Opportunity risk
Opportunity risk refers to the potential loss of a potential gain or opportunity. It is the risk of not taking advantage of a potentially profitable situation. This can occur in any situation, including business, investing, or personal decisions. It is important to weigh the potential benefits and risks of an opportunity before making a decision.
Opportunity risk analysis is the process of assessing the risks associated with a potential opportunity. It involves identifying and evaluating the potential risks that could arise from pursuing the opportunity, and determining the likelihood of those risks occurring. This analysis helps businesses make informed decisions about whether or not to pursue a particular opportunity and how to manage any potential risks involved. The analysis typically includes an assessment of the upside potential of the opportunity, the downside risk, the chance of success, and the resources required to pursue it.
What is opportunity?
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]
Examples of opportunities in risk management
Examples of opportunity risk include:
- Not investing in a rapidly growing industry because of a lack of familiarity with it, and missing out on potential returns.
- Not diversifying a portfolio and missing out on potential returns from other investments.
- Not investing in a new technology or product because it is not fully developed yet, and missing out on potential returns when it becomes successful.
- Not investing in a foreign market because of perceived political or economic risk, and missing out on potential returns from that market.
- Not investing in a company because of short-term financial struggles, and missing out on potential returns when the company becomes successful in the long-term.
Example of opportunity risk analysis
An example of opportunity risk analysis would be a company considering a new product line. They would analyze the potential market size, competition, and projected financials of the product line to assess the opportunity risk. The company would consider the potential gains of the product line, but also the potential losses if it doesn't perform as well as expected.
In this analysis, the company might also compare the potential returns of the new product line to other potential investment opportunities, such as expanding into a new market or acquiring another company.
They would also consider the opportunity cost of not investing in the product line, for example the potential loss of market share or the risk of competitors taking advantage of the opportunity.
Overall, opportunity risk analysis is a process of weighing the potential gains and losses of an investment opportunity, and comparing it to other opportunities to make an informed decision.
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
Opportunity risk analysis procedure
- Identify the opportunity: The first step in the opportunity risk analysis process is to identify the potential opportunity. This includes gathering and analyzing relevant information about the opportunity, such as market size and potential customer base.
- Assess the potential risks: After identifying the potential opportunity, the next step is to assess the potential risks associated with it. This includes identifying the potential risks that could arise from pursuing the opportunity and estimating the likelihood of those risks occurring.
- Assess the potential rewards: The third step in the opportunity risk analysis process is to assess the potential rewards associated with the opportunity. This includes identifying the potential benefits of pursuing the opportunity, such as increased revenue or market share.
- Estimate the probability of success: The fourth step in the opportunity risk analysis process is to estimate the probability of success. This includes assessing the likelihood of success and the chances of achieving the desired outcomes.
- Estimate the cost of pursuing the opportunity: The fifth step in the opportunity risk analysis process is to estimate the cost of pursuing the opportunity. This includes estimating the time, money, and resources required to pursue the opportunity.
- Evaluate the overall risk-reward balance: The sixth step in the opportunity risk analysis process is to evaluate the overall risk-reward balance. This includes assessing the potential benefits and risks, and determining if the potential rewards outweigh the potential risks.
- Make a decision: The seventh step in the opportunity risk analysis process is to make a decision. This includes considering the available information and making a decision about whether or not to pursue the opportunity.
- Implement the decision: The final step in the opportunity risk analysis process is to implement the decision. This includes taking the necessary steps to pursue the opportunity, such as developing a strategy and allocating resources.
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]:
- Generating options using real options thinking.
- Estimating the opportunity benefit.
- Evaluating the costs inherent in capturing the opportunity (including required risk mitigation activities).
- Estimating the probability that the risks needing mitigation will actually emerge.
- Calculating the expected impact/value of the risk.
- Calculating NPV of the opportunity and the risk.
- 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
- ↑ Bekefi T., Epstein M.J., Yuthas K., 2009
- ↑ Bekefi T., Epstein M.J., Yuthas K., 2009
- ↑ Ivascu L., Cioca L., 2014
- ↑ Ivascu L., Cioca L., 2014
- ↑ Bekefi T., Epstein M.J., Yuthas K., 2009
- ↑ Bekefi T., Epstein M.J., Yuthas K., 2009
- ↑ Bekefi T., Epstein M.J., Yuthas K., 2009
- ↑ Loosemore M., Raftery J., Reilly Ch., Higgon D., 2006
| Opportunity risk — recommended articles |
| Go no go decision — Business case development — Business risk management — Benefits of planning — Economic feasibility — Decision point — Capital planning — Business needs — Investment project |
References
- Bekefi T., Epstein M.J., Yuthas K., (2009), Creating growth from effective opportunity risk management, CMA Management
- Ivascu L. Cioca L., (2014), Opportunity Risk: Integrated Approach to Risk Management for Creating Enterprise Opportunities, Conference Paper
- Loosemore M., Raftery J., Reilly Ch., Higgon D., (2006), Risk management in projects: 2Nd edition, Taylor&Francis Group
Author: Aleksandra Wróbel
