The real market movers are those that are able to embrace risk as part of their business models and use it to their advantage. But when the stakes are high, how do you make sure you come out a winner?
Any gambler will tell you that the flip side of risk is gain. The most entrepreneurial and successful businesses seize the bull by the horns and negotiate an advantage, turning what others fear into a lucrative business opportunity. For example, some of the world’s most war-ravaged and inhospitable states are also rich in resources and minerals, waiting to be mined by the boldest market movers.
Meanwhile, inherent business risks – such as those posed by climate change and the uncertain financial markets – also provide innovative enterprises with niche market opportunities customised to manage and exploit risk. Here are five ways that you can incorporate risk directly into your business strategy.
1 Identify the limits of your risk appetite
When Shell goes into a challenging new territory to probe for oil, it carries with it not only the expertise it has gleaned from similar forays in the past, but also the knowledge that it can absorb any large losses. In the same way as a fund manager juggles the potential of returns across a range of investment opportunities, serious risk should be limited to a percentage that can be easily absorbed by the non risk-affected returns of the business.
2 Look for potential gains inherent in business models
A music producer may run a recording studio on the basis of safe return, satisfying clients on a day-to-day basis. But, if one of the clients records a hit, royalties from the hit album can bring a huge one-off gain. The risk in certain business models is entrenched in a similar way. This type of risk requires no extra cost outlay, and sits on top of the company model like a recurring lottery ticket.
3 New risks bring new ideas
Mining for oil has been a risky business for many years, but there are always new risk sectors emerging for businesses to exploit. Take the rising significance of climate change and environmental sustainability. Companies now evaluate their carbon footprints and water usage as part of their future growth forecasts. But these new sectors are also stimulating innovative business ideas.
Deloitte Consulting LLP director Will Sarni says US engineering giant GE was early to use its expertise with energy, transportation and engineering to move into the water sector. “All industries, whether consumer facing or business-to-business need water, and water scarcity will drive innovation,” he says.
4 Track underlying risk-affecting policy
Although risk is necessarily unforeseeable, that does not mean that it cannot be quantified within parameters. Managing director of London-based consultants Hargreaves Risk and Strategy John Hargreaves advises a group of housing associations that pool together to share their analysis of risk issues.
At the moment, the convergence of cuts in UK social security payments and underlying changes of government policy towards the housing sector mean that the nexus of risk is changing fast in this sector.
Hargreaves says that this means predicting future returns for housing associations need to be recalibrated according to the new risk environment that they are operating in. “Tracking the impact of changes in regulations and policy can be vital to assessing risk in any sector,” he adds.
5 You will always benefit In a captive market
If you are offering services in risky sectors, seek a niche where your company expertise cannot be easily matched. Even if your services or goods are so specialised that they are only required in very rare circumstances, if you are the only person capable of delivering them, sooner or later your speculation will pay off.
A good example was pioneering fire-fighter Paul Neal ‘Red’ Adair, who developed a reputation that made him the first port of call during disasters affecting oilfields. Cataclysmic disasters involving oilfields may have been few and far between, but when they happened, it was Red who got the call.
And because of this, he could charge pretty much what he liked, as he pointed out himself: “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur!” SR
