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Applying Risk Assessment to Potential Courses of Action

Applying Risk Assessment to Potential Courses of Action

January 25, 2024

Calculated risk-taking is a strategy used often by the US military, small businesses, and even families or individuals, when identifying and considering courses of action that lead to potentially high impact results. For businesses, a few common scenarios are the opportunity to potentially bring in higher profits, penetrate a key market segment, or capitalize on an acquisition opportunity, while also minimizing the potential for losses or failure.

It involves testing different solutions (assessing the risks) associated with a particular decision, weighing those risks against the potential rewards, and then making an informed decision based on the assessment. By taking calculated risks and pursuing innovative ideas, small businesses can increase their chances of success and growth to help stay ahead of their competitors by making better decisions around business operations.

Improvision is a tactic, not strategy 

While taking calculated risks is a critical aspect of business success, this process must be carefully thought out and planned to avoid potential negative consequences. Keep the following principles in mind when calculating the pros and cons of risk-taking:

Reward vs. Risk - Understand the potential reward versus the potential risk. It is important to analyze both sides of the equation before making any decision. How much is the potential reward? How much is the potential risk? The potential reward, obviously, has to exceed the potential risk. Normally multiple scenarios are developed and contrasted and key contributing factors to each are critically analyzed.

Planning – It is important to create a plan for how the business will manage the risk if things don’t go as planned. Not every new plan will be successful as originally envisioned. So, there must actually be two plans...one plan if all goes well and another plan (backup plan) to mitigate the downside of any decision if the plan is not successful. In the military, it is common to run many scenarios, but at least three potential courses of action all the time: a) the most likely, b) the most dangerous, and c) the most advantageous. 

Multiple Plans of Action - Be prepared to take action on the backup plan if things don’t go as originally planned. Having a backup plan can help a business recover quickly from any missteps or unexpected events that may occur along the way, but the backup plan must be acted upon and not just a plan with no execution.

It's also a good idea to know how risky your company is under the status quo. Robert Simmons authored a great article in 1999 titled How Risky Is Your Company? , published in he Harvard Business Review. It is worth reading. Check it out HERE.

It's Occurred Before – Many situations that a business encounters will have happened in the past to other businesses. Research (if possible) and consider how other businesses handled similar situations and what lessons can be learned from their experiences or similar situations within the same business even if all factors are not identical. 

Gain Insight - Use trusted advisors or mentors who can provide valuable insight into making prudent decisions and minimizing risk. There is no harm in seeking advice from others. It is more important to be right than simply making all decisions independent of valuable advice.

Trial and Error 

By testing different strategies and approaches, management can determine which ones are most effective for the particular business and which ones should be avoided. Trial and error (calculated risk-taking) can help a business identify potential risks before they become major issues or problems. A trial-and-error approach can save a business time, money, and resources in the long run.

Take Intelligent, Aligned Risks 

Risk-taking allows owners and managers to be creative and innovate that can produce increased growth and profits for a business and stay ahead of its competition. It is important to take smart risks in the right areas while avoiding undertaking unnecessary risks. With any new idea, there are always risks and benefits associated with the idea; therefore, it is important to evaluate the risks and benefits of any new idea before implementation. While contemplating a new idea, be sure to include calculated risk-taking when making a decision to go forward or not.

For questions or comments reach out to Brian directly at brian@gibborimfinancial.com .