RISK AND OPPORTUNITY

Explain how risks can present an opportunity to the organisation and how effective risk management can help a company achieve competitive advantage.

Historically, the focus of risk management has been on preventing loss. However, recently, organisations are viewing risk management in a different way, so that:

• risks are seen as opportunities to be seized
• organisations are accepting some uncertainty in order to benefit from higher rewards associated with higher risk - risk management is being used to identify risks associated with new opportunities to increase the probability of positive outcomes and to maximise returns 
• effective risk management is being seen as a way of enhancing shareholder value by improving performance.

Incurring an acceptable amount of risk tends to make a business more competitive. Conversely, not accepting risk tends to make a business less dynamic, and implies a ‘follow the leader’ strategy. Incurring risk also implies that the returns from different activities will be higher – the ‘benefit’ being the return for accepting risk. Benefits can be financial – decreased costs, or intangible – better quality information. In both cases, these will lead to the business being able to gain competitive advantage.

Focusing on low-risk activities can easily result in a low ability to obtain competitive advantage –where there is low risk there is often only a limited amount of competitive advantage to be obtained. 

High-risk activities can similarly generate low or high competitive advantage. Activities with low competitive advantage will generally be avoided. There remains the risk that the activity will not work, and that the small amount of competitive advantage that would be generated is not worth that risk. Other high-risk activities may generate significant amounts of competitive advantage. These activities are worth investigating because of the high returns that can be generated.

If a business does not take some risk, it will normally be limited to activities providing little or no competitive advantage, which will limit its ability to grow and provide returns to its shareholders. The challenge to the organisation is to manage the risks to ensure that the benefits are realised.