This paper applies risk and reward frameworks to a struggling pharmaceutical company, Capellon, whose marketing department faces declining sales, organizational dysfunction, and executive interference. Drawing on literature about entrepreneurial risk, emotional intelligence, and managerial risk aversion, the paper evaluates the worst-case scenario, the nature of financial and non-financial losses, the likelihood of further decline, and the expected payoffs of proposed strategic changes. It concludes by assessing the client's risk tolerance and recommends that the company become less risk averse in order to reverse its performance trajectory.
Kent (2008) discusses risk and notes that entrepreneurs seek to reduce risk. Entrepreneurism is risky because entrepreneurs do not always know what they are doing — this may have been something Peter Drucker said, but the reality is a little more complex. Entrepreneurial activity is risky because there are few established givens: sales are not well-established, products and processes may not be refined, and building a business from scratch is quite challenging when nothing is in place.
In this instance, Capellon's risk is not as great as that of entrepreneurs, because it has existing products. In the pharmaceutical business, many products are covered by patent protection that ensures a baseline level of demand. So the worst case scenario here is not total business failure. The worst case scenario is probably what the company is already experiencing, or something slightly worse: organizational dysfunction, declining sales, and none of the stated objectives being met.
Another important takeaway from Kent's discussion of risk is that the company needs to take more risk in order to succeed, particularly if it has capable people who can execute strategy effectively. The company needs to make changes to its existing strategy because it is struggling, but because it can only falter so badly, it should focus its energy on positive changes. The worst case scenario is essentially where the company is right now, and none of the proposed changes are likely to make things dramatically worse.
The nature of the losses will be primarily monetary. The current concerns center on sales performance. While many of the underlying problems stem from human resources, the measures of success are financial — and that means poor financial performance is the principal concern. Dunn (2008) notes that when someone violates a policy, they need to face consequences in order to maintain accountability. For Capellon, there have been many failures but few consequences.
The executives who have been interfering with the marketing department need to be held accountable for their meddling. The human resources department has also been a problem, supplying the marketing department with a succession of underqualified managers and creating conditions for poor communication. There has simply not been enough enforcement of the rules, and as Dunn (2008) notes, that creates a lack of accountability that sets a bad example for the entire organization. While some losses are emotional or tied to morale, the problems have been identified primarily as a failure to reach financial objectives, so non-financial losses are of secondary concern here.
A risk-averse person tends to assume that the worst case scenario is highly likely to occur, but a realist understands that it usually does not. In this case, the current scenario of declining sales is already so severe that the worst case scenario is essentially upon the company. This makes the likelihood of further decline high, but it also frees the company to move forward, knowing there is nowhere to go but up.
"Quantifying expected payoffs of strategic options"
"Low risk comfort stifles marketing success"
"Advising client to become less risk averse"
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