Risk!
What you know about risk can mean the difference between success and
failure. This article provides insights into risk and gives four tips for harnessing
risk to your own advantage.
When we define risk as exposure to the chance of loss, we see that risk
is unavoidable. Everything we do carries some risk; even doing nothing. With the vast
majority of new business ventures failing within the first few years and the global
competition getting tougher, it is obvious that risk plays a major role in business. The
questions are, how much risk is too much and how do we deal with it?
A highly successful entrepreneur, when asked what mistakes he made in
life, responded "I didn't fail enough." He elaborated by saying that he did not
take on enough risk to know where his boundaries were. He felt he could have been even
more successful if he had tested his limits to the point of failure and then built his
business on the basis of that knowledge.
Another entrepreneur, facing the closure of his business, told me that
his problem was that he had taken too much risk.
Who was right and who was wrong? Well, the truth is that risk is a
two-sided coin. On one side, if you take on too much risk, you are bound to fail. On the
other side, if you take on too little you are bound not to succeed. The true key to
success is a dynamic balance between too little and too much risk and knowing how to
moderate risk. The acceptable level of risk is personal and situational. Good managers
know how to reduce risk when necessary and to accept more when the payoff is justified
relative to the risk.
- Know your risk style and tolerance level.
Are you a risk-taker or are you risk-averter?
A risk-taker is more likely to look at the potential winnings and the risk-averter is more
likely to be concerned about avoiding losses. A risk-taker, given some positive odds,
might be willing to risk a $200,000 home against $200,000 cash because he is looking at
the $200,000 win. A risk-averter would be less likely to take the risk of losing his
$200,000 home. The higher the risk of loss, the less likely it is to be tolerated. This is
why state lottery tickets are $1 or $2 instead of $100. Try the Risk
Evaluation to see where you might rate.
Well-balanced companies include management
with each of these styles who can and do work together to choose what risks they must and
must not take to achieve the corporate mission.
- Know when to risk. When is it worth it?
When you are betting your house, you had
better know a good motel. When you are betting your company, you'd better have a
contingency plan. There's a reason for seatbelt laws and airbags. They reduce the risk
that you will be killed or severely injured in a car accident. Just as you don't drive 120
mph even though you have these safety features, you should not cavalierly make business
decisions that could severely injure your company unless the alternatives make it very
worthwhile. And entrepreneurs you should note that it is dangerous to make those types of
decisions without consulting with the rest of your management team. You stand the chance
of losing your team if you put them in harms way without having them on board. Not
everyone wants to or can afford to take on the same level of risk. A person living from
paycheck to paycheck is less likely to risk losing their job than another with a year's
salary in the bank.
- Know how to evaluate risk - make risk analysis.
While it's usually impossible to
know everything and thus remove all risk when making choices, understanding what the
risk/reward ratio is can be very useful. A decision tree can be
a powerful tool for analyzing the risk/reward picture for a set of options. The process
entails evaluating the probability for each of the potential outcomes of a circumstance or
choice. These are often mapped as a decision tree with the outcomes (reward) at the end of
each branch. You can make more informed choices on how much risk you are willing to
tolerate. At the same time, the tree provides the opportunity to evaluate the causes for
the risk probabilities you have chosen and to take action to moderate that risk. You may
be able to take actions to improve your decision choices. If, for example, you need/want
to reorganize your company to improve your profitability, you could moderate the risk by
ensuring that the staff are well informed and trained to take on the new structure and
demands.
- Moderating risk - It's not just luck.
Risk lies in the unknown and is ultimately a
result of a lack of time, a lack of information, or a lack of control. You cannot know it
all but you must know enough to make risky situations less risky. Tolerance for ambiguity
and uncertainty is more important than tolerance for risk. If a manager has a high
tolerance for risk, he may not be adequately motivated to cut through the uncertainty to
find out what is causing the risk and eliminate it. On the other hand, a manager who
cannot make a decision without knowing "everything" may very well be paralyzed.
Both can make bad decisions. Managers who understand risk and have a finite capacity for
it have the opportunity to gather information or conduct analysis to reduce risk to an
acceptable level in the decisions that they make.
Risk is an inevitable part of life. It can never be eliminated but
winners know when to take it and how...not with their eyes closed but with their eyes wide
open. And, yes, luck and chance have their hand in the game as well.
Read more about risk!
We can help you succeed in spite of risk.
