Business is not about avoiding risk, but about understanding it better than the competition – says business advisor Beata Drzazga
Why is everyone talking about risk all the time? Why do we have to think about it all the time instead of just working calmly?
Because our reality is unimaginably complex. In fact, we can never accurately predict all the consequences of our actions. Customer preferences and the legal environment change day by day, and competitors come up with new ideas. The number of possible variants of the development of the market situation is impossible to count, so instead of analyzing all of them, it is more convenient to talk about risk, which is also a strongly abstract category.
Business risk is exposure to factors that can reduce profits or lead to the collapse of the enterprise. That is, we are talking about very serious matters here. Getting to know the risk in the best possible way, or even making friends with it, is one of the most important tasks of an entrepreneur. It is also one of the first things a business advisor should talk to his client about.
So what factors make the business risk go down or up?
As a rule, it is assumed that greater risk means the possibility of achieving greater profits, but also greater losses. In fact, it is not that simple. What works in a casino where the risks are fully known may not be true in the business reality. Most often, the main risk factors are changes in consumer behavior, micro- and macroeconomic changes, as well as changes in laws and regulations.
Please note that we have no influence on all these factors. If someone a few years ago dealt with the production or importation of plastic cutlery from abroad, he could limit the risk in any way, but he was not able to protect himself against the fact that plastic cutlery would be banned. Here is an example of a stable business with a relatively low level of risk, where suddenly huge losses occur. Manufacturers of surgical masks can talk about the opposite. This low-risk business suddenly gifted an unbeatable boom. However, he is in trouble now, as the market has experienced very intense competition, struggling with falling demand.
The risk is also related to the intensity of competition. It is about both competition between suppliers and competition between customers. The risk is greater, the greater the competition between suppliers and the greater, the less competition for the product between recipients or consumers.
How, then, can we limit the risk?
In business, the primary way to reduce risk is to gain a sustainable competitive advantage. The risk is dramatically reduced if we are able to provide buyers with a certain added value at a lower cost than the competition. That’s when our competitors need to worry. Another way is to consistently test the business model, products and concepts, which is also a method of building a competitive advantage.
It seems a good idea to give up intuition and base the decision-making process on mathematical and statistical methods. In business, intuition is often pure gambling. Risk can also be distracted by engaging in several different projects at the same time. This method is very often used by investors. The dispersion of risk makes statistics our ally. We can compensate for failures in some projects with successes in others. By quickly closing the former and by improving and investing in the latter, we can build a quite profitable investment portfolio.
You mean risk is not a bad thing?
No, as long as we understand them better than our competitors.