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Balancing risk to manage your exposure

By Professor Stuart Read

Professor Stuart Read

Professor Stuart Read

As a manager or entrepreneur in a technology firm, take a moment to think about your challenges and risks in a systematic way.

Be specific about the risks you face
Software companies and biotech companies are both in the same business – bringing new, highly speculative technologies to market. Though the products are different, the problems - and therefore the risks - may seem the same. But at the core there is an important difference. These days, given enough people, money, and computer hardware, a software company can make software do almost anything in about 18 months. The risk is not whether the company can build the product, but whether the company can sell the product, as failed firms such as remind us. We term this exogenous risk, because it exists outside bounds of the company. Contrast this with the risk faced by a biotech company. There is no doubt people have health needs and will be overjoyed to pay for a solution. The risk exists endogenously, or inside the firm. Can the scientists create technology to solve the known market need? The list of uncured illness ranges from AIDS to Wolman Disease, with new additions outstripping cures. You may say fine – and this distinction is intuitive if not obvious – so how does it help me?

Risk is at the root of many strategic dilemmas Though not all firms are in positions as clear with regard to exogenous and endogenous risk as software and biotechnology companies, chances are in your environment, one type of risk predominates. And because it’s at the core of many of the problems you face, you might get that feeling of “deja-vu” with respect to the problems you see every day.

Gain traction by breaking recurring patterns
One way to manage risk is to better balance it. One reason you may feel you can’t get traction on those same problems that crop up again and again is that your risk portfolio is imbalanced. Let’s provide an example. For the biotech company, the risk is largely endogenous. But the firm can trade some of that risk for exogenous risk. In practice this might take the form of partnerships with outside entities to share in the product development effort and product development risk. Of course to persuade an external firm to share in the risk and work cooperatively, they would have to share in the reward as well. Alternatively, the software company might consider converting some of its exogenous risk into endogenous risk. To a certain degree this is accomplished by hiring seasoned marketing and sales people.

Bringing balance
But partnership can play a role here too.
If the software firm is successful at persuading prospective customers to invest in the firm, it has brought some balance to the risk, bringing some of the exogenous risk inside the company. In both cases, the practice of balancing risk between exogenous and endogenous risk enables both types of firms to bring more resources to bear on the most significant exposure areas and improve chances of success.

Putting it to work in your own context
As an exercise, try listing the top 10 areas of risk you face in managing technology in your business. Categorize them as exogenous or endogenous. The chances are high that you will find one type or the other accounts for the vast majority. From there, think about ways, particularly involving partners, you might trade in some of the risk type you are heavy on, for the type you are light on. And if you find you have no risk – start again. There is no such thing.

Professor Stuart Read teaches in the Building on Talent and the Business Marketing programs.

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