Risk occurs when a business knows the possible outcomes of a decision and can estimate how likely each outcome is. This estimation is usually based on historical data, market research, and past experience. Because probabilities are known or can be measured, risk can be analyzed and managed.
Possible outcomes are identifiable (profit, loss, break-even, etc.). Probabilities of risk can be calculated to each outcome. At least a business manager can able to study best-case, worst-case, and most-likely situations of his business. So that businesses can plan actions to reduce or control risk.
A retailer knows from past data that there is a 10% chance of low sales during the rainy season. Using this information, the retailer can reduce inventory, offer discounts, or adjust marketing strategies to manage the risk.
Uncertainty:
When a business cannot clearly identify the possible outcomes of a decision or cannot estimate their probabilities, decisions rely more on judgment, intuition, and assumptions only. This situation is called uncertainty. Uncertainty usually happens when there is little or no past data available, making prediction difficult and unreliable. Uncertainty is harder to manage than risk because it cannot be measured precisely
To overcome such uncertainty business should go for market research and pilot testing to gather initial information before start an action. Manager can save a business by preparing scenario planning for different future possibilities which may badly affect the business. Business strategies should be flexible so that it can adapt any change quickly. Also, business can invite expert personnel or appoint experience manager who can tackle uncertainty by continuous monitoring of the business environment.
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Example:
A company launching a completely new product in an unknown market faces uncertainty because customer response cannot be accurately predicted.
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