University of Massachusetts Amherst

Family Business Center

Risk tolerance turns small firms into big ones

by Emerging Business Services, PricewaterhouseCoopers

One quality that sets entrepreneurs apart from other businesspeople is the way they perceive risk. The don't view risk quantitatively or statistically. Instead, they believe the odds are affected directly by their own skills and efforts. They don't see themselves as risk-takers any more than mountain climbers see themselves as risking their lives.

The mountain climber is exhilarated by the prospect of achievement, not by the threat of failure. He believes that he'll be able to meet each challenge ahead with the proper move. If he felt otherwise, he would call off the expedition. If the entrepreneur felt he couldn't succeed, he too would halt the process.

Thus, while entrepreneurs take initiatives that others would consider risky, they see these initiatives as moving toward achievement of a tightly focused objective and they respond to risk opportunities by knowing their own tolerance level. This doesn't mean they are unaware of the risks, or where responsibility for failure would rest. Entrepreneurs know they have no one to blame if they fail but themselves.

When investing in the stock market, one can afford to risk only what one can afford to lose. On the other hand, one who never lost in the market probably never invested, either. The more risks an organization is allowed to take, the greater the chances that an effort will fail. The greater, also, will be the opportunities for success; however, one success can generally compensate for several failed efforts. This is particularly true when an effort that is failing can be discontinued before it becomes too costly.

In every enterprise there are those few critical areas where a failure-though the business may be performing well in all the other critical areas-will eventually mean failure of the current enterprise.

These critical success factors are built around the central values of the business. In the personal computer industry, for example, one critical success factor is to remain the vendor of first consideration, and the central value that may establish this is quality of service. Such a central value requires tight controls and should not be put at risk.

On the other hand, there are scores of other factors in the business that don't require tight control, such as how a particular task gets done. The business owner should resist the impulse to supervise every detail of the enterprise and should concentrate instead on developing people, building an organization, and reinforcing the entrepreneurial environment.

Risks should be commensurate with their entrepreneurs' ability to compensate for their losses through their own energies, through their successes, or through their abilities to rescind a decision before errors become too costly. Entrepreneurs are themselves taking risks when they authorize subordinates to take risks. However, in order to make that decision, they don't have to spend any more time than it takes to determine the worst-case scenario if the decision went wrong and what it would cost to fix. It is possible in this way to contain risks to what would be a manageable loss.

Entrepreneurs make many mistakes and correct most of them before anyone notices. Such a pattern would not be acceptable in most corporations, where the culture is normally geared toward the avoidance of risk and maintaining a status quo. The process becomes almost more important than the product. As a result, many entrepreneurs would feel discomfort within a traditional corporate structure.

The process of correcting a mistake-of reacting to the consequences of a bad decision-makes the entrepreneur a stronger force in the economy, a more confident leader in the marketplace. The process of taking control of one's own future and experiencing the survival of a vision through both good and bad decision-making breeds the kind of entrepreneurial courage that is always at a premium.

The ability to tolerate risk by delegating authority helps to build an organization and is the key to successfully transforming a small business to a large one.

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