A partner consultancy of ours recently told me the story of how they challenged a FTSE 100 leadership team to come up with a ‘ready to go’ online competitor business. In just 2 weeks they defined a compelling customer proposition, put together the financial business plan, spec’d out the technical platform, even designed the logo. Their own modelling showed that for a small investment they could create a very significant new market…
However, the proposition wasn’t nurtured any further as, even though it would disrupt the market, it would also disrupt their current business model. In the end the organisation was not brave enough to consider launching the proposition.
Disrupt Yourself from the Inside
This is a really powerful illustration about the importance of having the right level of risk appetite.
By protecting their current revenue streams, the organisation has left itself open to a competitor coming up with a very similar business model. If this happens, rather than leading the market disruption the FTSE 100 company will be playing catch-up.
This article looks at how organisations can increase their appetite for risk in order to respond faster and more effectively to changes in the market, customers’ expectations, or as in the above case, take advantage of internally generated innovations.
“A low appetite for failure and risk-taking is a key cultural barrier to organisations being able to respond quickly and innovatively to customer expectations.”
Using Design Thinking to Respond to Change
In our last journal, AI: Explore the Possibilities Go on Safari, we discussed how using a design thinking approach puts the customer at the centre of what the organisation does and helps them move quickly from business issue to solution.
For this to happen, leaders need to let go of the familiar way to launch a product/service based on having a fully designed product and a well-crafted business case that covers all eventualities. Instead they need to become comfortable with prototyping and fast failure. This essentially means putting a minimum viable product (MVP) into the marketplace and letting customers do the user testing in a real-world environment. To apply a design thinking approach, organisations needs to be braver and understand how to take calculated risks, which our example shows can be difficult even when there is a strong financial case for doing so.
Need to Change the Risk Mindset
For organisations that have previously been more focussed on protecting revenue streams and market share, moving towards a customer centric, design thinking approach will require a change in the mindset of both leaders and employees.
Gary Ashton picks up on this in his article with regards to how an organisation can start the mindset shift needed to be more customer centric, by introducing a Chief Customer Officer or CXO and giving the customer a seat at the top table.
However, this alone is not enough. To continuously respond to customer needs and quickly adapt to the market, the whole organisation needs a different way of working. A recent report concluded that “the biggest mindset shifts CEOs need to embrace, is the willingness to give employees the license to conduct rapid experimentation, and even fail if needed, in order to learn” (1).
The report also noted that to empower employees in this way an organisation’s culture needs to evolve so employees feel safe about taking risks and failing sometimes without fear of reprimand or embarrassment.
These conclusions give a clear direction for organisations: increase your appetite for risk to effectively compete in today’s market and be in a position to respond quickly to future changes.
If an organisation’s culture reflects the view that risk is a thing to be minimised, employees will be socialised in that mindset, and have developed internal cognitions that reflect this lack of risk appetite, ie. briefs opinions, values etc. They will exhibit the type of ‘risk adverse’ behaviour for which they have previously been rewarded by the organisation. Of course, it is worth noting that acceptable levels of risk are different for every industry sector and organisation. For example, levels of risk in Air Traffic Control are very different to those in Retail.
This will not change overnight. Leaders cannot stand up in front employees and say “from now on we will take more risks!” and expect employees to believe the new message. Nor is there likely to be a ‘lightbulb’ moment where people suddenly realise there is a need for, and are able to make, a change in the way they think about risk. In which case, modifying mindsets so that the change can be accepted and sustained, will best be achieved by a process of ‘nudging’ people towards the new way of thinking.
Mariam Mirza’s article, discusses habits and how leaders can sustain and embed the mindset into the organisation’s culture by creating cues, routines and reward.
The Psychology Behind Nudging Mindsets
There are a variety of ways of achieving the desired outcome, but I believe two of the most effective levers leaders have at their disposal are communication and employee engagement. Before looking at how to use these levers we will look at the psychological theory that underpins the approach.
“The language needs to take on a more positive tone, so ‘risk’ is the chance to try something new and ‘failure’ becomes a useful learning opportunity”
Cognitive Dissonance is a theory first developed by Leon Festinger (2,3,4). His premise is that people seek to have consistency between their cognitions, between their beliefs, opinions, values, etc. We are comfortable when our cognitions align with the things we say, do and the information that we have to hand. Dissonance is the mental discomfort experienced by a person when there is misalignment. There are two main ways that the discomfort is generated:
- People hold two or more contradictory beliefs, ideas or values
- A person’s action or speech does not align with their cognitions.
1. Communicating to Reframe Risk
When confronted with new evidence or information that contradicts their beliefs, ideals or values, people are naturally driven to find a way to resolve the contradiction and reduce their mental discomfort. As the information is in the public domain (and therefore cannot be un-known) the individual has two options – they can either ignore it or adjust their internal mindset to accommodate it. The latter results in nudges to a person’s mindset. Organisations can start to achieve the change by communicating a new message that encourages experimentation and risk taking (at the appropriate level, not a free for all). The language needs to take on a more positive tone, so ‘risk’ is the chance to try something new and ‘failure’ becomes a useful learning opportunity. By talking about risk in a different way, leaders will consciously start to shift employee mindset by introducing cognitive dissonance.
Employees should hear the new risk message frequently from leaders. The communication needs to be consistent and authentic from all sources, or employees will discredit the new information and resolve the dissonance without making the required mindset change.
2. Engagement to Nudge Employee Mindset
When a person’s behaviour or speech runs counter to their cognitions it results in dissonance. In both cases the fact that it has been externalised and observed by others, means it cannot be retracted. The only recourse left to the individual to resolve the discomfort caused by the contradiction is to change their internal cognition to incorporate the way they have spoken / acted – i.e. start to change their mindset.
The resolution of cognitive dissonance through engagement is a mainstay of Hollywood buddy movies. Two protagonists who start out hating one another, get into situations where they find out new information about the other or are forced to behave in a different way. As if by magic, by the end of the movie they are firm friends – they have managed the dissonance by adjusting their thoughts, values and beliefs which are once again consistent.
Organisations can use similar magic to engage employees in the new risk-embracing approach by metaphorically taking them on a ‘change of mindset road trip’. Providing opportunities to use prototyping and fast failure techniques will enable employees to try the new behaviour in a safe environment. For example, they can practise the desired new ways of working in small continuous improvement activities. Once employees have exhibited the new behaviour a number of times, they will need to adjust their internal cognitions to re-establish the balance between the new external world and their internal view.
To be in a position to respond to change in their markets, customer expectations or to be a disruptor, organisations need to deliver new products and services faster and with a greater focus on customers. Design thinking with its fast failure method offers an approach that will help equip companies to respond effectively.
However, it often requires bravery and an increased risk appetite. These cultural changes will not occur overnight but can be achieved as a result of ‘nudging’ employees towards a new mindset. Using Festinger’s theory of cognitive dissonance we have shown how communication and engagement are two of the most effective levers an organisation and its leaders have to achieve the required change in mindset.
This approach also gives the organisation a very tangible way to demonstrate that they are providing a supportive environment which encourages employees to take more calculated risks. It also reinforces the new language around risk, increasing the credibility of the message and reducing the likelihood that that employees can ignore the new information.
1. Singapore Management University (2018). Cultural transformation in the digital world. Research Report
2. Festinger, L. (1957). A Theory of Cognitive Dissonance. California: Stanford University Press
3. Hamon-Jones, E. & Mills, J. (1999) An introduction to cognitive dissonance theory and an overview of current perspectives on the theory. American Psychological Association
4. Cooper, J. M. (2007) Cognitive Dissonance: Fifty Years of a Classic Theory. Sage