In working with so many companies over the years, one of the more surprising things I have learned is that not taking a risk can be more dangerous than taking one. Most of the time the companies I have worked with who are not willing to even consider taking a risk are the ones who do not move forward very quickly. There is something counterproductive about being risk-averse. And in the end the company that continuously avoids risk taking is the company that just does not do that well.
Deciding when to take a risk in business involves a combination of intuition, analysis, and strategic thinking. Here are some guidelines to help you determine when it might be time to take a risk, along with methods for conducting calculated risk assessments.
During the past twenty-five years of consulting I have found that there are some opportune times when a company should take a risk, when a company should go for it.
Chance of significant growth: When there is a chance at significant growth. When there is a clear opportunity to expand market share, enter a new market, or introduce a new product that has high potential. A company should do a careful evaluation of the risks it must take to take that next step, make sure that it makes sense and then go for it. In the words of that great philosopher Wayne Gretzky, “I never made any shots I didn’t take.”
Innovation and Differentiation: Taking a risk could lead to innovation, setting your business apart from competitors and creating a unique value proposition. This kind of risk can be scary, especially in our capital intensive business, you might have to spend a lot of money on new equipment to be able to produce that new technology. The key is to mitigate that risk by developing a ROI (return on investment) forecast to make sure you will have enough customers and business in the future to earn a good ROI. Taking a risk does not mean being fool hardy
Market Trends: When market trends indicate a shift that aligns with your business capabilities and strengths, taking a risk to capitalize on these trends can be beneficial. Once again the risk can be mitigated by doing the research. You can conduct customer surveys to get a better indication of the market’s and specifically your customers’ needs not only today but in the future as well. You have to make sure that there is a real and strong customer demand for the new capabilities you will be attaining.
Competitive Pressure: When competitors are gaining an edge, and a bold move is needed to stay relevant or regain a competitive position. This is probably the best time to take a risk. You have to keep up with the needs of the market and you have to make sure you are at least equal if not superior to your competitors when it comes to your capabilities. Frankly, I don’t think it takes much of a risk to stay ahead of your competitors, that’s just, excuse the expression, common sense.
Financial Stability: When the business has a strong financial foundation that can absorb potential losses, making it a good time to invest in riskier projects. It’s pretty obvious that when you have enough funds to sustain a risk, that’s the best time to take one. As a matter of fact, having a strong treasure chest is the perfect time to take a risk. Actually, you should be looking for the right strategic risks to take when you can finance them.
Acquisitions: taking a risk by buying another company is one of the best ways to grow your business. Sure, you’re taking a risk, but you are also taking on overall equity, which will make your company even stronger. Of course, you have to make sure that you acquire the right company, one that has capabilities and technologies that complement your own. You have to be looking for a case where two and two will equal three to speak.
Risk Mitigation: But before you take a risk there are a few things that you have to do. The first is to identify the risk, clearly define the risk you are considering. What are the potential opportunities and threats associated with this risk? To do this you have to do your research. You should gather relevant data and information that can help you understand the potential impact of the risk. This could include market research, financial analysis, and industry reports.
Then you have to take a look at what could possibly happen by using tools like SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to evaluate the potential outcomes of taking the risk. And then assess the likelihood of different outcomes and their potential impact on your business. This can be done using scenario analysis or risk matrices.
And finally figure out what you will get out of taking the risk. What will be the true reward in the end? Calculating the expected value by multiplying the probability of each outcome by its financial impact will quantify this risk.
By carefully evaluating these factors and conducting thorough risk assessments, businesses can make more informed decisions about when and how to take risks, increasing their chances of success while minimizing potential downsides.
But remember taking risks is serious business. You can’t just shut your eyes and go for it. You have to make sure that the risk you are taking is a smart one and not do it just for the fun of it. Nope you have to do it because after checking everything out you can say for sure that it makes sense. And that’s only common sense.
