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It’s Only Common Sense: You Gotta Risk It for the Biscuit

One of the more surprising things I have learned in working with companies over the years is that not taking a risk can be more dangerous than taking one. Most of the companies I have worked with that are not willing to consider taking a risk are the ones that do not move forward quickly. There is something counter-productive about being risk averse. The company that continuously avoids taking risks is the company that 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, together with some methods for conducting calculated risk assessments:

In my past 25 years of consulting, I have found there are some opportune times when a company should take risks and go for it.

Chance of significant growth: When there is a clear opportunity to expand market share, enter a new market, or introduce a new product, is when a company should undertake a careful evaluation of the risks to take that next step; make sure that it makes sense and then go for it. In the words of the great philosopher Wayne Gretzky, “You miss 100% of the shots you don’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 produce that new technology. The key is to mitigate that risk by developing an ROI (return on investment) forecast to ensure you have enough customers and future business to earn a good ROI. Taking a risk does not mean being foolhardy.

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. Again, you can mitigate the risks by doing research. You can conduct customer surveys to get a better indication of the markets and specifically your customers’ needs—both today and in the future. Make sure there is a real and strong customer demand for your new capabilities.

Competitive pressure: When competitors gain an edge, you need to make a bold move to stay relevant and/or regain a competitive position. This is probably the best time to take a risk. You must keep up with the needs of the market and ensure you are at least equal, if not superior, to your competitors when it comes to your capabilities. I don’t think it takes much risk to stay ahead of your competitors. That’s just, excuse the expression, common sense.

Financial stability: A good time to invest in riskier projects is when the business has a strong financial foundation that can absorb potential losses. The best time to take a risk is when you have enough funds to sustain it. Having a strong treasure chest. Look 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, make sure to acquire the right company—one that has capabilities and technologies that complement your own. Look for a case where two and two will equal three, so to speak.

Risk mitigation: Before you take a risk, there are several things to do. First, identify and clearly define the risk. What are the potential opportunities and threats? To do this, you must do your research. Gather relevant data and information to help understand the potential impact of the risk. This could include market research, financial analysis, and industry reports.

Second, use tools like SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to evaluate the potential outcomes of taking the risk, then assess the likelihood of different outcomes and their potential impact on your business. You can do this by using scenario analysis or risk matrices.

Finally, what you will get by taking the risk? What will be the true reward? Calculate the expected value by multiplying the probability of each outcome by its financial impact and determining how good will it be for the company and to what extent, if you succeed.

By carefully evaluating these factors and conducting thorough risk assessments, businesses can make more informed decisions about when and how to take risks, which increases their chances of success while minimizing potential downsides.

Remember, taking risks is serious business. You can’t just shut your eyes and go for it. You must make sure these risks are smart and not just for fun. Take the risk only if, after checking everything out, you can say with certainty that it makes sense.

It’s only common sense.

Dan Beaulieu is president of D.B. Management Group.