Creating Growth: Using Opportunity Risk Management Effectively

By Bekefi, Tamara; Epstein, Marc J. et al. | Journal of Accountancy, June 2008 | Go to article overview

Creating Growth: Using Opportunity Risk Management Effectively


Bekefi, Tamara, Epstein, Marc J., Yuthas, Kristi, Journal of Accountancy


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EXECUTIVE SUMMARY

* By focusing on the downside of risk, companies can overlook opportunities that provide significant possibilities for organizational innovation and new competitive advantage.

* Opportunities can arise from within the organization and externally. Internal sources include technological innovations, supply chains, how a company structures itself, partners with other entities, and operates to deliver its products and services. Externally, sensitivity to customer needs, competitors and the political, legal and social landscape can provide opportunities.

* Assessing, and potentially altering, the organization's risk appetite is a first step in managing opportunities related to risk, A company's risk appetite is influenced by its culture and changes over time. Risk appetite can be altered by improving organizational learning, using networks for increased learning, expanding the time horizon, and expanding the breadth of stakeholders considered in the analysis.

* Companies that can identify and profit from opportunities often do so through innovation. Innovation can include a breakthrough idea that leads to a winning product. Innovation is a system to improve the likelihood that ideas will flourish and lead to market success. Financial professionals play a critical role by creating structures, measures, and incentives and rewards systems that keep the innovation system goal-oriented.

* Evaluating is the final step in the process of managing opportunities that have been identified as both aligned with corporate strategy and viable within the organization's structure. This can include expected profits, expected value added (profits minus the cost of capital involved in developing and running the opportunity project), or common measures such as ROI.

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When General Electric launched Ecomagination, its commitment to products and services that are as profitable as they are ecologically sound, it recognized an opportunity where many others saw only risk. While competitors were litigating and lobbying to avoid liability, GE discovered opportunities from concerns about the environment by developing products ranging from energy efficient compact fluorescent light bulbs to hybrid locomotives. Ecomagination is a business strategy driving growth. Revenues from this program already exceed $12 billion annually, according to a 2006 report (http ://ge.ecomagination. com/site/news/media/2006ecore port.html). GE is not alone; many companies are discovering opportunities in, and making money from, issues traditionally seen as too risky

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 that risk and opportunity are two sides of 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.

Consider Kinepolis, a Belgian movie theater operator that entered the market in 1997 when cinema audience numbers were in decline and cinema operators across Belgium were closing. The first Kinepolis theater opened on the ring road outside of Brussels--a location challenging the conventional wisdom that movie theaters needed to be centrally located to capture foot traffic and spontaneous movie watchers. Kinepolis also entered the market when most observers believed that a movie theater could not be a successful business proposition.

The world's first megaplex, with 25 movie screens and 7,600 seats, provided superior screens, sound, and seats, the latest movies, and free parking in a city notorious for its high parking cost and scarce parking in the downtown area. Kinepofis achieved spectacular growth, capturing 50% of the market in Brussels in the first year, expanding to France, Spain, Poland, and Switzerland, and posting a 14. …

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