Posts Tagged ‘trust’

Risks and innovation

January 19, 2014

In 1979, Daniel Kahneman and Amos Tversky won the Nobel Prize for Economics for their “Prospect Theory: An Analysis of Decision under Risk”.

This theory shows that we prefer certainty to taking a risk. We see this on auction sites where the “Buy It Now” price is often much higher than the price of similar items sold by auctions. The BIN price may influence the bidding but it is for those of us who are willing to pay more for certainty.

Stable, well-established organizations tend to be risk averse. They place great value on their stability and choose continual improvement instead of innovating. Indeed, most organizations with process-based management systems continually improve their goods, services and processes. Some also go beyond development to design something entirely new.

Sustainable organizations do both; they continually improve and they innovate to find new ways of fulfilling their missions.

Successfully managing risk implies formal largely predicable processes. Being innovative tells us that selected team members interact in an informal free-thinking “sandbox” of collaborative effort. How do process-based organizational management systems help their leaders to manage innovation and the risks inherent to innovation?

First, let us never forget that effective process-based management systems deliver a valuable resource: time. By preventing problems, the management system substantially reduces time wasted on firefighting. The organization has time to innovate. Secondly, remember the leaders who serve to lead. Such leaders remove causes of fear from their systems. Their words and actions earn trust by selflessly taking responsibility for helping employees to understand and fulfill stakeholder needs. In this supportive environment, noble causes can stimulate innovation to find new ways of creating successful stakeholders.

The leader challenges and authorizes the special innovation team that comprises accomplished problem solvers. Unlike capable processes, innovating requires the leader’s patience and to expect to “fail” many times. Of course, knowing what does not work is not really a failure. And so-called failures may be successful in completely unexpected ways. Think Post It Note®.

Innovative teams comprise a mixture of different types of people with a wide variety of talents. Instead of endlessly talking, the team creates prototypes as soon as possible. Prototyping a new service may require a focus group. The team allows for the fact that focus groups usually comprise people who favor certainty. The prototype must impart value by solving a costly problem.

A shared understanding of the costly problem is a vital input to innovating. In bringing the innovation to market (internally or externally), successful organizations decide which innovations yield the greatest benefit to stakeholders. They determine which innovations have the greatest chance of success. The latter stages of innovating show that innovating is a process that really is design rather than development. It is a process that includes such risk assessment techniques as SMEA (Success Modes and Effects Analysis) and FMEA (Failure Modes and Effects Analysis) before verifying and then validating the design.

Of course, risk has an upside. Nevertheless, risk managers tend to manage risk to avoid loss instead of managing risk to add value. Prospect Theory can help them to understand this. By fully appreciating risk, we recognize and manage both the downside and the upside of our decisions including our decisions to innovate.

In responding to a recognized adverse risk or threat, we use our management system to avoid, accept, transfer and mitigate aspects of the threat. Similarly, we respond to a recognized positive risk or opportunity by using our management system to share, enhance, accept and realize the opportunity.

Knowing Kahneman and Tversky’s Prospect Theory, we can dissolve the fear that would otherwise stop us from making difficult investment decisions. Organizations can enjoy the thrill and rewards of innovation by recognizing the value of taking positive risks that are essential for sustainable organizations to create even more successful stakeholders.

Playing our part in value networks

December 22, 2012

Stakeholders may dream of having their requirements satisfied by the organizations that affect them. Some politicians and NGOs say the stakeholders have the right to have their requirements fulfilled. Others say that stakeholders, who can, should earn that right. It is intensely political as the forces for “equal opportunities” fight the forces for “equal outcomes”.

Organizations can understand themselves as systems and then develop their process-based organizational management systems to enable workers to add value faster and prevent loss sooner to benefit all stakeholders. They reward employees for working to benefit customers so employees can look after their families, their communities and themselves.

Businesses network and these networks comprise many different organizations so they are complex. Members may organize themselves to become a value network. Organizations are the nodes in the value network. Each node interfaces with other nodes that use contracts to govern their relationships as customers and as suppliers. Building, supporting and running a value network requires transparent, voluntary, consensus standards. Some of these standards specify more reliable management systems. Organizations develop and use their management systems to govern their work. They may even show they are ethical and competent enough to join and remain members of the value network. Once a supplier promises a standard, customers may use contracts to enforce even the voluntary standards. Organizations can and do impose strict selection and re-selection criteria on the members of their value networks.

Of course, the leaders and managers of the value networks and the organizations that comprise these networks should personally be transparent and accountable. However, to encourage risk taking to generate wealth, the individual decision makers are largely protected by their organization becoming the person accountable in the eyes of the law.

This separation of the organization from the people that run it creates mistrust. How then are customers confident enough to do business? Personal relationships count for a lot in making and accepting promises. The organizational management system helps salespeople and sales processes to make and keep competitive promises for their customers.

Customers and other stakeholders rely more and more on the law to protect them from poor decisions and broken promises. Organizations can see the rules are changing and want to stay ahead by broadening their duty of care to include customers, employees and communities. Indeed, the 2006 Companies Act in the UK reminds company directors of these wider duties.

Now we see companies climbing on the long bandwagon named “Sustainability for ALL Through Being Socially Responsible in Everything We Do”. Even if it were available, ISO 26000 certification would not “prove” social responsibility or sustainability credentials.

Instead, organizations have to perform to prove their heads, hearts, decisions and actions are socially responsible to their stakeholders. Stakeholder trust may then grow from websites that truth-check the social responsibility and sustainability claims of any organization. Indeed, stakeholders may fund these websites directly or indirectly.

Instead of publishing socially irresponsible versions of “greenwash”, may we see more leadership by global companies benefiting their stakeholders wherever they operate?

Leaders earning trust

December 22, 2009

Increasing the capacity of a system without using the additional capacity is a waste.

Everyday, leaders must show their commitment to keep the system in balance from end-to-end and with customer demand.

For example, making manufacturing more efficient without making product design, marketing and selling more efficient will not increase throughput and could reduce livelihoods in manufacturing.

Imagine developing a workforce with the competence and determination to manage change of their system for their customers and themselves.

Those who add value to data, information, people and/or materials (by something called work) must first believe and trust their leaders.

Trouble is most leaders do not even think system, let alone talk and act system.