Calculated Risk: A Driver of Corporate Growth

Risk drives reward.  We’re all familiar with the financial maxim which defines investment return as a function of risk incurred.  Can this construct also better describe how we view marketing investments?  Organizations showing increased expenditure on stock buybacks and dividends relative to growth investments (advertising/marketing and R&D) tend to be more risk averse.

A recent Marketing Scenario Analytica (MSA) study suggests that organizations managed to extreme financialized incentives exhibit slower growth: “Instead of managing for growth, it’s clear company managements are increasingly running firms for shareholder benefit, almost exclusively — even if it means incurring negative or slowing growth.” [1]

Others agree.  As Tim Williams at Ignition Consulting writes for WARC:  “It doesn’t require much imagination to see the correlation between today’s risk-averse culture of brand organizations and declining profits and brand growth.” [2]

An over-reliance on these “data driven management techniques” can lead to a “problem … endemic to publicly-traded corporations that sacrifice long-term R&D to the perceived imperatives of the quarterly report:  a foreshortening of corporate priorities and vision to near-term opportunities where the paramount concern with the foreseen immediate consequences excludes consideration of further or other consequences,” writes Jerry Z. Muller in Fast Company. [3]

This shifting of resources away from marketing leaves the function impoverished and companies more susceptible to external threats that can negatively impact corporate value.  While the de-prioritization of marketing may free up resources for the near-term maximization of shareholder value, these actions can starve the corporation of longer term growth opportunities.  Ultimately, a corporation that feeds only off the value of its established brands and assets, in avoidance of risk, without seizing opportunities for innovation, product development and marketing outreach can find that it’s “burning the furniture” to keep warm and survive.  What’s next: burning the rafters?

A tyranny of metrics is driving a management ethos that administers — rather than builds — profit.  While metrics-driven efficiency is a necessary component in driving the evolution of business success, a single-minded focus on this driver contributes to a corporate management that derives profit through the extraction of already established company and brand value rather than through product and marketing innovation that typically drives new growth.

Risk can’t be wholly avoided; even avoiding risk entails risk.  Rather, adjusting and honing a corporation’s bearing with respect to risk can instead lead to improved business optimization.

While “there are no financial instruments that gauge the costs of not taking a risk … it’s the risk not taken that can cost businesses the most,” Tim Williams notes. [4]  In other words, the profits and brand growth over the long run doesn’t happen because risks were avoided.  Rather, profit and brand growth results from understanding and applying the principles of calculated risk to potential growth initiatives.

This alternative view of constructive marketing risk management can perhaps be compared to the theory of evolution and the notion of natural selection.  Famously, the idea says mutations best adapted for survival will thrive, while those least adapted for survival will ultimately die out.  But, this popular view of evolution understates the risks nature takes with variation.  Without the multiplicity any mutation poses, there would be no variety upon which natural selection could do its important work.

Likewise, risk averse management strategies that promote a data driven efficiency of process work only on established processes.  And, to singlemindedly focus on such efficiencies neglects the productive contribution that calculated risks make to innovation.

In the slow-growth world we operate in today, the productive contribution of a more complete understanding of risk should be incorporated by enlightened corporate decision-makers.  Future growth relies on it.

[1] Marketing Scenario Analytica, “The Financialized Corporation and the Sacrifice of Marketing,” February 2017.

[2] Tim Williams, “All Profit is Derived from Risk,” WARC, May 31, 2018.

[3] Jerry Z Muller, “Why Trying to Measure Performance at Work Backfires,” Fastcompany, May 2, 2018.

[4] Tim Williams, “All Profit is Derived from Risk,” WARC, May 31, 2018.

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Authors

Patrick Marrinan is a co-founder and Managing Principal of Marketing Scenario Analytica (MSA).  By applying measurement, monitoring and mitigation approaches, MSA helps firms improve their marketing readiness in an era of consumer activism and politic… read more
James Harn

James Harn, Ph.D. is a brand strategist and market researcher.  He has worked at Young & Rubicam Advertising, Wunderman Health and Omnicom while earning his Ph.D. in philosophy from the New School for Social Research. 

First appeared in Media Village