MANAGING

RISK:
METHOD
(STEPS

TO

TAKE)

Action is critical in management. In the face of

some risks, no action is sometimes action. The
critical nature of action or the deliberate decision
to wait and see, is that as things change, you
and your organization are exposed to risk but get
the opportunity to learn. Commitments of
resources expose those resources and the
organization to the risk of loss.
When we take action, there are several types of
errors that we can fall into. The first are the Type
I and Type II errors similar in nature to those
afflicting statistical tests:
Type I: Accept the change hypothesis and
commit to a change that doesnt occur
Type II: Reject the change hypothesis and recommit to the status quo when, later, the
hypothesized but rejected change
actually occurs.
Unfortunately for those seeking magical insight,
the world is more complex than we care to admit
as most of our cases demonstrate. The precise
and contained statistical world dealing mostly
with what is, and evolutionary changes that can
be parameterized backwards and projected
forwards -- is not how the future always unfolds.
There are, as a consequence, therefore, several
other types of error. For example, we can misjudge or mis-weigh the power of the forces
driving change or fail to consider the
heightening importance of a long ignored
interdependency within the system we are
competing in for, example, the shifting
sensitivity of customarily ignored stakeholders.
Moreover we might act too early or too late,
possibly with insufficient force or even with too

much. Then, too, we may find that we know

what will happen next but to our frustration

discover that our persuasive powers inadequate
to the demanding task of convincing others, in
time. In this sense, the what will happen may
be clear to us, while why? is not clear to
them a modern organizational life version of
the seers curse represented by Merlin in the
Arthurian legends (White) and in Greek
Mythology, Cassandra.
Change invariably makes new winners and
losers so, with hindsight, we can say that their
prescient or foolish responses to change led to
their rise and fall. This is merely to say that
change represents opportunity and threat. Thus,
when we are surprised, the unexpected may
bring either opportunity or threat. The Chinese
character for crisis is the combination of the
characters for opportunity and threat. Thus,
experience points to the fact that with change
being one of the few constants we are faced with
-- like death and taxes -- we are certain to be
surprised sooner or later. What to do about it?
How to avoid being paralyzed by shock?

ACTION STEPS
The course is focused on efforts to recognize and
then prioritize risks and, thereafter, to mobilize
an organizations response to risks.
One very practiced CEO, Ken Iverson, the late
founder of Nucor, now Americas largest steel
producer, tapped his experience and accepted
that preparation to avoid the unexpected cant
have much better record than a baseball player at
bat, 0.400 is probably a good score! Thus he
says be prepared to act although you could be

wrong. Do the best you can but learn. Dont

repeat a mistake. Learn to contain, resolve, and
profit from change and the disasters in which
you find yourself. He also said always listen to
the workforce they know what is working and
what is not and what is changing. Andy Grove of
Intel said look to the causes of dissonance along
the value chain both inside and outside your
organization.
Iverson and Grove recommend listening to
others, particularly those at the boundaries of
your organization and other organizations that
interact with it. The point is to open ourselves
up to a wide spectrum of inputs from each part
of the PESTS, PETS, NSTEPS world -- facts,
opinions, concerns and knowledge.
There are psychological difficulties for decision
makers when things change, when senior
management is isolated, single-minded, and
committed. Consider the dithering at Toyota that
during the SUA crisis -- we will study this crisis
during the semester. There technological and
organizational complexity impeded the flow of
real world information into the firm and up to its
key decision makers. Complexity interacting
with rigid formal organization structures is
another risk multiplying factor, as is an
entrenched culture reflecting the old political
power structure of a firm or country (see PETS).
Power reflects and reveals how organizations
priorities are expressed day to day. At most
times, most people will be working hard trying
to improve the performance of yesterdays
strategy. Thus, when paradigms begin to shift
there are few looking out with the confidence to
shout, No! or Stop!
Recognize that the PESTS bugging you are
signals heralding the need for change. (That is
why I used the mnemonic.) Identify all the
PETS -- the deep elements of corporate religion
that impede change because you will have to
deal with them. Then, consider the possible but
feasible STEPS. The unthinkable is usually
something that violates long held (assumed)
truths. If you know where the rigidities are you
may be able to be prepare for change and, note,
often those most resistant to change see

themselves as guardians of the firms distinctive

competencies the competencies that were the
foundations of the organizations past success
(Gerstner at IBM may have faced this type of
resistance see his book, Who Says Elephants
Cant Dance).
The Method:
1. Think hard about which PESTS are really
important. Identify the drivers.
2. Look for the opportunities and threats
associated with each of the forces driving
change; consider the consequences of each
driving force, one by one, and impacts of
their multiple or interactive effects on the
systems we live in.
3. Evaluate your thinking with an Impact
Analysis.
4. What is the important dimension describing
where Change impacts your organization
and puts it at risk or presents opportunities?
5. Then, think about stakeholders and decision
makers: Who is the source of uncertainty? Is
their power or their veto right threatened?
How hard will they fight to protect their
stake? How will they react to change?
6. What is the sum (effect) of all the forces and
stakeholders in play? Usually there are some
for and others against some change. For
every political economic and social force
there is likely to be a social reaction. People
react. Which way does the Force Field
point?
7. Turn to Eric Bests approach. Create an
Importance/Uncertainty map, and use it to
identify possible scenarios and catalyst
events. Remember changes foster reactions
to develop your scenarios talk your way
out along the four diagonals (Maybe work
on each diagonal in sets (of two?) to break
up the work and then get together to discuss
the whole situation.
8. What do you expect? What is the expected
zone? What could be a surprise? Identify the
High and Low Probability and High and
Low Impact issues, trends and events.
What are the risks (and opportunities) in
each scenario (in each quadrant)? What
limits and constraints shape what is
possible?

9. Name the scenarios! That helps synthesize

thinking your own and any audiences.
10. Assess these in a new Impact Matrix for
later discussion. Recognize that improbable
is not impossible many are likely to be
quite possible albeit less frequent events.
Have you separated what is possible from
what is impossible?
11. Consider how to take advantage of the
danger and how to avoid the danger in the
advantage (Sun Tzu, circa 500 BC). That is
where creative strategy emerges.
12. Be explicit about your model of the real
system. Have you separated its
predetermined and uncertain elements?
13. For long run crisis preparation focus on
resolving the problems that are emerging in
rapid succession.
14. For more futures oriented work be sure to
consider the High Impact Low Probability
possibilities the Black Swans.
15. Moving on to STEPS, where there is risk,
seek ways to test the waters without overcommitting to do so youll have to move
early. (In Resources See Be Right, Be
Early which deals with the early phases of
a Mobilization effort.)
16. As the situation unfolds, youll have to
engage others to mobilize any organization.
Getting their commitment in small things
and tapping their resources can help you
develop new insights and mutual confidence
more quickly. Shared experiences can build
commitment.
17. Strategize develop options. Invent some
that might help you ride change to a more
advantaged position. Recognize the basis of
competition may change. What was once
sufficient may now become merely
necessary or sometimes, irrelevant.
18. Test your strategies in the scenarios you
have identified using Cross Impact Analysis:
If we do this and the world is that how will
that organization/environment interaction
impact us? You may simply have to reduce
the complexity you face here if the numbers
of alternatives is large and the number of
possible states of your world is large. There
is risk in cutting some options and
possibilities out BUT if you focus on what
cuts risk and opens opportunities and

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eliminate yesterdays thinking carefully

youll be able to move ahead confidently.
Working with the final strategy set and your
final state of world set, use the Payoff
Matrix to move towards a
recommendation. Be sure to carefully
assess their impact on your (relative)
Advantage to the present and emerging
competition.
Test further if you can, for example, if there
is time, experiment.
Sell the plan a focused matrix of
Alternatives and the Criteria used to
identify your Recommendation can be a
powerful way to simplify complex situations
and focus top management attention.
Commit if necessary but, before doing so, if
risks are unavoidable and you cant share
them, identify the data you need to monitor
events as they unfold over time and carefully
calibrate the risks you are exposed to (T1
and T2 errors happen).
Consider the impact of the time lines you re
managing to meet quite often speed
exacerbates risk!
Develop an information system to support
your action plan and set up appropriate
controls.
When you strategize, Dont take risks your
body cant cash.
Do not mistake your personal risk tolerance
as appropriate for your organization
usually organizations can afford larger
commitments than individuals.
Set up controls and muster the will to
manage. This means the will to act, to say
stop or faster, back or forward,
when warranted. Its a matter of knowing
when to hold on, knowing when to fold
them, and knowing when to run, and doing
it.
Avoid idle hope, procrastination and,
especially for male managers, avoid the
maze running behavior of laboratory rats
when it feels wrong, it probably is wrong
and likely to get worse!
It means, have an exit plan! Best if you
develop it and its trigger signals before you
commit to a new strategy or enter a new
market!

30. STEP out and get ahead of the completion

that is the objective when things change.
Note that PEST, PETS, N STEPS is not
intended for repetitive, iterative, slavish use, and
the MEMNONIC is not intended for repeated
literal application:

PESTS identifies the core sources or

driving forces of change and so use a wide
lens and initially assess the force one at a
time. Then, assess them two at time, etc..

PETS focuses on ideas held tightly by key

decision makers inside or outside the
corporation (stakeholders), ideas that shape

and constrain behavior, and lead them to

resist organizational change and just
possibly thwart it.

N is to remind us that we do not control the

natural world and that bad things do happen.

STEPS is a signal to step out with a new

or revitalized strategy and shape your own
world. Best if your strategy is not anchored
in an easy tradeoff like cost for quality or
decentralized autonomy for central control.
Easy tradeoffs prevent innovation and it is
innovation particularly faster than the
others can manage -- that ultimately builds
competitive advantage