Question

Think about the concepts of risk which are part of this section of the course in the context of the size of a firm. Would these change if the firm were large? Small? Medium-sized? Why or why not? Provide an example in your post to add some specificity to your ideas. ( This Chapter is mainly on Risk & Cost of Capital in terms of corporate finance.)

Answer 1

Risk is inherent in any business enterprise, and good risk management is an essential aspect of running a successful business. A company's management has varying levels of control in regard to risk. Some risks can be directly managed; other risks are largely beyond the control of company management.

How large and small companies feel about risk-taking can vary considerably. Particularly where the smaller company is a start-up or still in a fast-growth stage, the organization at all levels may wholly embrace risk because, at this point, the whole business is a risk. However, in a large corporation that has been around for decades, people may be far more vested in keeping things as they’ve always been than they are in trying something new and potentially risky. Here again, this difference can lead to frustration on both sides when two such organizations engage in an open innovation partnership. Obviously, if a large company and its smaller open innovation partner differ in terms of what type of innovation they should seek—breakthrough versus incremental—this can cause their partnership to fail. This is why clarity of purpose from the get-go is so important. Big companies certainly can innovate. They have the required resources and deep talent pools. However, big companies are often very risk adverse, so it’s difficult to get a particular business unit or division to adopt an innovation that is not exactly in their market or technology sweet spot. True innovation often requires a company to embrace a totally new market space. Big companies are very reluctant to take any sort of risk associated with entering a new field.

or example, among manufacturing firms with 1,000 or more workers, the fatality rate per 100,000 workers was nearly eight times higher for the smallest establishment category (1–19 workers) than that for the category with the lowest rate (1,000+ workers) and more than three times higher than that for establishments with 20–49 employees. Findings were similar within other firm-size categories. For example, for firms with 50–99 employees, establishments with 1–19 workers had a fatality rate of 24.3, compared with 5.9 for establishments with 20–49 employees and 2.5 for those with 50–99 employees. This pattern was the same for all of the industry sectors