Is there a way of conceptually positioning ourselves so we understand the nature of uncertainties and risks (U&R) we are exposing ourselves to? I believe we can do so.
I use the common notions of U&R:
- Risks are when we understand the events, their consequences when they occur and the likelihood of their occurrence
- Uncertainties subset A: when we can envisage or foresee the event but we are limited in our capacity to sufficiently understand the nature of likelihood (sometimes call these Grey Swans)
- Uncertainties subset B: where we are oblivious to the events themselves (black Swans)
Many events occur that lead to U&R circumstances. many are irrelevant to us as they do not have any material effect on our lives (perhaps others lives, but not ours [or those we care about]).
So we have a clue that how we are positioned is instrumental to what U&R we are potentially exposed to. Hence, decisions on positioning are important. Positioning can take us into three types of choices:
- What we choose to do (play/not play)
- How we choose to play (where we choose to play)
- How we choose to not play.
Choice 1: If we choose to do something, we are exposing ourselves to everything that can go awry that is possible with that choice.
Choice 3: If we even choose to not do something, how we distance ourselves from others choosing to do these things cans leave us tangentially or peripherally exposed to some of those U&R. For example, if allow ourselves to be a non-particpant near a war zone (i.e, some form of spectator role) then we are still exposing ourselves to the consequences of those engaging in the activity. So non participation by itself may not be enough to remove ourselves certain types of event(s) U&R.
Choice 2: Okay we choose to participate, but how we participate has an impact on our U&R exposure. a sports example can help us here. We play hockey, but depending upon the position we play and the league we play in, we will be more or less exposed to the likelihood of certain injuries.
For purposes of this post we will explore the U&R positioning choices inherent in Chice 2 above. Furthermore, we will consider this choice through fundamental organizational options.
Organizations make fundamental choices regarding how they will operate and these include at least the following three:
- Centralize/consolidation: where we literally put all our eggs in one basket. This is the administrative/bureaucratic preferred option as it enables the standardization of operation which can provide the benefits of consistency, reliability and efficiency.
- Decentralize/distribution: where we breakdown our operations into smaller units and we spread them around in space and time. Regionalization type schemes exemplify this choice. There is still standardization around the distributed elements. Customer centric perspectives are drawn to this type of choice as it provides the benefits of timely service and the shaping of that service to meet local idiosyncrasies.
- Modularization/fragmentation: where we choose to loose confederations of operation. Here we are concerned about not putting our eggs in one basket and not locking in ourselves into any one means of operation. The desired benefits are being able to quickly and effectively (less about efficiently) mobilize and demobilize. Examples of this are the movie and building development businesses where organizations are formed around the projects themselves.
What is interesting is how each choice creates more or less exposure to certain types of U&R.
- Centralize: clearly exposed to knockout type U&R events. The “too big to fail” experiences are situations where this choice has been made.
- Decentralize: clearly exposed to rigidities in infrastructure investments. Note these investments even include stakeholder expectations about “presence” so a decision to vacate a non-profitable location can be fraught with adverse customer relationships elsewhere.
- Modularize: clearly exposed to vagaries in immediate “supply pinches” U&R events. Because these projects are often under specific time, cost and deliverable expectations any thing that interferes with the orderly and timely formation of necessary inputs can devastating. Many building projects have “sunk” because of a skilled labour shortages (real and contrived).
Being clear about the U&R implications from choice on on how we implement our strategies can be very helpful in several ways:
- Given our local (time and place) circumstances we may determine that some U&R events are more likely to occur. This is true even in situations (grey swan) where we do not know likelihood, but we have a sufficient grasp of cause and effect factors to make the reasonable judgement that the situation is more/less likely.
- Our expertise may be such that we are more capable of responding to certain U&R events better than others. So we can choose an operational model that is better matched to our U&R response capabilities.
- Some U&R events are more troublesome to our business in that they have disproportionate secondary and tertiary consequences that far outweigh the direct consequences. Examples may be impacts on reputation of: providing inconsistent credit extension policies; being in sensitive to local conditions, securing limited liability but leaving customers “high and dry” from a failed project, etc.
So choice of how will operate usefully considers the attendant relative U&R exposures and our willingness to have to deal with them if they occur.
No choice is U&R free. But we do have choice to stand behind the U&R consequences of the choices we make.