Business professionals are no stranger to risk and uncertainty. Whether it’s reaching out to a new client, or releasing a new product, risk and uncertainty influence every business decision. They can push a startup to innovate faster, or bankrupt businesses that fail to plan accordingly.
But what are the differences between the two concepts? Are they similar, or more different than people think?
The Difference Between Risk and Uncertainty
Risk is defined as the possibility or probability of an unpleasant or undesirable event.
In business, risk might suggest the potential loss of money, time, or information. Most importantly, risk can be calculated or measured. Entrepreneurs can use market data to calculate whether a new product may be worth introducing. Accountants can use balance sheets to measure the profitability of certain stores. Calculated risk can be beneficial, as risk takers can also generate significant returns.
On the other side, there’s uncertainty. In contrast, uncertainty involves situations with unknown variables, information, and outcomes. Uncertainty cannot be measured or calculated.
Since uncertain events are unique and difficult to plan for, they come with even greater downsides for unprepared businesses. During the dot-com era, companies invested heavily in expensive domains before understanding their value. When the bubble finally burst, several companies disintegrated, and thousands of employees laid off.
The main takeaway from these two concepts: risk can be measured and predicted, while uncertainty cannot.
Examples of Risk and Uncertainty
Here are a few examples of risk and uncertainty in the business world:
- Risk is when an online clothing store decides to sell a new line of clothing, based on customer analysis. Uncertainty is when that same clothing store introduces a new, unrelated product without research, such as a new furniture line.
- Risk is when a company moves their processes and data to the cloud. Uncertainty is when a major outage affects multiple servers across the nation.
- Risk is when an ad agency opens an office in a new country. Uncertainty is when the country enters a recession.
Risk Management: How to Plan for High-Risk Events
Fortunately, risk is something that can be predicted and planned for ahead of time. Gary Patterson’s Million Dollar Blind Spots, outlines a simple but repeatable process for risk management:
- Identify risk – Spot the risk early through research and historical analyses.
- Assess the probability – Evaluate all the factors involved, including the likelihood of positive and negative outcomes
- Make a cost-benefit analysis of alternatives – Measure the pros and cons of each decision you could take.
- Choose a response
- Evaluate results – How did the chosen action impact the business?
- Ongoing monitoring – Risk events should be constantly checked for changing circumstances. In some cases, risk aversion may be the best option.
While uncertainty cannot be measured, the same approach may be taken in addressing related tasks and challenges. While a recession cannot be predicted, a business can take steps to protect the future of its employees and customers.
Turning Risk Into Opportunities
Risk and uncertainty surround every business. Weighing options and outcomes, and deciding the final action as a team is just one way a business can remain vigilant. With enough practice in risk analysis and assessment, risk turns from an obstacle into a challenge. Risk forces startups to mature and innovate faster through competition, and rewards entrepreneurs with greater experience of the market and industry. Risk can’t be avoided, but when businesses learn to prepare, risk can open up new business opportunities.
Risk vs Uncertainty
The main differences between risk and uncertainty can be summarized by control and predictability. Risk can be measured, and therefore, controlled. Changes in sales because of the season can be predicted and planned. This is why risk analysis or risk assessment can be important for a business’s strategic development. Calculated risks can lead to great rewards.
Uncertainty on the other hand cannot be quantified or controlled. For example, a new local competitor can have unpredictable effects on your own sales. You cannot measure uncertainty, you can only deal with uncertainty. This is why we look for certainty as much as we can: the more certain future events are to take place, the better a business can prepare.
Need help with preparation? Read our 5 tips on business planning.
Addressing risky situations requires courage and leadership. Learn how to develop those skills.
For more tips and guides on managing businesses and startups, follow Novel Coworking’s blog today.