Number of words: 630
The greater the risk, the smaller the case for the project. Risk-taking holds its pride of place among the managerial virtues for reasons deep in managerial psychology, for managers need no urging to take chances. The most purblind old buffer in the boardroom will cheerfully approve ventures of total insecurity. The monstrous chances which managers take with other people’s money are often unwitting, but they are still risks. And managers who take great risks, whatever folklore says, are as dangerous to a company as a crooked accountant.
The great and fabled business empires, with hardly an exception, were built, not by outlandish risks, but on Irresistible ideas of elemental simplicity. This is not just hindsight. From the Model T and the chain stores to semi- conductors and instant photographs, the great entrepreneurs have taken available methods and married them to burning market needs. From the moment when a peddler named Michael Marks decided to sell every object on his stall under one slogan – ‘Don’t ask the price, it’s a penny – the main lines of development of the Marks & Spencer store-chain were fixed: simplicity (the price limited the merchandise), control over suppliers (if you wanted to sell everything for a penny, you had to buy everything for under a penny), value for money and a uniform trading policy. Risk hardly came into the idea.
A marvellous, risk-free whim, like Henry Ford’s mass production to serve a mass market, can survive grotesque mismanagement. Ford lost $ 8.5 million in the 1930s as Henry I bungled the challenge of Chevrolet, fell into the toils of the gangsterish Harry Bennett and tortured his son, Edsel. He still died richer than Croesus – because sales went on proving, in their millions, that it takes a genius even more perverse than Ford’s to ruin the commercial career of a great idea.
Terrible disasters (like the Edsel car put out by Henry’s grandson) likewise result from gross and elementary errors of concept – not from marginal mistakes in abstruse calculations like discounted cash flow. Yet intelligent men plump for one project rather than another on the strength of a difference of a few decimal points in the rate of return calculated over the next decade. All such mind-stretching calculation comes under the lash of the Seventh Truth of Management: If you need sophisticated calculations to justify an action, it is probably wrong (the sophisticated calculations, anyway, are all too often based on simple false assumptions). A rider to this is, shun any project which, if all goes according to plan, will just earn its keep. In real life, hardly anything follows the script. What sensible managers seek is the project whose margins are so large that, if it actually works out, they can all retire to the Bahamas.
Most businesses meet only three classes of major investment decisions – the inevitable; the optional; and the make-or-break. Only the last involves risk in the classic sense. The first category includes embarrassments like new steel, paper or cement works. Nobody interested in profits would build these expensive encumbrances today: but failure to expand in step with the competition guarantees slow atrophy in a business to which (because of its deadly concentration of fixed assets) the company is bound in perpetuity.
Factory extensions, modernisation of machinery, even important product changes are usually fixed by market forces, not by managerial choice. The risk here is to do nothing like Gillette when first confronted with the Wilkinson blade – or to do the inevitable at ruinous cost and delay at which British steel-makers have proved adept. Gillette’s forlorn hope that the stainless steel blade would rust away was only matched by the resolute conviction of Detroit car-maker imports
Excerpted from pages 147-148 of ‘The Naked Manager by Robert Heller