Factor 9: Tolerance for Risk

This factor concerns tolerance for risk in the planning process.

Factor extremes as measured in survey

Management has a low tolerance for uncertainty (as distinct from risk)


Management has a high tolerance for uncertainty (as distinct from risk)

Overview to restructuring initiatives

In an ever changing world, uncertainty (defined here as not having sure knowledge) cannot be entirely eliminated but it can be anticipated and effectively managed. Risk in the planning process refers to the degree of uncertainty associated with the predictability of business plans, assumptions and profit projections. One can take steps to minimize risk (or uncertainty in the planning process) by conducting extensive market research, carrying out employee attitude surveys, experiments to prove idea acceptance, etc. but in many cases such actions are simply too costly or the chances of new information actually reducing risk is minimal. In these cases judgments must be made to move ahead without full knowledge. Seeking additional information can also be seen as a delaying tactic for senior managers unwilling to take a chance. Betting the farm may not suit most senior managers. Each organization gains a reputation for dealing with uncertainty through the actions it takes and therein sets the culture.

Other research results which confirm tolerance as most important to innovativeness

The Boston Consulting Group, in their report entitled Innovation 2007, point out the importance of having a risk-averse corporate culture. This was identified as the single most important factor impeding a companies’ ability to maximize their return on innovation spending. The authors of the report point out that a leader must have the ability to encourage risk taking in the face of structures and metrics that are put in place by many corporations to mitigate risk. A balance needs to be struck and that is very much up to leadership.

Possible Initiatives to Modify and Improve the Culture for Innovation

Make transparent the risk associated with introducing a new idea

You cannot fool people all the time. Senior management in innovative companies at once want to impart a sense of direction in an uncertain world but at the same time should take pains to openly address the uncertainty associated with a new initiative and, how, should the future not unfold as predicted, how the corporation is prepared to react or manage the then realized risk. A fall back position is required.

Are risk and innovation exclusive or complimentary

Innovation involves risk, but the opposite is also true. If one does not innovate, there is every likelihood of experiencing a gradual decline in the business ending up in total failure. The choice is clear; one has to choose the level of risk that is appropriate given the dynamics associated with the business and the industry segment that is served. In some industries the pace of change is so slow that one could adopt a policy of not being a leader but rather being a follower and such a policy would work. In other faster paced industries, such a policy would lead to an immediate drop in market share and eventual extinction.

Measure risk in the planning process

Try using a multi-dimensional approach to measuring risk in the planning process and be circumspect in so doing. When considering a new idea look such factors as; managements’ current competence, the company’s competitive position, is the idea likely to be a small leap or a total restructuring, is the industry volatile or predictable in terms of its reaction to the new idea, how realistic are the assumptions about the future, and most importantly, has management demonstrated it’s capability to undertake similar new initiatives. Only when the new initiative crosses a threshold when considered in this multi-dimensional way, should it be considered for integration into the planning process. The risks are assessed and known and to this extent the uncertainty has been delineated and minimized. Surprises are therefore limited.