The future is UNKNOWN… so what should you do about it? The answer lies here!
For those of you who are not familiar yet, RDS is a pyramid-shaped framework with 11 tenets and 3 foundations. When applied properly, these principles help businesses achieve their short-term and long-term objectives. In today’s article, let’s talk about one aspect of the 10th tenet of RDS: Balance Focus and Options. Ready? Keep reading the article below.
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The future is UNKNOWN… so what should you do about it? The answer lies here! How do you respond when you’re reminded that the future is unknown? Do you respond in fear? … or do you respond by doing everything you can at the moment to prepare for the future, no matter how uncertain it may be? Do you focus on the RISKS or OPPORTUNITIES? In business, there are also risks and opportunities in uncertainty. That’s why return-driven firms balance their focus and flexibility in planning and execution to manage such uncertainties. Let’s dive deeper into this through Professor Joel Litman and Dr. Mark L. Frigo’s Return Driven Strategy (RDS)… RDS’ Tenet 10: Balance Focus and Options According to Professor Litman and Dr. Frigo in the book, “Driven,” Tenet 10 is one of the five “Supporting Tenets” of the RDS framework. Here, the highlight is on how return-driven firms succeed by managing uncertainty in business planning through:
So, how do firms achieve these? One way is by focusing on OPTIONS…
Pfizer, Johnson & Johnson, and Glaxo-Smith Kline are some of the world’s largest pharmaceutical companies. The three of them collectively display high returns on investment that span 15 years or more, higher-than-average growth rates with revenues in the tens of billions, and commensurate valuation levels. Aside from that, what’s common about these firms? At least in their cases, Pfizer, Johnson & Johnson, and Glaxo-Smith Kline are focused, but with options. Why do they still need options despite being focused? It's because of uncertainty. Under incredibly uncertain conditions, these pharmaceutical firms created drug development processes that can yield phenomenal results. Their drug development pipeline is one that uses options and staging of resources to create the best platforms for creating unique, need-fulfilling offerings. That means even if the times change and a particular drug gets phased out, these companies still have other offerings in place to keep them afloat. Achievement Through Uncertainty Professor Litman and Dr. Frigo state that to best accomplish any of the tenets of RDS, uncertainty must be managed, taking advantage of opportunities and reducing risks. Think about this: Oftentimes, the perception of history gets “revised,” and so “facts” that drive business planning always contain some level of uncertainty—what worked yesterday or today might not work tomorrow, or what didn’t work yesterday or today might work tomorrow. So, to maximize wealth, high-performance managers have a healthy respect for the uncertainty of the future and the frailty of human perception. That’s not all! According to Professor Litman and Dr. Frigo, the one certain thing about any forecast is that forecasts are always wrong… but by how much? Time and again, the authors say even assessments of the current environment need to be called into question. Why is that so? It’s because opportunities may exist and risks may lie where managers LEAST expect them. So, as a steward of assets and people, successful managers need to learn to balance a portfolio of activities and options in harmony with the uncertainty of perception and forecasts. Uncertainty: A good thing or a bad thing; can be controlled or cannot be controlled? Professor Litman and Dr. Frigo agree that the belief that uncertainty equals risk is simply NOT substantial. Risks in a business can definitely be controlled, managed, and mitigated. Always remember that risk is only the downside of uncertainty while the upside of uncertainty is opportunity. In fact, Professor Litman and Dr. Frigo say that people new to the finance world will first come across the importance of risk in understanding the value of companies. They will often make a statement such as, “Uncertainty increases risk and lowers valuations.” However, as finance students study in options and volatility, uncertainty can also increase valuations. Why do you think some pharmaceuticals, consumer goods, or technology firms keep on exhibiting high returns in the last decade or so? It’s because all of them leverage uncertainty in order to succeed. See? Uncertainty is not at all a bad thing! Actually, certain types of uncertainty can be managed well. For example: Firms can pay for insurance policies for certain identifiable risks… Controls can be put in place to better ensure worker safety… Quality tests can be done to determine that product quality meets promised levels and customer expectations… In short, there’s always something you can do to avoid specific potential risks even in the midst of uncertainty. However, it’s a different approach for the upside of uncertainty a.k.a. opportunities—they CANNOT be so tightly managed. According to Professor Litman and Dr. Frigo, it’s ironic that very tight management is a surefire way of missing out on potential opportunities. Imagine that’s the type of management the three pharmaceutical giants we mentioned above have… Sure, they’ll be able to avoid or eliminate risks at all by simply sticking to what currently works for them… but at the same time, they’ll risk other opportunities that could come their way by opening up to and managing uncertainties. In trying to avoid the downside of uncertainty, they also closed their doors to experiencing the upside of it. This could happen to you and your business too, so be careful! Don’t be afraid of the unknowns; instead, use the thought of uncertainties as inspiration to compel you to come up with fresh ideas for your brand! Don’t worry too much about the risks. As we mentioned above, certain risks are manageable. What’s dangerous is tightening your management out of fear of the unknown. Not only will this make your business stagnant, but it will also prevent you from enjoying exciting opportunities ahead. Keep these tips and insights in mind! If you’re looking to gain a better understanding of Return Driven Strategy and Career Driven Strategy, we highly recommend checking out “Driven” by Professor Litman and Dr. Frigo. Click here to get your copy and learn how this framework can help you in your business strategies and ultimately, in ethically maximizing wealth for your firm. Hope you found this week’s insights interesting and helpful.
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