Page 43 - (DK) The Business Book

START SMALL, THINK BIG 41

See also: How fast to grow 44–45 ■ Hubris and nemesis 100–103 ■ Who bears the risk? 138–45 ■ Leverage and excess risk
150–51 ■ Off-balance-sheet risk 154 ■ Avoiding complacency 194–201 ■ Contingency planning 210 ■ Scenario planning 211

managing risk, it might be best there is a risk that interest rates will
to put all your eggs in one basket, rise, and repayments will become
then watch that basket. too burdensome to afford. Start-ups
From the collapse of Lehman that rely on overseas trade are also
Brothers (2008), to BP’s Deepwater exposed to exchange-rate risk.
Horizon disaster (2010), events of Moreover, new businesses in It’s impossible that
the early 21st century fundamentally particular may be exposed to the the improbable will
changed how organizations risk of operating in only one market. never happen.
perceive risk. Companies now think Whereas large companies often Emil Gumbel
in terms of two factors: oversight diversify their operations to spread German statistician (1891–1966)
and management. “Risk oversight” risk, the success of small companies
is how a company’s owners govern is often linked to the success of one
the processes for identifying, idea (the original genesis for the
prioritizing, and managing critical start-up) or one geographic region,
risks, and for ensuring that these such as the local area. A decline
processes are continually reviewed. in that market or area can lead
“Risk management” refers to the to failure. It is essential that new At its heart, risk is a strategic
detailed procedures and policies businesses are mindful of market issue. Business owners must
for avoiding or reducing risks. changes, and position themselves carefully weigh the operational risk
to adapt to those changes. of start-up, or the risks of a new
Inherent risks The Instagram image-sharing product or new project, against
Risk is inherent in all business social-media application, for example, potential profits or losses—in other
activity. Start-ups, for example, face started life as a location-based words, the strategic consequences
the risk of too few customers, and service called Burbn. Faced with of action vs. inaction. Risk must be
therefore insufficient revenue to competition, the business changed quantified and managed; and it
cover costs. There is also the risk track into image-sharing. Had poses a constant strategic challenge.
that a competitor will copy the Instagram not reacted to the risks, Fortune favors the brave, but with
company’s idea, and perhaps offer a and been savvy enough to diversify people’s lives and the success of the
better alternative. When a company its offering (regularly adding new business at stake, caution cannot
has borrowed money from a bank features), it may not have survived. simply be thrown to the wind. ■

In deep water

Even large and diverse who examined the disaster
organizations can find it hard to claimed that BP had prioritized
successfully balance risk against financial return over operational
potential financial reward. On risk. Chief executive Tony
April 20, 2010, Deepwater Horizon, Hayward, who took the post
an offshore oil rig chartered by in 2007, had suggested that the
British Petroleum (BP), exploded, organization’s poor performance
killing 11 workers and spilling at the time was due to excessive
tens of thousands of barrels of caution. Coupled with
crude oil into the Gulf of Mexico. increasing pressure from
The incident was blamed on shareholders for better returns,
BP’s Deepwater Horizon incident management failure to adequately the bullish approach that
led to huge fines and US government quantify and manage risk; the followed led to significant cost
monitoring of its safety practices and official hearing cited a culture cutting and, eventually, risk-
ethics for four years. of “every dollar counts.” Analysts management failures.