Home > Articles > Business & Management

Breaking the Go/No Go Vise Grip on Innovative Growth

what causes firms and managers to generally regard uncertainty as a negative, when in fact opportunities for unusual prosperity lie in being able to exploit that very uncertainty? Learn how to engineer the risk out of uncertain opportunities and go for high potential wins by slicing out your downside and boosting your upside.
This chapter is from the book

This book is about extracting growing profits, sometimes big profits, from uncertainty while only marginally increasing business risk—by what we call Opportunity Engineering®.

A day does not go by without someone in the business media waxing eloquent about the pace of change, the increasing turbulence of technology, or the massive pressures of global competition. Writers and broadcasters go on and on about the increasing uncertainty this brings about, and all this uncertainty is generally couched as threatening. This foreshadowing is astonishing when you consider that boundless opportunities for big-win investments can lurk within uncertainty—uncertain yes, but with huge upside potential nonetheless.

We asked ourselves what causes firms and managers to generally regard uncertainty as a negative, when in fact opportunities for unusual prosperity lie in being able to exploit that very uncertainty. As we looked into the reasons why managers do not forge prosperity out of uncertain investments, we decided that it is really not their fault! We found that managers have not been given the right tools for investing in uncertain times. They are in the grips of a "Go/No Go vise," using tools for investment analysis that were created for more stable times. Discounted cash flow (DCF) calculations and net present value (NPV) analysis have them fixated on "making their numbers" or being treated as failures. These blinkers keep them locked into a Go/No Go decision-making pattern, either proceeding full steam ahead or stopping in their tracks (which, in the face of uncertainty, is usually No Go), when in fact they could be engineering the risk out of uncertain opportunities and going for high potential wins by slicing out their downside and boosting their upside.

The problem with the traditional approach (i.e., NPV) is that after an idea for a new product or service has been assessed and given the green light by senior management, and the development team lays out a project plan, they are expected to turn the idea into an asset that delivers expected returns; otherwise, they have failed. Figure 1.1 is an example of this classic Go/No Go thinking. It seems logical, but it has the unintended consequence of stopping innovation dead in its tracks, and it often piles up large losses, too. Why? Because if an idea has to turn into an asset "or else," the logical response is to focus on low-risk ideas that are close to a company's current offerings—those that are a safer bet. This conservatism might make sense for the individual manager, but if it becomes the norm it keeps companies focused on what worked in the past rather than focused on the future, where the opportunities for high growth lie. This risk avoidance snuffs out the experimentation and innovation that lay at the heart of all great companies' history, when their entrepreneurial spirit ran high. Indeed, from our consulting work, we suspect that many managers self-select out high-potential, uncertain ideas because they are afraid of being wrong and being criticized for it. This fear causes a narrow focus on incremental changes to existing products. The question is, can anything be done to change this deadly dynamic?

Figure 1.1

Figure 1.1 Go/No Go

Something can be done. For the past four years, we have been working on bringing you the right tool to manage beyond Go/No Go. We found it in something that we call Opportunity Engineering (OE), which allows you to assess uncertain opportunities and find ways of selecting only those where you can engineer the chance to capture their high upside potential and slice out the downside. OE allows you to select and pursue ideas that reach a long way into the upside potential and wrench out profits, while at the same time allow you to contain your risk to little more than your existing business risk.

Making Uncertainty Work for You

The key concept of OE is making uncertainty work for you rather than against you. In most uncertain projects, the potential profits have a probability distribution, as shown in Figure 1.2.

Figure 1.2

Figure 1.2 Probability of potential profits

If (and only if) you can Opportunity Engineer the project, you can in fact "slice out" the downside risk by engineering the opportunity so that the left tail of the distribution is removed, giving you an asymmetric return in which the actual probability of profits is confined to the opportunity space under the solid line of Figure 1.2. This opportunity space is bought at the engineered cost, which is all you need to risk to "buy" the rights to the potential upside offered by the project. If you cannot create this asymmetry, and the downside risk remains, you do not have an Engineered Opportunity, you have a WAG (wild-ass gamble)!

The importance of this insight is that now the more uncertain a project is, the better! Uncertainty widens the curve because there exists a larger universe of possible returns. More of the profits will be to the right along the curve where there is a greater chance of a higher profit, while there is no chance of a loss beyond the engineered cost. This probability distribution usually causes a good deal of discussion with executives we advise—it is a completely different way of thinking, but it makes sense as long as you can control the downside.

The same reasoning lies behind stock options in the financial markets: The greater the uncertainty surrounding a stock, the greater the option value, because the downside risk is limited to the price of the option.1 Therefore, higher uncertainty allows for a bigger potential upside win with a controlled exposure to a downside loss, namely the option's cost. For the same price, would you rather have an option on Google (a proxy for high uncertainty) or on P&G (a proxy for low uncertainty)? Google, of course!

The disconnect between traditional financial valuations and management intuition results from a bias against uncertainty. But a situation that is uncertain has to have some positive context, or else it is not uncertain, it is just plain bad. Right? So as long as the risk reward profile is designed to have a limited downside exposure coupled with a high upside—the asymmetric return that we discussed earlier—the more uncertain the project, the better! We call this positive uncertainty. It is at the heart of the transformational effect of OE.

OE creates a safe harbor where high-payoff, innovative investments can be aggressively pursued, because it changes the development process.

Instead of considering just whether Go or No Go, a project could be broken down into stages and dropped cheaply if the early stages aren't working out, or a project once underway could be redirected to a different product or market, or the venture or the venture's intellectual property could be sold off, or the project could be scaled up or slowed down or postponed, or the project could spawn a joint venture or precipitate a merger with another company. Clearly, OE opens up many possibilities, and usually none of these possibilities are evaluated when Go/No Go thinking is the norm.

Go/No Go as a decision-making model is simply too constraining, but it's very understandable why companies stick with Go/No Go thinking. First of all, it's what we were all taught in finance and accounting courses. Second, it is relatively easy to manage, whereas managing uncertainty is not. The trick is to engineer into the project early indicators that convert the uncertainty into more certain knowledge, quickly and cheaply, so that you can redirect or shut down with minimum loss. In other words, fail fast, fail cheap, and move on to the real winners. That, in essence, is the key to OE and to this book.

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020