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Business leaders must focus on risks as much as on profit to ensure business success, according to Rice University research

When it comes to getting a good return on investment, businesses should be equally focused on mitigating risks as they are on earning a profit. Getty Images

Consider for a moment the race to build the next super computer. Google, Alibaba and other U.S. and China companies are racing to build a machine — called quantum computing — far more powerful than anything the world has ever seen. In this race, China reportedly has the lead.

Given that this kind of technology can protect trillions of dollars in corporate and even national secrets, why do American companies lag behind? If such research and development represents an unknown and is a potential business risk, should U.S. companies be interested in assuming such a task? Rice Business professors Vikas Mittal, Yan Anthea Zhang and a Rice Business Ph.D. student Kyuhong Han, may have answers.

They researched the various ways companies create strategic advantages for themselves. What is the relationship between these strategies and the risks involved? Companies create value through innovation-based activities such as research and development or else via branding and advertisement. As there's no set formula for success, each company has its own approach — which could affect the risk associated with the company's stock price (called idiosyncratic risk).

Typically, the two strategic pillars are examined separately, rather than jointly. But when they compared the two approaches, they found that one presented far more risk than the other.

To reach their conclusions, the Rice team looked at a data set of 13,880 firm-year observations that included 2,403 firms operating in 59 industries over 15 years (2000–2014). The data sets were from the firms' annual operational and financial information from Standard & Poor's Compustat, the University of Chicago's Center for Research in Security Prices and from the Kenneth French Data Library. What the data revealed was the stock price of companies that placed a higher strategic emphasis on marketing and branding (called value appropriation) than companies that focused research and development (called value creation).

If it is less risky for a firm to emphasize branding and marketing over research and development it stands to reason that firms would want to exercise caution in big new research and development efforts. What's the payoff for making a quantum computer or even Space X, after all, if the research and development risks associated with the endeavor are extraordinarily high? In some instances, it may be much safer to rebrand and market. Closer to home, many companies in the oil and gas industry bet big on innovative ventures — costly product features, digitization initiatives and so on that may only increase the risk to their stock price than meet customer needs.

The researchers found that firms that plunge big efforts into research and development have more to worry about than whether their innovations will work. They have to weather the fluctuations of industry demand. When industry demand is volatile, the downside of excessive research and development, at the cost of customer-relevant strategies is even worse.

For the Rice Business researchers, the lessons for managers are clear. The return on investment is intimately linked not only with optimizing potential profits but also minimizing potential risks. Research and development heavy endeavors like Space X and quantum computers may be flashy, but in the event of an unexpected drop in demand, they're also more likely to plummet to earth, creating stock-price volatility.

Managers need to think about the elements that create risk — like demand instability. The more companies create a stable and predictable client base, the less risk that they have to face in the stock market. There is still a tendency among many firms to see advertising and research and development as preceding and guiding customer perceptions, preferences and behaviors. But perhaps the relationship is just the opposite.

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This article originally appeared on Rice Business Wisdom. Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at the Jones Graduate School of Business at Rice University. Yan Anthea Zhang is a Fayez Sarofim Vanguard Professor of Management at the Jesse H. Jones Graduate School of Business at Rice University. Kyuhong Han is a marketing Ph.D. student at the Jones Graduate School of Business at Rice University.

How do people make sense of the epiphanies when they experience them? Pexels

It might be just the right word from your boss. It might be a phone call with a trusted friend. Or it might be waking up one morning and just knowing. There's no way to predict what will spark an epiphany that changes the way you see the world. But their power can be so far-reaching, they often leave us wondering where on earth that brilliant idea came from — and how we can find more.

Studying the mental processes behind epiphanies is especially hard because these flashes of insight are usually linked with unconscious mental processing and incubation, often during time periods when one may not seem to be thinking about a problem at all. In this way, epiphanies seem to arrive effortlessly.

So how do people make sense of the epiphanies when they experience them? In a set of unprecedented studies, Rice Business professor Erik Dane set out to find answers, first examining people who'd experienced general epiphanies, then analyzing a set of accounts of work- and career-related epiphanies themselves.

The research

In his first study, Dane surveyed more than 500 randomly selected people to ask them about their experiences with epiphanies, which he defined as a sudden and abrupt insight and/or change in perspective that transforms the individual.

Subjects who said they'd experienced epiphanies reported what they'd been doing beforehand, the feelings and insight associated with the epiphany and how they thought they'd changed afterward. Interestingly, though this survey wasn't limited to career- or work-related epiphanies, 20 percent of the responses related directly to these topics.

In the second study, Dane interviewed 22 professionals, asking them about distinct work- or career-related epiphanies, most of which resolved a nagging problem. After analyzing the transcripts of these interviews, Dane developed a set of theoretical categories describing the varieties of reactions an epiphany might spark.

People generally perceive and analyze their epiphanies in similar ways, Dane found. He categorized these into four dimensions: a person's emotional reaction to the experience of the epiphany, the question of how the epiphany arose, the circumstances that preceded the insight and a person's observations about how ready they were to experience change through an epiphany.

The findings

The typical first reaction to an epiphany, Dane says, is a sudden and emotionally charged release from a problem or tension. We've all been there: a stressful work situation that seems to offer no way out, followed by a dazzling solution that appears from the clouds. It's that suddenness that leads to the second typical reaction: a sense of astonishment due to the nonconscious nature of the insight's arrival. Feeling dumbfounded for a prolonged time isn't useful, though, so we usually start examining the factors surrounding the epiphany, including our own readiness to change.

What does this imply for workplace? After all, not every problem can or even ought to be solved by epiphany. At the same time, Dane notes, epiphanies can provide critical impetus to move forward.

Interestingly, his findings hint that one can increase the chances of having an epiphany. Though further research is required, Dane concludes that epiphanies most commonly arrive when people are open to the prospect of experiencing a major change. When something is mentally constraining us, on the other hand, eureka moments keep their distance.

The conclusion

As a worker, Dane suggests, you can open space for epiphanies by being actively aware of your surroundings. Look closely at your workplace, your constellation of coworkers and your place within the system. Perceived mindfully, these details may set the stage for problem-solving in a less focused moment.

If you're a mentor or a supervisor hoping to spark epiphanies in your work team, try applying this principle at work: Rather than laying out specific targets and attacking them head-on, aim for an environment that allows for mindful engagement, one that includes the problems that feature in your long-term goals and resonate with your workers' concerns and interests. Cultivating this environment and granting workers time and space to wander through it may lead, like a divining rod, to fresh sources of wisdom.

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This article originally appeared on Rice Business Wisdom.

Erik Dane is a distinguished associate professor of management (organizational behavior) at Jones Graduate School of Business at Rice University.