Bad Approaches to Risk
The nature of business is to take calculated risks to create value. Companies risk their human potential, capital, and resources to develop and sell products, services, and solutions customers are willing to pay for. The problem is that many businesses approach risk at one of two extremes.
Extreme #1: The Cavalier Approach
Some companies see potential in the market around them and seek to take advantage of every opportunity, regardless of the risk involved. They often commit more than they should and become overextended.
Both startups and long-term market leaders often fall into this category. Startups are constantly surrounded by risk, making them too comfortable and thoughtless in their decisions. Established leaders are too confident in their status and don’t respect real risks when they confront them. Think of how Blockbuster had cornered the market on video rentals until Netflix and video-on-demand obliterated it.
For both startups and market leaders, the inability to devote resources to scanning their current and future markets can wreak havoc on their viability.
Extreme #2: The Fearful Approach
Rather than being oblivious to risks, firms that are too risk-averse become paralyzed and unable to respond to changing market conditions. They rely on data from past successes to inform their current choices and fail to innovate. These organizations possess a signal-to-noise problem: They cannot effectively sift vital information from background clutter. Prime examples are Research In Motion and Kodak — they were both market leaders in their day, but were unable to recognize the risk in their positions of apparent strength.
An off-balance approach to risk can cause a number of problems. Businesses are left with no way to identify risk as a precursor to managing it, and they often suffer dire consequences from inaction. Across the enterprise, there may be patterns of risky practice, but because there’s no method for voicing risks, they continue until they cause harm.