Business Risk Management Strategies
Business Risk Management Strategies
Every business venture has the prospective for events that present opportunities for profits or are a threat to its activities. However, the potential for events happening is usually taken in a negative context, and only those factors that may be a threat to the organization are considered as a risk. As a result, risk management for the business entails planning for envisioned risks in such a way that if they were to occur, their impact would be minimal. Thus, the risk management strategy employed by an organization should be aligned with its strategic plan to ensure that business is not interrupted in case of an occurrence.
The risk management strategy follows certain processes that, if employed sequentially, offer an adaptive decision-making process. According to Vose (2008), these risk management processes are:
- Risk management planning
- Risk identification
- Qualitative risk analysis
- Quantitative risk analysis
- Response planning
- Monitoring and control.
Risk Management Planning
Risk management planning entails communication and consultation. It is during this phase that the people who will be involved in risk assessment, monitoring and control, and review are identified. During this phase, risk information is elicited and perceptions of stakeholders on risk management are managed through communication and consultation (Loosemore, Raftery, & Reilly, 2006). Since not a single individual holds or has the ability to identify all the risks, it is important that the necessary people are identified. These individuals may be internal staff and/or other stakeholders who may include customers, suppliers, and insurance providers among others. Besides, a clear strategy on needs, modes, and frequency of communication needs to be established from the onset (Merna & Al-Thani, 2011). As a result of these consultations, a complete picture of the risks and communication needs will emerge.
Establishing the context under which the risks will be identified is the beginning of risk identification phase. According to Merna and Al-Thani (2011), this process entails:
o Establishing an internal and external context
o Establishing risk management context
o Developing risk analysis criteria, and
o Defining a structure for risk analysis.
Due to the fact that there remains a chance for something to happen that will impact the business, all inherent risks need to be understood. As such, comprehension of the organization’s goals and objectives is necessary to ensure that all significant risks are properly understood. Further, this helps in ensuring that all the risks that would impact the objectives of the company are covered. Besides, the understanding of the goals and objectives encourages strategic thinking that covers the long term and also identifies the internal aspects that would be a hindrance or a resource (McNeil, Frey, & Embrechts, 2015). As a result, the internal context is hinged on the goals and objectives of the business.
During this step, the entire operational environment of the business is analyzed including customer perception of the business. In addition, it looks at competitors and how they are likely to impact the business in the short and long-term. Furthermore, regulatory requirements and social, cultural, or political considerations that may affect the business are analyzed (McNeil, Frey & Embrechts 2015). Thus, the strengths, weaknesses, opportunities, and threats of the organization are identified through the scrutiny of its external environment.
Risk Management Context
During this step, the scope, objectives, and limits of the process are defined to ensure it is structured and eliminates time wastage and defines boundaries. In addition, this phase enables for the allocation of resources since its framework is properly defined (Vose, 2008). Besides, objectives can be categorized into different aspects of the business and the likely output can be identified.
Risk Analysis Criteria
The development of a risk analysis criterion enables the business to define levels of risk that would be acceptable or unacceptable for each event (Vose, 2008). In addition, it reflects the objectives and goals of the risk assessment. At the same time, it defines the person responsible for accepting the risk at each level.
Defining Risk Analysis Structure
The risk analysis structure is a framework that is chosen to categorize and manage different risks. Usually, in the form of a table, it enables a complete and accurate identification, description, and analysis of risks. However, the structure to be used depends on the complexity and circumstance of the identified risk. In addition, it provides greater precision in identifying major risks (Vose 2008). Thus, the nature of the risk analysis structure to be used is dependent on the context.
Once the context has been established, it becomes possible to identify risks. The process of identification can either be retrospective or prospective. Through sifting of internal and external sources, it is possible to identify risks that have happened previously (Kaplan & Mike, 2012). Furthermore, this is possible not only for the identification of particular risks but also their impact on the business thus making it one of the easiest and fastest ways to identify risks.
However, prospective risks require the engagement of different methodologies to identify. This is because they are much harder to identify since they have not happened before. Thus, the methods range from brainstorming sessions, research external aspects of the business, conducting interviews and surveys among others (Kaplan & Mike, 2012). Nonetheless, all imaginable risks that may happen in future should be identified and recorded.
Qualitative Risk Analysis
An effective risk management system is one that takes into consideration the differences in approaches necessary to deal with different risks. Kaplan and Mike (2012) state that “the first step in creating an effective risk-management system is to understand the qualitative distinctions among the types of risks that organizations face.” Further, they note that the risks can be categorized into three categories namely:
Category 1: Preventable Risk.
These risks are as a result of errors emanating internally form staff members and happen due to varied reasons including negligence, willful omissions, and unethical behavior among others. Usually, they indicate a breakdown in the company policy where rules are disregarded intentionally. For instance, a lawyer falsifying evidence to win a case may bring short-term gains to the firm but the risk can cause serious harm if the information were to become public knowledge (Kaplan & Mike, 2012). Thus, since the situation has no long-term strategic advantage to the firm, it should be avoided and discouraged through rules.
Category 2: Strategy Risk.
Due to economic dynamics, companies face situations where they need to take a strategic risk to gain superior returns from the strategy. Strategy risk differs from preventable risk in that it is a desirable risk that has the potential for financial gain (Kaplan & Mike, 2012). For instance, although Blackberry was leading in the high-end cell-phone business, the company avoided the risky smart-phone idea. However, Apple took the risk and in 2007 launched the first smart phone, and by the time Blackberry was reacting, it had already cornered that market.
Category 3: External risks.
This category of risk is usually risks that are beyond the company’s control. They emanate from the environment that the company works in and are hard to control. Mostly, political uncertainty and shifts in macro-economic fundamentals occasioned by government regulations are some of the external risks that companies face. Thus, companies focus the risk management in mitigating the impacts of the risks since they cannot prevent them (Kaplan & Mike, 2012). Nonetheless, different categories of risk require different management solutions, and the risk management framework for companies should reflect this.
Quantitative Risk Analysis
Once a qualitative risk analysis has been conducted and a prioritized list of risks has been achieved, it is possible to do a quantitative risk analysis. A quantitative rating is assigned to risks based on highest priority to develop a probability analysis of the project risks to come up with a risk assessment value (Anthony (Tony) Cox, 2008). For instance, in a three-matrix scenario, consequences for both threats and opportunities may be high, medium, or low while the possibilities of occurrence may be high, medium, or low. Nonetheless, risk analysis should be conducted based on existing primary controls.
Once the risk analysis process is complete, it is vital to evaluate the level of risk against the established risk criteria which may be cost of treatment, environmental apprehensions, stakeholder concerns, etc. However, this process helps to inform the decision on whether certain risks will require any treatment or whether they will be accepted. If a risk is not considered tolerable, a decision to treat it is made. This is done to either negate, or prevent any negative results on the business. In addition, the chosen treatment should enhance the positive result of the treatment (Zwikael & Ahn, 2011). Consequently, this process enables the management to make decisions based on the significance level of a risk and its consequence on the business.
Monitoring and Control
An effective risk management plan is one that has a good structure for reporting, monitoring and reviewing of risks, and taking instituted counter measures. Standard audits of the plan should be carried out periodically to ensure that there is compliance and also identify areas of possible improvements. The management plan should be flexible enough to absorb major shifts in corporate structures and the business environment (Zwikael & Ahn, 2011). Furthermore, since the risks are not static, adjustments need to be made on the risk management plan to capture and incorporate emerging risks.
In conclusion, the risk management strategy employed by any organization is guided by its goals and objectives. Nonetheless, the process of creating a risk management strategy follows certain processes which enable risks to be identified and ranked based on their significance to the company. Besides, after analysis, the process of response planning determines which risks are acceptable due to various reasons and which ones need to be treated. Thus, once the decision has been made to treat a risk, the expected outcome should be favorable to the business. Nonetheless, periodic monitoring and reviewing of the strategies ensure that emerging risks are taken care of and changes made when needed to enhance the positive outcome of the treatment.
Anthony Tony Cox, L. (2008). What’s wrong with risk matrices? Risk analysis, 28(2), 497-512.
Kaplan, R., & Mikes, A. (2012). Managing risks: A new framework. Harvard Business Review. Retrieved from https://hbr.org/2012/06/managing-risks-a-new-framework.
Loosemore, M., Raftery, J., & Reilly, C. (2006). Risk management in projects. Park Drive, UK: Taylor & Francis.
McNeil, A. J., Frey, R., & Embrechts, P. (2015). Quantitative risk management: Concepts, techniques and tools. Princeton, NJ: Princeton university press.
Merna, T., & Al-Thani, F. F. (2011). Corporate risk management. Hoboken, NJ: John Wiley & Sons.
Vose, D. (2008). Risk analysis: A quantitative guide. Hoboken, NJ: John Wiley & Sons.
Zwikael, O., & Ahn, M. (2011). The effectiveness of risk management: An analysis of project risk planning across industries and countries. Risk analysis, 31(1), 25-37.
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