Opportunity risk

Opportunity risk
See also

Opportunity risk is a type of risk that is associated with a loss arising as a result of irreversible use of resources for an emerging opportunity, which prevents their use in the event of a better chance. Understanding the word "opportunity" itself is key. Due to the misconception of this phrase, many people consider it only in a negative sense and define opportunity risk management as the prevention of bad events only. Because of that many organizations and programs were created to raise awareness of the idea that risk has both bad and good results. “By focusing on the downside of risk, companies can overlook opportunities that provide significant possibilities for organizational innovation and new competitive advantage. The reality is, risk and opportunity are two sides to the same coin — and both require attention by those who want to survive and thrive in the current business climate. By knowing how to recognize, manage and innovate around risk, a world of opportunity is available to companies”[1]

Opportunity risk management

Opportunity risk management is a very important element in every enterprise. Risk assessment is considered as the basis that has an impact on the type and severity of the undertaken strategy[2]. “Opportunity Risk Management is a process in which the benefits are tangible. The key is to ensure that risk management is not done in isolation, but is included in every process within the enterprise”[3]. “Opportunity Management helps eliminate poor ideas before they consume substantial resources and allows at the same time the development of powerful ideas that support the continued development of the enterprise”[4].

The basic activities that are carried out in the process of managing opportunity risks include[5]:

  • presenting ideas
  • defining opportunities
  • managing opportunities
  • implementing ideas

Strategies for identifying opportunities

“A number of strategies exist to help identify new opportunities and to give consideration to those that have been neglected because of perceived, but unexamined, risk. Some of these strategies include[6]:

  • Learning from the past- while past experience cannot necessarily be a predictor of future performance, signals that were ignored, missed opportunities, and business surprises can provide insight into In organizational blind spots.
  • Customer sensitivity- trying to understand customers in a way that the competition does not, and creating systems to exploit this information, can lead to great gains.
  • Learning from others- the adage, “A wise person learns from experience, but a wiser person learns from the experience of others,” holds as true in business as it does in life.
  • Scanning- active scanning of the business environment, potential competitors, or rival technologies is critical to successfully seizing opportunities and combating risk.”

Evaluating opportunities

Evaluation is one of the most important step taken in the process of managing opportunity risk. There are many methods that are used for this purpose. One of the most common is ROI.

“A modified ROI calculation that includes real options is a seven-step process that includes[7]:

  1. Generating options using real options thinking.
  2. Estimating the opportunity benefit.
  3. Evaluating the costs inherent in capturing the opportunity (including required risk mitigation activities).
  4. Estimating the probability that the risks needing mitigation will actually emerge.
  5. Calculating the expected impact/value of the risk.
  6. Calculating NPV of the opportunity and the risk.
  7. Calculating the expected value of the ROI”.

The risk and opportunity management plan

It is a document specific to each project, which contains records of decisions that have been made throughout the entire project. This plan includes risk analyzes with a description of their opportunities and threats as well as final assessments. “ This information is recorded in a risk and opportunity register, which lists every decision, its identified risks and opportunities, their likelihood and potential consequences in terms of project objectives, who owns the risk and the response strategy in each case (including identifying responsibilities for actions needed)”[8].

Footnotes

  1. Bekefi T., Epstein M.J., Yuthas K., 2009
  2. Bekefi T., Epstein M.J., Yuthas K., 2009
  3. Ivascu L., Cioca L., 2014
  4. Ivascu L., Cioca L., 2014
  5. Bekefi T., Epstein M.J., Yuthas K., 2009
  6. Bekefi T., Epstein M.J., Yuthas K., 2009
  7. Bekefi T., Epstein M.J., Yuthas K., 2009
  8. Loosemore M., Raftery J., Reilly Ch., Higgon D., 2006

References

Author: Aleksandra Wróbel