The degree of risk is a measurement of risk along a continuum. One end represents no possibility of loss or opportunity (either the probability of occurrence has been eliminated, or we have found a way to circumvent the issue should it occur). The other end represents risks that cannot be eliminated because the necessary information is impossible or too expensive to obtain.
Example: A company wants to develop a product using new technology in which they have no experience. Whether they would be successful in developing and launching this product is highly uncertain. If they were to fail, they would lose the $100 million invested. They can reduce risk and improve their chances of success if they acquire a firm that already has experience with this market and technology, instead of developing the product in-house. Alternatively, they can pass on the product and eliminate all risk.
They might evaluate their options as follows:
- High risk. Adopt in-house development, where we lack the necessary expertise
- Medium risk. Acquire the required capabilities
- Eliminate risk. Do not pursue the project
Note: Often, the degree of risk is subjectively rated on a scale of 1 to 5, with 1 representing extreme risk (high uncertainty and/or high amount of risk) and 5 representing no risk (no uncertainty and minimal risk).
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