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Topics: Risk Management
How is risk tolerance measured?
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Some companies have a higher tolerance for risk than others. Does a higher risk tolerance level make them more competitive as compared to a company than is willing to take no risk? Companies that quantify their risks and actively manage their risks tend to be more tolerant in accepting risk. By defining and monitoring risk action plans they become more risk tolerant.
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I'm curious if risk tolerance drives strategy (cost leadership vs differentiation) or if strategy affects risk tolerance. You would think that a low cost leader would be less risk tolerant, while a company with a differentiation strategy would be open to taking more risks. There are probably examples of the opposite being true, as well.
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Risk appetite can be defined as ‘the amount and type of risk that an organisation is willing to take in order to meet their strategic objectives". The problem to define it is because is a high subjetive item (depending on each person psicology profile). So, it is critical to understand the organization as a system becasue external and internal environment must be analyzed to determine the level of risk that jeopardizes the objectives achievement. When you define the level then you can define the tolerance too. Once again, key here is to understand the organization as an open an adaptative system that interact with the environment thanks the defined strategy in order to survive, grow and develop.
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I Agree with Sergio comment ‘the amount and type of risk that an organisation is willing to take in order to meet their strategic objectives".

What is the tolerable to the C-Level group define your risk tolerance. That need to be define and revisit regular interval, since environment and strategic objective evolve.

Tolerance can be measure in $, time,.... according to the source.

I'm not clear on managing risk make the organization more risk tolerant, I think it make it possible to readjust to a more realistic tolerance.
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I also like Sergio's definition. My intent in the statement "managing risk make the organization more risk tolerant" was a comparison of a company that does not manage risk versus one that does. Companies that have not risk management process tend to avoid most risks, whereas a companies that actively manage risks tend to accept more risk because they are more informed as to the extent and consequence of the risks.
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1 reply by Vincent Guerard
May 09, 2017 1:26 PM
Vincent Guerard
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It is in line with my last sentence. Once you manage risk you can better define where is your true tolerance.
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May 09, 2017 11:45 AM
Replying to Thomas Andrews
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I also like Sergio's definition. My intent in the statement "managing risk make the organization more risk tolerant" was a comparison of a company that does not manage risk versus one that does. Companies that have not risk management process tend to avoid most risks, whereas a companies that actively manage risks tend to accept more risk because they are more informed as to the extent and consequence of the risks.
It is in line with my last sentence. Once you manage risk you can better define where is your true tolerance.
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"Does a higher risk tolerance level make them more competitive as compared to a company than is willing to take no risk?"

No, it doesn't. The many small differences that exist between organizations means a strategy that works well for one organization might prove disastrous if adopted by another. However, an organization can maximize its competitiveness by accepting the level of risk appropriate to its particular situation at a given time.
Organizations can learn much from long-distance runners. Marathoners know they all have different strengths and weaknesses, and that they can’t simply imitate their competitors’ strategies.
Those who run too fast or sprint too early might not even finish the race, so marathoners analyze themselves and run at the best speed for their particular situation. Organizations must similarly employ an individualized risk tolerance strategy if they are to maximize their performance.
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Let's call 2 organizations as "Org A" (open to risk) and "Org B" (averse to risk).

Under the similar environmental conditions, the organization more open to risk will be more competitive than a risk averse organization.

The long-term success of Org A depends on how they manage the risks. So, it is important for the organization to develop the strategy based on maturity of the risk management processes among other things.

Risk and rewards come together, "when risks are managed successfully"!
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1 reply by Thomas Andrews
May 13, 2017 8:26 AM
Thomas Andrews
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Very well stated. Through managing risk, organizations become more competitive.
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May 12, 2017 8:09 AM
Replying to Visswanathan KKN
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Let's call 2 organizations as "Org A" (open to risk) and "Org B" (averse to risk).

Under the similar environmental conditions, the organization more open to risk will be more competitive than a risk averse organization.

The long-term success of Org A depends on how they manage the risks. So, it is important for the organization to develop the strategy based on maturity of the risk management processes among other things.

Risk and rewards come together, "when risks are managed successfully"!
Very well stated. Through managing risk, organizations become more competitive.
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Measurement of risk tolerance as highlighted by many depends upon managing risks taken to the best of the organizations's ability. However, a company having huge cash reserves, can take risks in terms of getting into new investments in similar business in geographical diversified locations, or getting in to bit of new segments with say partners who are experienced in those areas, while a corporate which is not having enough spare cash, has to first build up it's reserves position without getting too much ( does not have too much risk tolerance in management terms, though it hopes it will manage very well) into untested waters.
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Principle - Organizations to generate value have to take risk, that does not mean assuming all type of risks, but if risk appetite and tolerance are low business may have to let go many good opportunities.
"Does a higher risk tolerance level make them more competitive as compared to a company than is willing to take no risk?" I do not believe that this is a statement holds for all organizations, but in most case it is true.
All organizations must take some level of risks, if an organization takes no risk is because is not operating.
I believe that organizations with high risk appetite are more competitive because they tend to take advantage of more opportunities, the results may not always be favorable, there is no general rule.
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