Risk Aversion

Avoid Useless Plans to Mitigate Risk with this Method

 

Davide Gronchi shares an article on risk mitigation that includes his pragmatic method designed to drive out ‘failure-mode and effects analysis’ designed by the U.S. military in the 1940s. 

Whilst in the middle of an heavy and unexpected crisis, company leaders are requested to keep looking far ahead and shape the future of their company by (re-)designing the strategy and how to implement it.

Current times are full of worries and threads, every day are more negative than positive news that capture our attention. How to concentrate on our business, sailing in calm waters and heading to a bright future? Yes, company leaders must keep this attitude! Nobody else can do this, it cannot be delegated. And recent research proves that CEOs like crafting strategy most than other task their are responsible for!

Nevertheless, we are all prone to see risks everywhere now during the COVID-19 crisis. This was a risk that nobody was really ready to mitigate. Nobody actually ever thought it could ever been real!

In our life of leaders, in our companies, many can be the risks that we might face and that need to be considered and need a mitigation plan. How to identify and prioritize risks?

I apply a good pragmatic method that derives out of FMEA. FMEA stands for Failure-Mode-and-Effects-Analysis and was invented by the US military in the late 1940s. I am not going to describe in detail what that is (there is plenty of literature around it), but I want to describe how I use this to prioritize risks. The beauty of this approach, is that it helps to put some objective criteria into an exercise that could else be very theoretical and subjective. FMEA is a semi-quantitative evaluation.

 

Key points include:

  • Severity
  • Occurrence
  • Detection

 

Read the full article, The pragmatic way for Risk Mitigation, on LinkedIn.

 

The Cost of Risk Aversion

 

Jason George uses the evolution of the aviation industry as a means to explore the cost of risk aversion and how it can stymie growth.

Building in every possible contingency as part of a strategy can end up producing something so encrusted with extraneous elements that agility is compromised. Alternatively, it may hew so closely to known and safe paths that it ends up losing the novelty that would make it compelling. If you can’t cut yourself loose from a certain strategy or mental model, your degrees of freedom become limited. In the process new paths are closed off, even though they might unlock a different way of operating. Sometimes caution is a crutch whose real costs are not adequately calculated. A better path might involve getting rid of the safety net.

When faced with ambiguity too often we choose the guaranteed loss, which might be greater than the as-yet unknown costs of taking the riskier path. The safe route may be comfortable, but it is costly.

 

Points explored include:

  • Contingency as part of a strategy
  • Product cannibalization
  • The cost of the safe route

 

Read the full article, Calculated Risks and the Costly Status Quo, on Jason’s website.