product innovation blog

The Multiple Personalities of Risk

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In everyday conversation we tend to think of “risk” as something negative to be avoided, and “assumption” as something we believe or find acceptable. Such generalities can get confusing, so Strategy 2 Market has developed a cheat sheet for the multiple personalities of risk terminology.

Known – Something that is known with certainty or with little uncertainty. Some things are considered known because we have already gathered the information to resolve the uncertainty satisfactorily (to a level we are comfortable with).

Example: We have experience with the user interface software used in our products. We know we are able to code the features required by a new product.

Fixed – Something that will not change and that acts as a constraint. The business model is usually considered fixed (unless the company is intentionally pursuing new business models). Something that is fixed is also considered known.

Example: The company sells its products through a direct sales force and has no other channels. The sales channel is fixed.

Unknown – Something that cannot be known. Either it is impossible to know, or gathering the information to make it known is too expensive.

Example: We don’t know if new competitors will enter the market. We could send out scouts around the globe to looks for signs of potential competition, but we cannot afford such an expenditure.

Assumption – A statement that is accepted as true or as certain to happen, to provide a basis for logical reasoning or decision making.

Example: We assume customers will be willing to pay $100. From this, we can reason: At a unit cost of $70, this price will yield a profit of $30 per unit. At a unit cost of $60, the profit will be $40.

Hypothesis – A proposed assumption to be tested, such as in an experiment or by gathering information (e.g. secondary research).

Example: We will test our hypothesis that customers are willing to pay at least $75.

Uncertainty – A state of having imperfect or limited knowledge about something, resulting in the potential for surprise or unpredictability.

Example: We think customers will be willing to pay around $100.

Degree of certainty – A measurement of certainty along a continuum. Sometimes this is referred to as a level of confidence in the truth of an assumption. One end represents things that are known and the other end represents no knowledge about something. Sometimes companies subjectively rate degree of certainty on a scale of 1–5.

Example: Based on our testing with customers, we are very confident that a price of $100 will be acceptable to customers.

Risk – A state of uncertainty that can result in consequences that may be positive or negative in impact. If there is no meaningful impact, then there is no risk. Sometimes the term risk is used to describe only negative consequences, and opportunity to describe only positive consequences.

Example: We know our unit cost is $99, but we don’t know the maximum price a customer is willing to pay. If it is more than $99, we can cover our costs and maybe make a profit (positive impact). If the maximum price is $99 or less, we will lose money (negative impact).

Risk attitude – The organization’s willingness to take on risk in order to obtain profits. Often this is a subjective description ranging from “risk averse” to “risk seeking.”

Example: We are a risk-averse company and generally prefer to take on projects we are confident will be successful.

Risk is inescapable in product development and generally flies below the radar in many companies, resulting in surprises that cause projects to fail or not meet their potential.

We believe better identification and management of risk is the next evolution of product development systems, as we address in our forthcoming book Exploratory Product Development. Keep up with our progress and read excerpts at ExploratoryPD.com

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