In business, everything you do is related to a consideration of risk and reward. Businesses take risks all the time. Risk is not a four-letter word and is not to be avoided. Rather, it is to be managed and controlled. Businesses need to take the risk that it is appropriate for them to take while, at the same time, measuring and managing that risk to ensure that it is effectively aligned with stakeholder expectations.
Let us consider what that is likely to mean in practice. Any business intends to deliver something to someone. Whatever they deliver needs to be of some perceived benefit to the recipient or they would not purchase the goods or service. They could just copy what is on the market already, but there is a risk that the existing product already has an established brand and customer loyalty, forcing the new market entrant to what might be a lower price strategy. They could produce a cheaper version, but it could be less reliable, damaging the new entrant brand. They could try to make the product better than the current market product, but this could involve excessive costs, and the market may not perceive value in the improvement. They could just copy the cost structure and product of the incumbent firms, but this may result in an infringement of patents or copyright.
Every option includes some level of risk, which the firm needs to take to achieve a reward. So, risk is everywhere and needs to be considered appropriately.
By saying that risk is not a four-letter word, I am suggesting that risk should not always be avoided. If a firm takes no risk at all then it cannot do any business, have any staff, or premises, or any customers. It is not possible for a business to operate without taking risks.
All of you reading this book will have taken some risk today, risks that are acceptable to you. You will have woken up. I can be sure of that because sleeping people do not tend to read many books! Having woken up, your first decision of the day is whether or not to get up. You could read the book in bed or read it somewhere else. That is a decision, but what are the risks? If you read this book in bed as soon as you wake up, apart from being a rather sad individual, you will also not have had any breakfast. If you get up and have breakfast, then you may not read the book.
Life is full of decisions and each of these has a risk assessment that needs to be taken into account. To do this, you use the world’s greatest neural modeler, which is sitting between your ears.
How does this play out in business? If you decide you want to start a business, you are immediately confronted by a range of questions.
Even the initial question is fraught with risk. Leaving a full-time employed role to start your own business is clearly a risk. However, if you did not have a job, then starting your own business could be seen to be less of a risk. In the first case, the entrepreneur gives up certainty of income and the support of an existing company for the hope of a more successful future. So, what are the risks? They are many, including the following:
- The risk that the new venture will be unsuccessful and will fail because the idea or its implementation are poor
- The risk that the new venture will not be able to raise the funds it needs to meet its liquidity or capital needs
- The risk that the new venture will not have the skills necessary to be successful
- The risk that the entrepreneur will not be able to get a role of equal level once the new venture has failed
- The risk that the partner of the entrepreneur may not share this risk-taking spirit and prefers food on the table and shiny red bicycles for the children, rather than hoping for a future nirvana
So, poverty, loss of status, divorce, and depression are all risks that the entrepreneur needs to face. Of course, the entrepreneur who starts without a job is also taking risks, although some of these may be seen as being lower than that of the successful employee. In this, the final two risks still exist although they could potentially be a little lower. How could you get a lower salary if you do not have a job? Would you be as worried about your future if you were unemployed and did not appear to have much of a future? Without answering any of these issues, it is clear that unemployment and career change can be the catalysts for someone deciding to become an entrepreneur.
Having achieved that transition, I know this to be true.
So, everything in business focuses on the taking and managing of risk. Indeed, I view risk as being the currency of human activity, not money. Making money is often a consequence of risk-taking, not its cause. A gambler putting $400 on 15 at a casino is not doing it with the expectation that they will generally win. There is the balance of hope over experience and money is how the risk is expressed. The risk is better shown through using probability, the probability that the next number will be 15. The gambler knows it probably will not be, but that the return will be great if it is. This return is not only expressed in pure monetary terms, but also in the feeling of wellbeing and elation that the gambler feels. It therefore is not to be measured purely in terms of monetary value. So, risk is a concept that encompasses many things and it is only through obtaining a thorough understanding as to how risk impacts on your business that you will get to the heart of effective enterprise risk management. Indeed, the failure of many firms to fully understand their risk profile and the uncertainties that are inherent in their business is why so many companies fail in practice.