How does our inherent risk taking behaviour influence how we take risk in business to pursue high growth
Risk taking behaviour in pursuit of high growth is a topic well explored by entrepreneurs in all industries.
Research has shown that 55% of business start-ups fail within 5 years and a staggering 71% fail after 10 years. Lets go even further down the line. Recently, UK’s high streets have seen a litany of failed businesses. A few high profile examples include Comet, Jessops, Blockbuster and Barrats. Failure doesnt stop there. Global Giants are not immune to failure. Lehman Brothers is the best example.
According to a Harvard Business Review study:
- Its human nature to over estimate their ability to influence events (that are determined by chance)
- Be overconfident about the accuracy of our forecasts and risk assessment
- Be far too narrow in our assessment of the range of outcomes possible.
We also have what they call a Human Bias: We anchor our estimates on readily available information. We extrapolate the past to a highly uncertain future.
Our Confirmation Bias drives us to favour information that supports our position (typically success) and supress information contradicting them (typically failures).
Now at an organisational level, collectively, individual human biases forms an organisational bias which inhibits members of the organisation from openly discussing risk and failure. Groupthink is prevalent especially where the leader(s) is overbearing and/or over confident.
This was confirmed by the Association of Certified Chartered Accountants in a survey of their members, which found the following causes of strategic organisational failures:
- Underestimate risk (68%)
- Overestimate ability to predict and control risks (59%)
- Decisions are biased by personal interest (41%)
- Over estimate rewards (23%)
(bear in mind that respndents could choose more than one category).
This is interesting and goes to the heart of the notion that risk management is all about human behaviour. Looking at recent case studies, Fred Goodwin overestimated the risk of acquiring ABN Amro. Dick Fuld of Lehmans, underestimated the risks prevelant in the mortgage securities market. Both Fred and Dick were overbearing, over confident and enshrined a Groupthink culture, as no one could apparently challenge either.
This research certainly goes some way to explaining the crisis and why some executives still don’t take risk management as seriously as strategy and revenue growth, unless of course the regulators tell them to do so.
If high growth SMEs could embed this awareness into every aspect of this business, and challenge themselves when making decisions, I believe we will see an improvement in the number of businesses actually surviving after 5 and 10 years. These businesses would be building resiience in their business, developing the ability to bounce back even stronger when adversity strike, rather than breaking even when just a mild wind blows.
Indeed, one can argue that an organisation’s approach to how they deal with adversity and uncertainty, will eventually prepare them to embrace more risk in return for greater and faster profits. The question is though, do high growth SMEs take risk management seriously? Do they do it as part of day-to-day business (unconsciously) or do they actually have a systematci framework for identifying, assessing, controlling and monitoring risks?
Leave your comments below, or if you wish to explore this topic further, get in touch by emailing enquiries @vedanvi.com. If you think you are a fast growing SME, we would love to get your views.
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