I am teaching a new course, "Risk Analysis in Business Concept Development for Engineers and Entrepreneurs", which is a graduate level course in the Engineering School at FIU. Most people think about business risk in terms of:
There is another more meaningful way to think about risk:
Assumptions=Risk=Cash Flow Variance
Two key concepts in the course:
Frank Knight .."an ever-changing world brings new opportunities, but also means we have imperfect knowledge of future events. According to Knight, risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place."
Marc Andreesseen.."Now I am raising a B round. Here are my milestones, here are my risks, and by the time I go to raise a C round here is the state I will be in. And then you calibrate the amount of money you raise and spend to the risks that you are pulling out of the business. And I go through all this, in a sense that sounds obvious, but I go through this because it is a systematic way to think about how the money gets raised and deployed. "
Some readings for the course:
- Drucker, P (1994), Theory Of The Business, Harvard Business Review, September-October, pp 95- 106, Boston, Mass, USA.
- Daly, J (May 2010) Drucker’s Theory of the Business and Organizations: Challenging Business Assumptions; Management Decision Vol 48 Issue 4 http://druckersociety.at/repository/scientific/Daly.pdf
- “What Peter Drucker Taught Me” (http://www.managementpro.com/articles-resources/articles/outfoxing_murphy_by_managing_strategic_assumptions.php)
- McGrath, Rita “Discovery Driven Planning” http://ritamcgrath.com/download/Discovery_Driven_Planning.pdf
- The most common mistake when forecasting growth for new products (and how to fix it) http://andrewchen.co/the-most-common-mistake-when-forecasting-growth-for-new-products-and-how-to-fix-it/
Image credit: http://commons.wikimedia.org/wiki/File:Variance_various.svg