Manage risk
As you are piloting your company out of the recession, you might have the temptation to forego a smooth, gradual approach to recovering in favor of the home-run swing — the off-the-wall idea or all-in opportunity that could slingshot your company back to high profitability.
There is certainly room for risk in business. You probably didn’t get to where you are without taking some risks — maybe even some sizable risks. But risk is still something that needs to be carefully managed. Risk management needs data and brainpower, not gut feelings and Hail Mary heaves.
Kalenka says risk management is the most important topic being discussed in boardrooms today.
“I’ve never seen many boards agree or come up with the same definition of risk tolerance or risk appetite,” he says. “It will really vary depending on the growth objectives of the company. The more aggressive the growth strategy, the more risk appetite that the company has. There is always a calibration that takes place, which is the result of a series of discussions between the management of the company and the board.”
When analyzing whether an opportunity contains too much risk, you once again need to go back to the ground level and take a look at the market and the resources that you will have available to try and turn the opportunity into a reality.
“If you’re looking at expanding into a market to approach the consumer or end user of your product, then it’s clear that you need to look at the forecast demand for the product,” Kalenka says. “A lot of the expanding I’m seeing is into foreign markets, and it’s sort of a combination of being able to utilize local production capabilities around research and development, at the same time being able to access the local market.
“I have a client that just expanded into Brazil. They bought a factory and acquired production talent, and clearly Brazil is a large, growing market and an opportunity from a consumer perspective. But they looked at the size of the consumer market as well as the labor force, the cost of doing business and the quality of manufacturing that they expect coming from that local marketplace. Those are all important considerations, and each of those can be flexed depending on the need of the company that is expanding.”
You also need to consider the legal and tax-related ramifications of making any thrust into a new market.
“There is a basic set of requirements, such as the regulatory environment, the tax burden that might be put on your company and the international tax structure, all of which might need to be taken into consideration.”
There is no uniform definition of what qualifies as too much risk for a company — which is why you need to go back to your strategic planning process and, as part of your assessment phase of a given market, define your risk tolerance levels before attempting to seize any opportunity.
“There isn’t a lot of money to be thrown around right now, so what we typically see is a definition of risk tolerance established early on in the strategic planning process,” Kalenka says. “It’s the larger risks that push the risk tolerance level, and that’s when you have the biggest need to discuss how it’s going to be mitigated. But there really is not a one-size-fits-all answer.”
How to reach: PricewaterhouseCoopers LLP, (619) 744-8000 or www.pwc.com
