How an Entrepreneur Can Decrease Risk

It's often said that it's not easy to turn a big ship, especially when it's in motion. After all, changing its course is a slow and deliberate process, requiring precise navigation, timing, and control.

In 2020, the cruise industry, including major players such as Royal Caribbean, Carnival, and Norwegian Cruise Lines, found themselves at the epicenter of the COVID-19 pandemic. Shut down for over 15 months, this pause provided a unique opportunity to take a hard, introspective look at its business operations, conduct risk analysis, and assess the internal risks involved. Rather than merely weathering the storm, the industry leveraged the challenge to become more resilient and innovative. By April 2023, Carnival and Royal Caribbean reported record-breaking booking volumes, and global passenger numbers are expected to rise 12% above pre-pandemic levels by 2026, signaling a strong rebound and a promising future for the industry.

Understanding Calculated Risk 

Entrepreneurial risk encompasses the uncertainties and challenges that are inherent in starting and growing a new business venture. Understanding calculated risk is an integral part of entrepreneurship, reflecting the dynamic nature of building a new business in a constantly changing environment. Entrepreneurial risk can manifest in various forms, each with its unique characteristics and mitigation strategies.

The Five Types of Business Risk

Entrepreneurial risk can be categorized into five key categories, each representing a specific aspect of the business that requires careful consideration and management:

• Market Risk: Related to fluctuations in market trends and consumer behavior
• Financial Risk: Concerned with financial obligations, cash flow management, and overall financial stability
• Operational Risk: Encompassing risks related to the day-to-day functioning of the business
• Credibility Risk: Involving the risk of losing credibility in the market
• Competitive Risk: Focused on the risks related to competition in the marketplace

Importance of Risk Management for Entrepreneurs and Small Business Owners

For small business owners and aspiring entrepreneurs, understanding and managing these risks is paramount. Effective risk management transforms potential risks into opportunities for growth, fosters innovation, and builds resilience. It enables informed decision-making, aligns with the business model, and enhances the likelihood of success in the entrepreneurial journey.

Market Risk

Market risk encompasses the uncertainties and potential changes in market trends, consumer preferences, and broader economic conditions. It's the risk that external factors, such as shifts in demand, competition, or regulatory changes, might adversely affect the market's perception and acceptance of a product or service. Understanding market risk is vital for businesses to anticipate challenges and adapt strategies to remain competitive and resilient.

Key Strategies for Decreasing Market Risk

• Diversify Products: Offering a diverse range of products or services can mitigate dependency on a single market segment.
• Target Different Demographics: Expanding the target audience spreads risk across different consumer groups.
• Adapt to Consumer Behavior: Aligning with market demands ensures responsiveness to consumer behavior changes.

The Cruise Industry's Response to Market Risk

Historically, one out of three cruise passengers was at least 60 years old. The shutdown provided an opportunity to reassess and target different demographics, specifically younger generations. Through market research, the industry recognized that younger travelers value experiential components and affordability. By offering packages that appeal to Gen Z and Gen X generations, and focusing on experiences, the industry has begun to attract a younger customer base. Bookings for passengers sailing in the Caribbean are now averaging in the mid-40s.

Financial Risk

Financial risk pertains to the uncertainties and challenges associated with managing the financial obligations and cash flow of a business. It involves aspects such as liquidity, credit risk, investment risk, and the overall financial stability of the firm.

Key Strategies for Decreasing Financial Risk

• Plan Meticulously: Developing a comprehensive financial plan that includes budgeting, forecasting, and financial controls ensures that the business operates within its means and anticipates potential financial challenges
• Manage Cash Flow: Effective cash flow management is vital for maintaining liquidity. Regular monitoring of cash inflows and outflows, coupled with timely financial decisions, can prevent cash shortages
• Strategically Deploy Capital: Utilizing venture capital or securing a business loan with favorable terms like those backed by the Small Business Administration can provide financial support and alleviate financial risk, especially for new business ventures

The Cruise Industry's Response to Financial Risk

The three major cruise line operators owe almost $70 billion to lenders. Moody's Senior Analyst Pete Trombetta stated, “They had to borrow to stay alive. So it's going to take time to start tackling that debt. But they're definitely on the right path." While the industry has seen a sharp rebound, the massive debt and interest payments are a reminder that they are not out of the woods yet. Business owners must evaluate the precise amount of capital required and commit only to the obligations that can be feasibly repaid.

Operational Risk

Operational risk encompasses the uncertainties and challenges related to day-to-day functioning such as process inefficiencies, technology failures, human errors, and disruptions in the supply chain.

Key Strategies for Decreasing Operational Risk

• Implement Technology: Leveraging technology to automate processes and improve data accuracy can mitigate the risk of human errors and enhance productivity
• Properly Train Staff: Investing in employee training and development ensures that staff are well-equipped to perform their roles, reducing the risk of mistakes and enhancing overall performance
• Manage the Supply Chain: Building robust and diversified supply chain relationships minimizes the risk associated with dependency on a single supplier or region

The Cruise Industry's Response to Operational Risk

The cruise industry's ability to adapt its supply chain in response to challenges exemplifies effective operational risk management. For instance, cruise companies have become more nimble in sourcing food supplies to combat inflation. Additionally, the industry's efforts to move away from fossil fuels and explore alternative energy sources demonstrate a proactive approach to lowering operating costs and mitigating environmental impact.

Credibility Risk

Credibility risk involves the potential loss of trust and reputation in the market. It can stem from various factors, including quality issues, legal non-compliance, unethical behavior, or public relations mishaps.

Key Strategies for Decreasing Credibility Risk

• Maintain Quality: Ensuring consistent quality in products and services reinforces the brand's reputation and minimizes the risk of customer dissatisfaction.
• Operate Ethically: Operating with integrity and adhering to ethical principles fosters trust and minimizes the risk associated with unethical conduct.
• Transparent Communication: Open and transparent communication with stakeholders, especially during a crisis, helps in maintaining trust and managing potential damage to reputation.

The Cruise Industry's Response to Credibility Risk

With cruise ships at the center of some of the early COVID-19 cases, the industry faced quarantines and a barrage of negative publicity. Recognizing the critical importance of passenger health, cruise lines have implemented stringent safety protocols such as increased health care personnel and adding more intensive care equipment. These measures have not only reassured passengers but have also demonstrated a commitment to their well-being, helping to rebuild trust.

Competitive Risk

Competitive risk encompasses factors such as rival firms' strategies, market positioning, pricing power, and innovations.

Key Strategies for Decreasing Competitive Risk

• Understand Competitors: Regular competitor analysis provides insights into rivals' strategies, strengths, and weaknesses, enabling informed decision-making
• Innovate: Continual innovation in products, services, and business processes helps in maintaining a competitive edge and differentiating the firm in the market
• Protect Intellectual Property: Safeguarding intellectual property through patents, trademarks, and copyrights minimizes the risk of imitation and preserves competitive advantage

The Cruise Industry's Response to Competitive Risk

The cruise industry has faced intense competition in the wake of the COVID-19 pandemic. The three major cruise line operators have been working diligently to rebound, with strategies that include “diplomatic pricing,” a tactic of avoiding deep discounts on fares to fill-up ships and instead packaging together different amenities. This practice allows cruise companies to add or subtract items included in a booking system based on-demand and in real-time.

The Role of a Business Plan in Risk Management

A well-crafted business plan serves as a guiding compass for entrepreneurs and small business owners, allowing them to navigate the uncertain waters of the business world. By meticulously outlining the business model, market analysis, financial projections, and operational strategies, a business plan provides a comprehensive view of potential challenges and opportunities.

• Explore Risks on Paper: Through a business plan, entrepreneurs can identify and analyze various risks, including market, financial, operational, credibility, and competitive risks. The cruise industry's strategic adaptations during the COVID-19 pandemic exemplify how this exploration enables proactive risk mitigation
• Align Goals and Vision: Ensuring that all risk management strategies align with the overall goals and vision of the firm creates a cohesive approach to risk management
• Facilitate Informed Decision Making: Detailing potential risks and corresponding strategies facilitates informed decision-making, enabling entrepreneurs to take calculated risks that align with their objectives
• Provide a Framework: A business plan not only identifies risks but also outlines pathways to success, transforming risks into opportunities for growth and innovation

Entrepreneurship is about embracing risks and turning them into levers for success. With the right approach, including the strategic use of a business plan, even the biggest risk can become a catalyst for innovation, differentiation, and growth.

As a small business owner, it's quite unlikely that your new venture will be a cruise ship, but the industry's resilience, adaptability, and innovative approach to risk management provide valuable lessons. In any business venture, having a well-defined 'Plan B' and understanding risk factors are essential. 

The approach taken by the cruise industry serves as a model for how a successful entrepreneur can decrease risk. By analyzing and learning from their journey, entrepreneurs can equip themselves with the business ideas and strategies needed to navigate the complex seas of business risk, transforming challenges into opportunities for growth and success.