Disrupt Success Metrics not Risk Appetite

Big corporates take big risky decisions all the time. They also lose money in spectacular ways at times. What stand in the way of most corporates and disruptive digital is not risk appetite. Disrupters have a different set of measures of success.

It is Not Risk Appetite

In a conversation about digital disruptive threats to large organisations today the view was expressed that it was their risk appetite that holds them back. There are undoubtedly companies for whom this is the case. Entrepreneurs have high risk appetite than many companies.

However risk management is one thing that large corporates tend to do a lot. They specialise in it. They have expensive professionals to measure and value risk. The global financial crisis showed us their preparedness to take big risks, not always wisely.

Every day large organisations make multi-million and even billion dollar investments in highly uncertain returns. The fact that many of these fail but there is still an appetite to make the plunge shows this.

Big companies make bet the company decisions too. IBM did so when it developed the System/360. Boeing did it with its early jets. Intel was a leader in chips because In part of its investment in plants. Many long lived capital assets like mines, property and large scale industrial plants can involve huge risk and highly uncertain returns.

However these decisions were made and justified by logic of the traditional business measures of success like discounted cashflow valuation, margin, profit growth and shareholder returns.

Different Measures

Tried any of these arguments to justify an investment recently?

‘There are currently billions of dollars of margin in this industry. We think we can wipe out 90% and capture half of what’s left’

‘We have no revenue but we will be valued in an exit for our incredible exponential customer growth rate and because we might be a threat’

‘We will invest billions and spend all our margin in profit less growth for decades to dominate our category globally’

‘We have billions of dollars of funding to operate in developing markets below cost to expand a new market because what we are doing is revolutionising our industry, we promised to be global and people guess that we are capable of more’

For disruptive startups, it takes bravery, a good pitch deck, the right investors and a whole lot of momentum to make people buy what you are selling. In corporate life, these arguments rarely ever fly. Usually, the premise is so divergent from the usual measures of success the risk of the venture is irrelevant.

Newspapers struggled to react to advertising online because 90% of their highly profitable and very tangible revenue vanished. Kodak didn’t invent Instagram because it had a film business that dominated through its profitable film processing. Retailers struggle to compete with Amazon because nobody is really sure what Amazon wants to define as success. Uber’s global expansion into markets like India where they have paid drivers as much as twice the fare charged follows no short term transactional financial logic.

Even in a more traditional example we see the stickiness of our measures. A recent study from the Reserve Bank of Australia showed that one of the barriers to investment in this country is the inflexibility of return thresholds for investment. Investment return thresholds don’t change even in low interest rate environments. Our Boards, CEOs and CFOs like their measures and stick to them.

How are you going to compete with new measures? If you want to play the disruptive game how do you disrupt your traditional definition of success?

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