From the moment we drew our first breath, we were at risk. And every moment thereafter we have lived in an inherently risky world. Risks are ever-present, and managing risks is something that we all must do.
When, as a child, your mother admonished you to look both ways before crossing the street, you were engaged in risk management. And virtually every day, you engage in eliminating, mitigating and transferring risks or responding to the opportunities such risks may create.
According to the Small Business Administration, roughly 30 percent of an estimated 250,000 new businesses each year fail before their second birthday, 50 percent are gone before year five and 66 percent fail by year 10. So, of the new ventures started this year, 165,000 will have failed by 2028!
How should today’s entrepreneur deal with the risks inherent in today’s complex, competitive environment? Noted business guru Peter Drucker gave this sage advice: “The first duty of business is to survive — and the guiding principle of business economics is not the maximization of profits; it is the avoidance of loss.”
While that counsel might lead us to lean toward risk avoidance, Drucker also said, “People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.” Either way, we dance on the tightrope.
So, what are we to do to survive? Responses to perceived risks can range from paranoid fear to reckless abandon — or more measured and thoughtful consideration of risk factors and how to respond to them. In that regard, it may surprise you to discover that some of the best advice came in a book first published in 1662, Logic or the Art of Thinking.
The book, authored by a group of French monastery monks, states, “Fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event.”
An example of this might be the risk of being struck by lightning, an event that might prove fatal. The probability of this catastrophe, however, is quite low. Nevertheless, some people are terrified by the sound of thunder. While they understand the low likelihood of being struck, they have extreme fear of the potential “gravity of the harm.” It is real to them and factors into how they should respond to the risk.
Recognizing that both the gravity of the harm and the probability of the event are important, we should consider these nine business assassins that routinely destroy companies today:
1. Failure to identify the needs of a clearly defined target market for products/services.
2. Failure to nurture customer relationships.
3. Poor product/service quality.
4. Failure to price products/services to generate profit.
5. Failure to effectively compete.
6. Failure to develop and implement a coherent business model.
7. Poor marketing.
8. Undercapitalization, lack of cash.
9. The wrong team.
With these in mind, where are the risks for your business? How do you see the “gravity of the harm” of those that seem most critical? And what, in your best judgment, is the “probability of the event” that any given risk factor will rear its head?
With those answers in mind, you should have a good idea where to focus in eliminating, mitigating or transferring the risks most significant for you.
No discussion of risk should fail to acknowledge the critical role of inspired risk-takers in creating the extraordinary innovations we enjoy today. It is the bold individuals who make the big bets who have brought us Amazon, Google, Tesla and many more corporate all-stars. They have thrived in our risky world, recognizing that without risk, there is no reward. In this regard, we would all do well to consider our risks through the eyes of Theodore Roosevelt, who said, “It is hard to fail, but it is worse never to have tried to succeed.”
Richard Tyson is the founder, principal owner and president of CEObuilder, which provides forums for consulting and coaching to executives in small businesses.