The following is an excerpt
from a forthcoming book titled "Growth Without Risk".
Article Released January 12, 2000
Understanding Business Risk
The rapid economic globalization, growing market volatility and accelerating technological change have dramatically increased the complexity and competitive pressures of today's business environment. These factors combine to create a climate of increased uncertainty regarding business risks. Uncertainty has become so great as to render ineffective, if not counterproductive, the kind of planning most companies still practice. Traditional planning is based on assumptions of what is most likely to happen. Planning for uncertainty takes the broader approach of assessing which events that have already happened will create the future, and evaluating and mitigating the risks associated with each business decision.
Many changes have already occurred that will shape the future, such as the explosion of advanced education, women in the workplace, and the aging of the population. In addition, nearly everyone who will be in the labor force of the developed countries in 2010 is already alive today, and as the current generation retires, additional productivity increases must be put in place to make it possible for companies to do more with less employees.
The intent of this writing is to increase the awareness of how risk management processes can influence business growth. Currently, if you mention "risk management" to most people, they will immediately think you are talking about insurance, and why not? Many large corporations call their corporate insurance departments the "Risk Management Department." Insurance consultants now refer to themselves as "Risk Management Consultants." Other consultants offer risk management services in controlling fraud and white collar crime, crisis management, business recovery planning, Y2K exposure analysis, and risk financing, among others.
Risk Management Applied to General Business Management
Risk management can have broad implications when applied to general business management. Risk management procedures provide a powerful set of tools to the business owner to quantify the potential results of various management decisions. If the results of a pending decision can be quantified, risk management processes can estimate the quantified results of each option of the decision, success or failure. When business owners are armed with the knowledge of the consequences on the rewards and consequences of major business decisions, they are better able to make informed decisions and achieve a higher success rate.
Growing a business involves risk. As shown in the previous chapters, a small business is particularly vulnerable to the negative consequences of high risk decisions. Unfortunately, in this age uncertainty it is impossible to eliminate all risks to business growth. A small business owner can actively avoid risk, or he can actively mitigate and seek to control risk, or he can do nothing and passively accept the consequences of risky situations as they occur. Using the principles of risk management a small business owner can recognize risks, evaluate the positive and negative impacts of the risk, mitigate the constraints and uncertainties, choose the appropriate alternative(s), track the outcome of the decision, and thereby manage much of the risk.
Many business decisions involve tradeoffs that result in risks to the employees, stockholders, suppliers or management. While some operational decisions may involve little risk, strategic decisions could result in disaster to the company. Within the parameters of risk, there are least two possible decision alternatives: 1) maintain the status quo (the least risk, or the "sure action"); and the "risky action" which may have two possible outcomes, a gain or a loss.
Within the parameters of loss, there are two types of loss: 1) an outcome that can leave the company worse off than before; and 2) an outcome that is not as successful as it could have been. The world is a dynamic global economy that is constantly changing. Therefore, avoiding decisions and maintaining the status quo can also result in missed opportunities.
Characteristics of Risky Situations
A risky situation can be defined as a situation in which a company is exposed to a chance of loss. Risky situations generally have three major determinants: lack of control, lack of information, and lack of time. If we had complete control over the situation, we could control the eventual outcome and there would be no risk. If we complete information about the event to occur, we could make our decision based on that knowledge and again, there would be no risk. If we had unlimited time to wait until the outcome of the uncertain event could be determined, we could then select the best alternative and then there would be no risk. However, such is not normally the case in most business decisions. For small businesses, we have to add one more characteristic: lack of resources.
Lack of Control
The elements over which a business owner may have no apparent control include natural forces, human forces, insufficient resources, insufficient information or insufficient time. Without control, there is no way you can affect the magnitude of the potential loss, reduce the chances of the potential loss, or the exposure to the potential loss.
Some events are uncontrollable for a variety of reasons. Such events include nature (earthquakes, hurricanes, or other unpredictable weather events), and the acts of people (actions of competitors, demand for products by consumers, election results, and the unpredictability of human nature). However, if you have the resources to acquire the major clothing designer firms, and the ability to seed the clouds over large areas to control rainfall, you may be able to exert some control over the fashions for next year and reduce the risk of some weather events. Large corporations can exert some degree of control over public and political opinion through massive advertising and lobbying campaigns, but most small businesses do not have the resources to exert the same degree of control.
Lack of Information
Information available at the outset of the risky situation may be inadequate, unreliable, unfamiliar, or unpredictable. At the same time, there may also be insufficient time. Without information, there is no way to know the magnitude of the potential loss, the chances of the potential loss, or you exposure to the potential loss. Large businesses have the resources to obtain information on almost any subject, and information on virtually any subject can be purchased for a price.
Any information that can be developed will be about what has happened in the past and predictions by "experts" as to what to anticipate in the future. Even if you could purchase the information, can you rely on it? History does not always repeat itself. Therefore, without control of the situation no one can predict what fashions will prevail next year, anymore than they can predict the weather for next year.
Lack of Time
It takes time to gather information and investigate the alternatives of decision. Generally in decisions in which there is a lack of time, there is also a lack of information. Without control over the timing of the decision, a decision has to be made on time using the available information. In some cases, the failure to make a decision can also result in a loss of opportunity, as in the case of failing to launch a new product that is technically superior to your current product before your competition launches its new superior product.
Crisis management situations are inherently risky because decisions must be made quickly with little knowledge of the options available, little information on the uncertainties, and lack of understanding of the possible consequences. A company undergoing crisis management is typically a company out of control.
Even when there seems to be insufficient control, information, or time available to eliminate all risks in a risky situation, you should try use these elements to partially reduce the risk and possibly mitigate the outcome to your best available alternative.Having partial control over certain events can allow you to influence the number of outcomes available without determining the specific outcome. Some control is better than no control.