Why Risk and Growth Are Inseparable

Last night while watching the latest Alvin and the Chipmunks movie with my kids, something interesting happened: when asked if he was happy with Dave (the chipmunk’s “dad”) legally adopting him, Simon — the nerdy chipmunk — said “1,000%, and that’s not even a real number!” My kids then argued about whether 1,000% is actually a number or not.

Anyone that has kids or used to be one knows how easy it is for children to argue about anything and everything, especially if it’s with a sibling. I am getting better at tuning arguments out if and until things get physical; but, the topic of this argument specifically caught my attention for the following reason: Simon was only thinking in terms of proportion.

Of course, the sum of the parts should not be greater than the whole, but the whole can GROW by more than 100%. Not only can something grow by 1,000%, but in some cases the upper limits to growth are nearly non-existent. For example, over the last 10 years Amazon has grown Sales by 1,170% and Operating Cash Flow by 2,240%. As usual, my train of thought left the tracks, and that’s about all I remember about that movie. But, the circumstances led me to think about business-growth — why it is so sought-after, so rarely found, and even more rarely sustained.

One of the ways that my firm works with business owners is to help them think through and execute business growth. In these cases, we usually become involved when a business has demonstrated its viability, but needs help figuring out how to move forward. Many times, our work becomes less about market studies and profitability analysis and more about taking a step or two back and asking a few questions, like:

1) Growth in… what? Usually, the first thought is Revenue. But, revenue growth alone can potentially cause significant problems. Does your business have the resources in-place or identified to operationally handle growth at the level you will target?

2) Why grow? Which stakeholders (you included) are interested in growth? Is it customers that demand more than your business can supply? Is it employees that want something to get behind and grow with? Is it vendors/suppliers that rely on customers like you for their own growth? Is it shareholders that want a bigger piece of pie? Is it all of these and more, and how do you as a business owner fit into the discussion?

3) How much will growth cost? The common saying is “growth gobbles cash.” Will you need outside capital for the growth hopper? If so, how much and what is the best choice out of limited potential sources? In addition to capital, growth will take time, fortitude, and a willingness to be wrong coupled with the ability to learn quickly.

Your understanding and definition of risk should play a huge part in answering questions like those. But, what is risk and how does it impact decisions? Risk can be looked at as uncertainty, or the breadth of potential outcomes that differ from your expectation. Being honest with oneself about the possibility of bad outcomes and thinking through the resulting challenges can help owners prepare to lessen those negative impacts. As important, but often overlooked, is the risk that your business grows significantly faster than you had planned.

There are a couple characteristics of risks as they pertain to growth that are less well understood, but very important:

1) The decision to take risk and the realization of it are usually not contemporaneous. The disconnect between behavior and feedback can make it easier to dig a metaphorical hole without fully appreciating how hard it will be to climb back out. Similarly, you can choose whether or not to take many risks, but once you’ve decided you are married to the outcome.

2) Not all sources of risk are the same. Sources of risk vary in important ways, such as the extent to which they can be identified, measured, prevented, managed, etc. Think of the answer to this as a corollary to the Serenity Prayer: “God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.” For business owners, this translates to identifying your business’s exposure to various risks, and focusing on pragmatic change, which leads to the third point…

3) Worrying is not a good management technique. For example, you can’t control whether the economy sinks into a recession, but you can prepare your company to withstand one. As another example, you have little control over the future of your largest customer, but you can impact how much they can influence the health and stability of your business by growing your customer-base.

When has taking risk to grow worked?: Growth-motivated risk-taking worked out for Apple when it shifted focus and resources away from PC’s; first to the iPod and then to the iPhone and iPad. Since Steve Jobs’ death there hasn’t been much if any massive-change producing innovation out of Apple, but the company continues to benefit from strategic moves it began making long ago.

When has taking risk to grow failed?: Blackberry took a risk by locking in its focus on business-users instead of pursuing wider use by consumers heading into the smartphone revolution. Efforts to right the ship and change direction have been largely unsuccessful.

Both stories share a critical characteristic: They could have easily gone the other way, if a few key variables had changed. That said, one of those key variables was the competence of the management team for each company. There are good lessons to be learned with a deeper look into how the management at each company has handled major challenges resulting from more hidden and nuanced risks and opportunities than the broader strategic risks highlighted above.

In retrospect, growth-oriented actions taken by even the best managers will either look like the result of good judgement and hard work if they result in growth, or horrible decisions and bad luck if they don’t work. The tendency to ignore the uncertainty of a situation after an outcome is known does not change the fact that the uncertainty existed, but somehow most of us manage to forget. The most successful businesses know that risk is inseparable from growth. In pursuit of growth, they choose to take measured risks and prepare to deal with challenging circumstances rather than pretend that negative outcomes are impossible until they happen.