... we are supposed to be taking risks. So, we don't think of risk management as trying to minimize risk. That's actually the way to prevent creativity. Rather, is to do risky things and then when they go in some unpredictable path, to be able to respond to it.
Says Ed Catmull when he explains how Pixar fosters collective creativity. Ed Catmull is the co-founder and president of Pixar and the president of Disney Animation.
This modern and progressive perceptive of risk management is in contrast with its traditional perspective which looks at risk as an unavoidable and costly evil. This contrast reminds me of how our perceptive of supply chain management has evolved during the twentieth century.
Originally, manufacturers and retailers looked at inventories and shipments as nothing but a source of cost. This was the dominant mindset when most producers served local markets and mass production was not a common practice. As producers found out how they could benefit from the economies of scale by mass production of a product and serving multiple geographical markets, they eventually started to realize that they could minimize handling, inventory, and transportation costs by using techniques from the newly born discipline called logistics, a discipline which eventually evolved to supply chain management..
It wasn't, however, until more than two decades ago when pioneers like Wal-Mart started to view their supply chain management not as a cost minimizing tool but as their core competencies.
.
A similar evolutionary change of perspective is happening to risk management. That is, traditionally, companies used to look at risks in their operations as only an extra source of cost (many companies still have this perspective). Now, we can see a trend in which companies look at risk as something that can be managed to reduce the cost of unexpected consequences. There are very few companies, however, who are trying to use their abilities to manage risks as a source of competitive advantage.
Although looking at risk management from a strategic point of view is not new in insurance and financial companies, this perspective is not common in other industries. Nevertheless, one can find examples of how risk approaches of exceptional companies have served them as a source of competitive advantage, even if it wasn't their original intention.
.
A good example is the famous case of Nokia vs. Ericsson, two major cellphone manufacturers at the beginning of the new millennium. When their shared supplier, Royal Philips Electronics, disrupted by a fire on March 17, 2000, the different approaches of these two companies toward the same realized risk resulted in two very different outcomes. The incident pushed Ericsson to the verge of bankruptcy and finally it was merged into Sony, and hence the Sony-Ericsson brand. On the other hand, proper response of Nokia to this realized risk not only did not hurt the company, but also resulted in an increase in Nokia's market share.
Now, the question is how risk management could possibly be turned into a competitive advantage. A company can turn its capability of properly managing risks, especially disruptive risks, into a competitive advantage in three different ways:
- Disasters hit everybody. Those who can avoid the disasters better or recover faster than the others are winners of the market.
There are higher potential profits in riskier venues. When you can handle risks better than your competitors, you can enter riskier ventures with higher potential profits (the more valuable treasures can be found in more dangerous waters).
A company with high capability of dealing with disruptive risks is more agile, has more decisive managers and empowered employees, communicates well, both internally and externally, and has more streamlined processes. Such a company can compete more effectively and in a more sustainable way.
Of course, this list might not be limited to the three mentioned items. One might come up with new ideas on how to use the risk management in a strategic way. It could also be the case that we find a company who has already adopted other practices which let the company compete more effectively based on the way it manages the risk.
We should, however, keep in mind that before we can use our risk management capabilities as a competitive advantage, we need to acquire such capabilities. That, I believe, is a greater challenge.
