Risk is a function of the severity of an adverse event times the probability of the event occurring. A lightening strike is often deadly (very severe). Luckily they happen infrequently. However, a third component influences risk. That is the degree to which a risk itself is knowable.

Lightening strikes are easy to know. We can measure the voltage of typical lightening strikes, and they don’t vary much between strikes (all have high amperage). And because we can understand the risk (i.e. the risk severity and occurrence frequency does not vary much) we can develop standard mitigation responses and then follow-up. Lie down when lightening occurs, don’t hold metal objects, stay in your car where the rubber wheels insulate you, are all mitigation responses.

The steps to mitigate risks in this environment are straightforward.

1. Aware of risk
2. Assess risk
3. Scope the mitigation response
4. Implement mitigation
5. Monitor

But what do you do when the risks themselves are highly variable? When there is a great deal of uncertainty about the risk itself. When the risk itself is unknowable.

For example, Apple launched the iPod in 2003 featuring a device that stored and played songs in MP3 format, where they gave away the software to manage it for free, and were planning to sell the songs for $1 through their Apple Store. They did this in a market dominated by large players who owned the rights to popular songs, where their biggest competitor for selling songs was illegal downloading for free, with a technology that had not yet broken through into the mass market.

Here’s a partial list of highly severe adverse events they faced.

1. Could they convince the owners of the songs to sell them rights to distribute the songs?
2. Would anyone buy the songs given they could download them for free?
3. Would anyone buy the iPod?

Any one of these risks coming to pass would cause a catastrophic failure.

That’s what makes this venture so risky. It’s entirely unique. Nothing about what we know about launching new products can help us predict whether this particular venture will succeed or not.

It’s the uncertainty of the risk itself which multiples the risk and makes it so terrifyingly large. It’s the reason why you can buy insurance against lightening strikes on your building, but you can’t buy insurance for the failure of a product launch. The former is knowable, the latter is not.

The key then for managing in this environment is how you deal with the uncertainties. In projects of this type don’t focus on managing timelines.  Instead, focus on managing the uncertaintites around the risks.

Tips

1. Conduct rapid prototyping to learn your way through the uncertainty.  This means you need to keep your idea and business model flexible.  As you learn your way through the uncertainties you will change your business model as you go.
2. Prioritize your uncertainties.  Which ones are at the root of the problem?  Solve the root uncertainties first. Is it access to songs or people buying?  Does one influence the other?

We’ll return to this topic in later posts.

Thanks for visiting http://ennova.ca