Managing risk: you can take risks or shape them. Adrian Slywotzky thinks that the former choice tends to lead to failure while the latter increases odds for project success. Here's why.

The accepted wisdom nowadays seems to be "no risk, no reward," which doesn't exactly square with the risk aversion that seems so characteristic of the auto industry in general. Still, during program initiation, observes Adrian J. Slywotzky, director with corporate consultancy Oliver Wyman (www.oliverwyman.com) and author of numerous books including the recent The Upside: The 7 Strategies for Turning Big Threats Into Growth Breakthroughs (Crown Business; www.crownbusiness.com), "People say when you're trying to do a new project--a new product a new process, a new business--that you've got to take risks to get high rewards. Implicit in that is that you have to take your chances--that it is a little like a lottery--and that if you don't take your chances, you're not going to get the big win." While he doesn't deny that there is risk involved in new undertakings, he thinks that all too often people look at things incorrectly (and not only in the context that, as Nobel economist Daniel Kahneman determined, people have a tendency to vastly overestimate their chances of success). Slywotzky counsels that rather than starting out with "We've got to take a risk," there should be a more focused approach, one essentially predicated on the answers to two questions:

* What are the odds of success?

* What things can I do to change the odds of success?

The difference is between being a "risk taker" and being a "risk shaper." He points to two products that, in retrospect, seem to be proverbial slam-dunks but started out as having not particularly good odds: "Less than 5% for the Prius and less than 10% for the iPod." Various moves were taken by Toyota and Apple in the products' developments (e.g., Toyota focused internal attention on the "G21" project, involved manufacturing personnel early on, considered 80 different hybrid types, and more; Apple cut a deal with Toshiba on 1.8-in. disk drives, licensed technology from a company called PortalPlayer, created a sleek, innovative design and interface, and more).

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But this leads to a third question. Once you have started changing the odds of success based on the product:

* What is the right business model to take this product to market?

(It should be mentioned, of course, that if the odds can't be raised sufficiently, then walking away is probably the right choice.)

The Business Model. Slywotzky states that there is generally an insufficient amount of attention paid to the business model: "When you study the natural history of product failures, it shows that we spend about 98% of our time getting the product right and there's nothing left over to ask the question about the business model for the product." He posits that getting the product right can get you to about 50%, but that getting the right business model--which involves answering another set of questions, including:

* Who is the customer?

* What's the unique value proposition?

* What's the profit model?

* What's the source of strategic control?

--can drive the odds of success up to about 80% to 90%. Speaking of the auto industry, he says, "You have so many great cars: the product was good, the technology was good, but the business model wasn't right to create economic value out of it." Which means, in effect, discounting and inventories collecting dust at far-flung car parks.

Slywotzky points out that information about previous programs exist within organizations and suggests that that data be used for new programs so as to get a better handle on what worked, what didn't, and what it cost. Even though it may be information from a program that was fundamentally a financial failure, he believes that it is valuable if used as input for the next development process.

Over-investment? One of the recommendations that he makes in The Upside is for people to avoid under-investing in new projects. Given the prevailing financial situation in automotive, over-investing is, perhaps, unthinkable. "If you're not prepared to over invest," Slywotzky says when this state of affairs is pointed out to him, "don't do it." That's right: He thinks that over-investment is something that you have to start with. "How do we square that with economic reality?" he posits, rhetorically. "Three points."

1. "People do too many projects and they under invest in all of them. They have a very low success rate." Pare down the number of projects.

2. "If you have fewer projects, much more customer data and customer input, and if you start working on the business model in parallel with the product itself, you can dramatically change the odds of success." In other words, this focus can get you ahead of the curve.

3. "Many of the projects that you are spending money on is duplicative of what seven competitors of yours are spending--unnecessarily. This is an industry that cannot afford to have eight independent hybrid development efforts." Slywotzky is a big proponent of collaboration.

The Collaborative Imperative. Few examples notwithstanding--GM and Toyota at NUMMI; DaimlerChrysler, Hyundai, and Mitsubishi at GEMA; the GM/DaimlerChrysler/BMW collaboration on the two-mode hybrid; the Ford-GM six-speed transmission development--collaboration in the auto industry still remains the exception rather than the rule. Slywotzky says, "I would look beyond the auto industry to an industry that's even tougher: consumer electronics. There, death-rivals like Sony and Samsung have entered into a massive technology cross-licensing agreement because they understand that in that industry, with its development rate and with its margins, if you try to do everything or too many things yourself, the economics just aren't there." While acknowledging that auto is an industry "where old habits die hard," he thinks that when it comes to collaboration, those habits ought to give way sooner rather than later: "It's a race between changing the thinking versus slipping deeper into a set of financial challenges that will only get worse."

Now, not all companies in automotive are hanging their heads. Some are doing exceedingly well. Which is unalloyed good news, right? Think again. In The Upside he writes, "strategic risk is highest when your success is greatest. That's precisely the point where you are least able to see the risk and least inclined to do anything about it." When asked about this, he ticks off a number of companies that were, at least at one point in time, on a roll-think of Ford in the early to mid 1990s, for example. Or Motorola in '97 or Sony in '98. Winners all. "You get on a roll. You have tremendous moments. Often, you're gaining market share. Your people are incredibility busy, dealing with volume increases." That's one point. The second point: "It is inconceivable that people could beat up your brand." He points out that in 2001, Wal-Mart was seemingly indomitable. And then came Target.

"It is very difficult in terms of time available and psychology to say, 'Time out. There's a very good likelihood'--and, in fact, the number is 40%--'that our brand will be significantly eroded in the next three years.' It is very hard for people to take that conversation seriously," Slywotsky says. He advises that it is very important for organizations to have a system in place--not just an individual whose job it is to anticipate bad things, as that person will be invariably discounted--that will anticipate and track the potential causes and factors that can lead to a decline. "Those risks seen late and reacted to become a killer. Seen early and managed proactively they become the next big growth opportunity. Imagine Sony with iPod. Imagine Motorola with a cool customer brand. Imagine Ford having Toyota's position in hybrids."

Gary S. Vasilash

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by Gary S. Vasilash

EDITOR-IN-CHIEF

RELATED ARTICLE: The Seven Risks of Business

In The Upside, Adrian Slywotsky identifies seven major risks that businesses face (and provides the strategies that can address them):

1. Project risk. The big initiative fails. (Know the odds beforehand and shape them.)

2. Customer risk. As in they leave. (Have intensive customer data--more than your competitors.)

3. Transmission risk. The industry reaches a fork in the road. (Double-bet. For example, Microsoft bet on Internet Explorer while continuing to fund Windows development. So it was able to follow the move to the Internet without giving up on profitable business.)

4. Unique competitor risk. A seemingly dominant competitor arrives. (Play a different game, don't try to best the competitor at its own game.)

5. Brand risk. According to the book, "40 percent of leading brands experienced significant value erosion in the past five years." (Bolstering one's business design can be beneficial here.)

6. Industry risk. Some industries become what Slywotsky calls "no-profit zones." (One way to counter is for companies to collaborate, thereby being able to generate profits on what matters most to customers.)

7. Stagnation risk. A company stops growing. (Create new forms of customer demand.)

You can learn more about Slywotsky's most recent book here: http://www.oliverwyman.com/ow/3193.htm