiam’s success at Remington. Yet the book sold more than 200,000 copies, surpassing many books on entrepreneurship published about the same time.
Later it wasspeculated that the author had spent almost $2,000,000 on his TV ads in selling the 200,000 books. The net to the publisher was roughly 50% of the sales price. This book was priced at $30. Book royalties for non-fiction books to the author at the time were about 15% of the net amount received by the publisher from the bookseller. Therefore, the author had earned the following in royalties: ($30 x 50% x 15% x 200,000 books= $450,000) which was $1,550,000 less than cost of the cost of Kiam’s advertising. He may have been willing to take this loss for bragging rights and possibly for also promoting the company’s razors. But book sales contributed little to razor sales, and while sales numbers were typically used to assumed to represent the value of the book to the reader it was questionable in this instance.
Control requirements 5, 6, and 7 are equally important. First, they need to be timely. Results are an expensive waste of time if the information received arrives too late to be of use. They need to be simple. Complicated controls can cause confusion and lead to other errors. Finally, they need to be oriented toward action. Controls are not for academic interest. They are for implementing strategy and action with the appropriate risk.
The Final Limitation
The final control is the organization itself. An organization operates with rules, policies, rewards, punishments, incentives resources, capital equipment, etc. but its success comes from people and their daily, sometimes unquantifiable, actions such as the impact of customer interaction, morale and company policies. The expressions of actions, including compensation, may be quantifiable. However, feelings, drive, ambitions, leadership, vacations, and the health of employees may be less so. As an operational system the organization cannot be accurately quantified except by results or progress toward defined goals.
What Risk Analysis Means
Consideration of risk is essential. However, it is important to pick the right risks and to control these risks considering all factors which can affect them. Knowledge is power, or at least stored power. Selecting the right risks and monitoring the seven important aspects of risk controls as identified by Drucker means effective risk management. A manager cannot do more, nor should any manager consider doing less.
*Adapted and syndicated internationally from Consulting Drucker and Peter Drucker on Consulting: How to Apply Drucker’s Principles for Business Success/(LID 2016, 2018.)
*הכותב ד"ר ביל כהן הנו מומחה בתורת המנהיגות. ד"ר כהן הינו מייג’ור גנרל בדימוס בחיל האויר האמריקאי, בעל תואר דוקטור בניהול מאוניברסיטת קלרמונט. כתב למעלה מ- 50 ספרים שתורגמו ל- 22 שפות בנושאי ניהול ומנהיגות. ביל כהן שימש כיועץ בעמדות בכירות וכמרצה באוניברסיטאות הטובות בארה”ב בינהן ביה”ס לניהול באוניברסיטת קלרמונט וב-UCLA. בנוסף, הוא מעביר הרצאות וסמינרים בנושא מנהיגות בכל זרועות הצבא האמריקאי ובאקדמיה הצבאית וזכה בפרסים על הרצאותיו בעולם. מעבר להיותו גנרל בצבא ארה”ב, ד”ר כהן הנו בעל דרגת רב סרן בחיל האויר הישראלי והשתתף בקרבות אוויר במלחמת יום כיפור. שימש בתפקידי ניהול בכירים במספר חברות וכיהן כנשיא של שתי אוניברסיטאות פרטיות. ביל כהן היה חבר דירקטוריון במספר מועצות מנהלים ומועצות סחר עירונית, ממשלתיות ושל תאגידים שונים.ביל כהן היה תלמידו הישיר לדוקטוראט של פיטר דרוקר אבי תורת הניהול המודרנית שאמר עליו בין היתר כי ” ביל כהן היה סטודנט אשר אני והקולגות שלי למדנו ממנו לפחות כפי שיכולנו ללמד אותו”.
ד"ר ביל כהן הוא נשיא המכון לאמנות המנהיגות, מייסד ונשיא לשעבר של המכון ללימודי ניהול מתקדם בקליפורניה CIAM וחבר בצוות המומחים של קבוצת ד"ר עדנה פשר שות'
קבוצת ד"ר עדנה פשר ושות' היא הנציגה הבלעדית של תוכנית CIAM בישראל
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