While bound to my bed this weekend with a crazy stomach bug, I completed a marathon of The Hunger Games that was airing on TV. In the first movie, Katniss and Peeta, two star-crossed lovers, were fighting for their lives to survive the barbaric game. About half way through the event, they learned the rules of the game had changed and because of their developing romance, the game master would allow two winners. The two fought hand-in-hand to ensure they would walk away alive, victorious, and of course, together. That was, until they were the last two standing and the rules again were changed, this time back to, “there can only be one winner.” If you remember the movie, you will remember that Katniss, in a very Romeo and Juliet manner, pulls out poison berries for them to both eat and ensure that there would be no winner, sticking it to the man.
So what does this have to do with risk management? Metaphorically, situations like this are very common in the business world. We operate with certain assumptions and certain rules. The challenge is, what happens when assumptions change? In a great HBR article, What is a Business Model? the author, Andrea Ovans, stated “…sooner or later, some assumption you have about what’s critical to your company will turn out to be no longer true.” This is exactly what happened in The Hunger Games. So, if you make a decision, but the assumption(s) that decision was based off of is could someday no longer be true, what do we call that? Risk. In the movie, Katniss managed that risk by pocketing some poison berries earlier in the movie when the rules originally changed to allowing two winners. By saving these berries, she was managing her risk of the rules changing again knowing that if they did, she would not want to physically kill her friend Peeta. These berry’s would give them a second way out.
In the business word, Richard Branson has a famous example of how he managed risk which he covers in his book Finding My Virginity. Note: If you don’t want to read the whole book, you can also check out Tim Ferris’ podcast with Richard Branson below, where they also talk about it.
As Tim points out in his podcast, Branson seems to be a master of risk management and mitigation. In the Virgin Airline example, Richard recounts that when he went to his record label’s leadership to pitch the idea of getting into the airline business, they freaked out because of their perceived risk. Branson, however, had some assumptions about the airline business – British Airways needed a competitor to drive customer costs down, people didn’t like being bumped from their seats, and passengers generally wanted a fun experience while flying – but if proven false, these assumptions would undoubtedly cost him millions. So to manage this risk and to get the backing of his leadership, Branson convinced Boeing to write-in a clause in their contract that he could return the plane after a year if the business did not succeed.
The Virgin example is pretty extreme compared to our everyday decision making, but it does illustrate how it can be done. I often think about how people consider risk when working on projects or taking on new business adventures. Over these past holidays, this topic also got brought up when I was catching up with a friend over coffee. We discussed how when making business decisions, it is important to consider the following two questions:
- What assumptions drive the decisions we are making?
- What risks do we need to monitor around these assumptions?
I think these questions are critical because we know we have assumptions and it is good to make it clear what those are. This is especially true when working with a group of people, all of which may have different assumptions. From there, what are the risks that could alter those assumptions that need to be tracked. It is important to track these risks and assumptions because it is critical to not let those changes to your assumptions sneak up on you. This is especially true as technology continues to drastically change every industry in our economy.
Another famous example, in this case of a company not managing risks and business assumptions appropriately, is the Kodak company. Kodak, known for their film cameras, was actually one of the first company’s to develop a digital camera. However, Kodak had some inherent business assumptions that impeded their ability to see the changing market from film to digital. It goes without saying that Kodak is no longer a household name when it comes to current cameras. Virgin Airlines, on the other hand, has expanded throughout the world and has greatly impacted the airline industry.
So when you are working on your next project, no matter how big or small, consider the assumptions you are using as the basis for your decisions and what risks you need to manage around those assumptions to ensure your business remains successful.
Related: When Decision Making Rules are Wrong