Traditionally business risk management has been used to reduce and better understand the likelihood and uncertainty various ‘events’ can have on businesses achieving their objectives e.g. financial uncertainty, legal liabilities, strategic management decisions, cyber threats, accidents, natural disasters and business continuity etc. Increasingly, however, business risk methods are being incorporated into new start-up sciences, business design and prototype testing for new ideas, products and services well before firms go to market. Application of these risk based start-up sciences is also a key strategy to help new start-ups attract potential investors by minimising investor risk.
The global business environment is being driven by new digital technologies and disruption. This includes 3D printing, quantum computing, blockchain, artificial intelligence and new platform economics led by Facebook, Google, Uber, and Alibaba etc. (see Klaus Schwab, 2016, The Fourth Industrial Revolution). It continues to be a problem, however, that a lot of entrepreneurs and start-ups fail because they do not clearly understand the ‘risks’ associated with their business proposition from the start. In this context they waste time, money, resources and effort building the wrong product or service for the wrong market at the wrong time.
Risk mitigation and systematically de-risking
So increasingly building a successful product and business is essentially about risk mitigation and systematically de-risking your business model overtime by identifying and testing the problem your product or service is attempting to solve. Applying more rigorous start-up scientist helps reduce the ‘risk ‘of business failure. The approach requires you to develop a feasible solution and prototypes and to try out on consumers to give feedback before launching the final product to the market. Start-up sciences include Design Thinking, Lean Canvas and Innovator’s Method etc. to reduce risks and manage uncertainty across the key end-to-end start-up design process.
For example, in 2012, Ash Maurya redesigned Osterwalder’s earlier Business Model Canvas to develop his Lean Canvas idea. The Business Model Canvas provided a template describing nine essential elements of an existing business: customer segments, value propositions, channels, customer relationships, revenue streams, resources, activities, partnerships, and costs. Maurya’s Lean Canvas is a one-page business modelling tool that helps increase the probability of success by starting with the customer and using information or data derived from business-model hypotheses to lower risk and reduce uncertainty.
National Innovation Forum
At the La Trobe Business School/NORTH Link National Innovation Forum held in September 2017 a number of business leaders, consulting firms and academics came together to discuss Australia’s innovation system and how to increase innovation particularly for start-ups and SMEs. Several of the presentations chose to focus on the use of start-up science as a means to reduce business risk and manage business uncertainty.
For example, Antonio Palanca, CEO and Co-Founder of the HiveXchange presented a case study on his business, which has created a new form of business-to-business e-commerce called trust-based e-commerce, which is designed specifically to meet the challenges in perishable produce supply chains. Palanca described the company’s journey and how the use of Lean Canvas methodology shaped field experiments and prototypes to reveal problems early that became the foundation of HiveXchange’s trust based e-commerce software. Palanca explained that the benefit of this approach was that as you go through the stages you reduce risk and therefore become more attractive to investors and you can drive more commercial innovation on a global scale.
Similarly, Christine Axton, Director in Monitor Deloitte’s strategy practice, presented a short overview the innovator’s method and illustrated its application in a case study. Based on the work of Nathan Furr and Jeff Dyer (2014) the innovator’s method is designed to help firms to specifically manage uncertainty in the innovation process. The innovator’s method offers a set of tools and methods to consider and test uncertainty at each of the end-to-end innovation process steps.
Several other presenters at the Forum referenced Eric Ries’ book The Lean Start-up: Creating Growth through Innovation, as a major influence on their business or teaching practice. The thrust of Ries’ book is that start-ups tend to be much higher-risk endeavours than they need to be because they build elaborate products before testing them with consumers. Applying Ries’ build, measure lean-loop, allows firms to reduce waste, optimise production processes and find out what their customers really want before they go to market.
What the above illustrates is that the traditional application of business risk methods and tools are changing. The future of business risk management is no longer just seen as a method to identify, assess and control threats to an existing firm’s systems, people, capital and earnings. It is increasingly used as a key part of the start-up science that is nurturing a new generation of start-up businesses and de-risk businesses overtime.
This Blog is written by Dr Mark Cloney and originally published in Risk Management Institute of Australasia (RMIA), The Risk Magazine, No.3, March 2018, p.20. Read the full magazine here. Mark is Professor of Practice in Economics at the LBS. Prior to joining La Trobe University, Mark was the senior executive officer responsible for enterprises’ risk management, business planning, audit and protective security in the Commonwealth Department of Agriculture and Water. Mark teaches in the economics discipline and risk management practice.