The word ‘risk’ has a negative connotation in the business world. It’s seen as something to be avoided, whereas some people would prefer to take a gamble and hope for success. However, that mindset doesn’t work in the long run. Instead of avoiding risks by making decisions quickly without thinking through all possible outcomes, you need effective risk management software (RMS) tools that will help you identify key risks early on before they become crises—and provide solutions when they do occur.
With good risk management software (RMS), you can identify, manage and report risks in a way that is consistent with best practice.
RMS will help you to:
Identify risks from different sources and understand how they impact on your organisation.
Manage the selected risk strategy through the project lifecycle.
Report on all aspects of risk management activity within your organisation in a way that meets company standards.
Risk isn’t something that should be avoided in business. All projects and programs have inherent risks that can be managed by assessing them early and managing them strategically before they become crises.
According to Prof. MarkAnthony Nze, ‘Risk Management is a process of identifying, assessing, and reducing any risk that impacts or is inherent to the business strategy, strategic objectives and strategy execution of an organisation. Risk management includes identifying potential risks and opportunities in order to develop plans for their monitoring, response or control. The aim of risk management is not elimination but rather minimization through appropriate measures taken to deal with identified risks.’
Risk is an inherent part of business. The sooner you address risk, the more likely you will be able to deal with it effectively and continue on the path toward strategic success. If you don’t manage risks strategically, they can become crises that disrupt your ability to execute effectively and wreak havoc on your projects and programs—and ultimately your entire organisation.
The following are some things to consider when it comes to risk management:
•Assess your tolerance for risks. What level of potential losses will cause you to alter or abandon an investment opportunity? This helps you determine how much downside protection you should buy. It also tells you which investments can be made with little concern about losing money.
• Identify possible sources of loss. Not all financial losses have the same impact on value—and not all threats are equal. Some threats might result from unknown future events; others may come as a surprise but can be controlled by taking precautions against them. A key task here is deciding what constitutes ‘too great'(or ‘too small’) given each individual situation. For example, if a customer decides to cancel his orders with you because he learnt that one of your competitors offered him better service at a lower price, then this has little effect on your firm except for the time required to make up the lost sale(s). If you lose customers because your website crashes under heavy traffic due to problems with its performance-monitoring system then you’ve got more serious issues.
• Develop scenarios of plausible worst-case outcomes and their impacts on business objectives. Scenarios allow you to see potential outcomes in detail so they’re easy to analyse and compare. These include positive and negative scenarios related to specific decisions or actions. By looking at different situations and how they affect various aspects of your company, you’ll gain a better understanding of where you need to focus resources. You may find, for example, that improving your product development process could help offset higher shipping costs associated with expanding into a new market.
• Prioritise the risk responses. After identifying possible risks, assign them relative levels of importance. Your responses must reflect those priorities, so take care that you don’t waste too many resources trying to solve a problem whose probability of occurring is relatively low compared to other potential risks.
• Implement controls and mitigate any significant risks. In order to limit exposure, you should consider both preventative and detective measures to protect your organisation’s assets from threats. You can do this through physical security such as installing alarm systems or guard patrols; limiting access privileges, especially when granting temporary authority; restricting certain individuals’ access to data; reducing unnecessary expenses; training employees about what constitutes suspicious behavior (both in general and specifically directed at your company); establishing procedures for investigating suspected incidents; and performing regular audits.
The bottom line: There are no shortcuts to sound strategic risk management practices—you have to constantly evaluate your tolerance for risks against their impact on business objectives, identify sources of loss, develop plausible worst-case scenarios, determine the impact of these scenarios on business objectives, and then prioritize the most effective ways to reduce their impact. A good way to start developing a risk management strategy is by creating a table that lists all of the known risks faced by your company and how each might affect your company’s goals and plans. This is often called an enterprise risk management (ERM) framework because it serves as a comprehensive view of how your company can avoid, monitor, and respond to its various risks over time.
In today’s competitive environment, every firm must be able to create and sustain a long-term vision, formulate and execute strategies, build capabilities, and manage financial resources effectively in order to achieve sustainable growth. It also must leverage technology and innovation in its quest for value creation. The challenge for companies is how best to link these four components together in order to improve their competitiveness while ensuring that they continue to serve their customers well.
Meanwhile, there are three different approaches to doing this:
• Vertical integration: This focuses on designing products that satisfy customer needs better than those provided by competitors.
• Horizontal integration: It seeks to deliver total solutions by combining product design with distribution, services, and financing.
• Corporate venturing: It leverages corporate investments and expertise to help startups become successful ventures.
All of these types of collaboration—which can take place either within a single company or between two or more organisations—are important in helping firms survive in the twenty-first century economy. However, none of them can completely solve the problems of growing your company or taking advantage of the opportunities around you if you don’t first focus on understanding your business context and continuously adapting your business model based on the changing dynamics of your industry and marketplace.
Factors of Strategic Risk management
There are five main areas of risk associated with an organisation.
Business risk: Business risk is the risk of loss resulting from a change in the business environment. Business risk is associated with strategy, management, and operations. It is about the future and its uncertainties. Business risks can be caused by external events that are not certain to happen, including:
• The entry of new competitors.
• A change in market demand for products or services produced by your company.
• The inability of suppliers or partners to meet their commitments.
Industry risk is the risk associated with changes in the industry. Examples of these include a decline in sales, increased competition, and other external factors. Industry risk can be mitigated by keeping up to date with industry developments, understanding the dynamics of your industry, and having a clear vision for how your company fits into that picture.
Companies that manage their own risks well are able to take advantage of opportunities while minimising losses in adverse conditions. It is important that businesses understand their strengths and weaknesses so they can identify areas where they might be at risk when entering new markets or expanding into different regions.
Economic risk is the risk of loss due to fluctuations in the economy. This can be described as macroeconomic risk, market-based risk, or business cycle risk.
Economic risks include:
• A drop in consumer demand for a product or service
• A rise in input costs for raw materials and production
• An increase in petrol prices for transportation of goods
Financial risk is the risk of loss due to adverse changes in financial markets. It can be divided into four categories: interest rate, exchange rate, equity and commodity price risk. Interest rate risk refers to the possibility that an investment’s value will decrease over time as interest rates change. Exchange rate risk is related to fluctuations in foreign currencies relative to your domestic currency, which can negatively affect returns if you have overseas investments or borrow funds denominated in another currency. Equity price fluctuations are caused by changes in the market value of stocks or other securities held by the firm (known as stockholders’ equity). Commodity price fluctuation occurs when prices change for products that a company buys or sells regularly, such as oil and gas or metals used in manufacturing processes.
Financial risks can be mitigated by hedging—a technique used to manage financial risks by transferring them from one party (hedger) to another who accepts them willingly (redeemer). For example, a business may want protection against rising interest rates so it enters into an interest-rate swap agreement with its bank wherein both parties agree on how much each will pay on their outstanding debt if rates increase; typically this happens when interest rates rise above those agreed upon at origination but it could also happen if they fall below what was originally agreed upon.
Social and political risks:
Social and political risks are the risk of not being able to conduct business due to changes in legislation or government policy. For example, if a country’s government passes legislation that stops you from operating your business model within its borders, you’re at risk; this is known as regulatory risk.
Other examples of social and political risks include:
• Currency devaluation (the value of money being worth less than it used to be)
• Trade embargoes or sanctions (restrictions on exporting goods)
The five areas of risk that we have identified are very important to consider when running a business. The best way to be prepared for the unexpected is by having a plan in place and knowing where you stand with each one. When making decisions about your business, think about how each decision might affect its overall risk profile. For example, if you choose not to invest in new equipment because it will increase costs but also make your company more efficient then this could impact on financial risk.
* Strategy Execution It is the primary purpose of strategic risk management.
Strategy execution is about doing what you said you would do, achieving your goals and being successful. Risk management supports strategy execution by helping to identify where and how to invest resources so that the organisation can achieve its objectives.
Successful strategy execution requires effective risk management.
Risk management is a proactive process that helps an organisation to better understand, identify, and manage risks in order to make decisions that will lead to an increased likelihood of success with minimal consequences. Risk management is about reducing the impact of risk. It does not mean eliminating all risks from your business; it means making the best decision possible under the circumstances and being prepared for the worst case scenario.
Risk management is about avoiding risks altogether when possible; however, sometimes this approach isn’t feasible due to market forces or changes in regulations or technology. In these situations you’ll need effective processes in place so that you can respond appropriately when something goes wrong without creating a bigger mess than necessary (like having poor communication channels!).
It’s important to note that risk management isn’t just associated with big financial losses but also applies equally well across all aspects of your business: marketing strategy execution; product development and launch processes; customer satisfaction levels within support teams (e-mail response times); etcetera!
The sooner you address risk, the more likely you will be able to deal with it effectively and continue on the path toward strategic success.
Risk management is not just for large projects and programs. It is a continuous process that can be applied to any situation. Risk assessment and management need to happen throughout the life of your business, from strategic planning through day-to-day operations.
For example: If you’re considering launching a new product or service in your market, there are many risks involved with this decision—risks related to creating something new; risks related to whether the market will accept it when you launch it; and so on. You can assess these risks before they become problems by asking yourself questions such as ‘What could go wrong?’ or ‘What are we not seeing?’ or ‘How likely is each risk?’ These questions can help identify potential problems before they happen, which will help you develop strategies for addressing them before they become crises that cost time, money and resources.
Risk is not just a part of your organisation; it’s also embedded in everything you do on a daily basis. Risk is not always negative; sometimes you want ‘risky’ projects because they’re innovative and exciting. In fact, most projects are risky! However, while some risks can be positive (and should be taken into consideration when planning), most are negative and need mitigation.
Project and program failures are not necessarily due to faulty tactics, poor execution, budget overruns, or missed deadlines. More often than not, there is a root issue causing inefficiencies and barriers to achieving strategic goals.
Risks are unavoidable. They can be physical or financial, internal or external, seen or unseen. Risks exist in every aspect of life—even when we’re not aware of them.
Risk management is a continuous process that starts before the project begins and continues throughout its life cycle. It can be considered a strategic process rather than an operational one because it helps you identify and manage risks associated with your organization’s goals and objectives (rather than just avoiding failure). As such, it’s important to understand risk management as more than simply an exercise in contingency planning: it’s also about achieving success by identifying opportunities that arise from risk identification and mitigation strategies!
The key question you should ask is what’s at risk if your project or program fails? Is it too expensive to fail? Is it critical to strategising success? Are there negative impacts that could affect revenue, employee morale, customer confidence, and brand reputation?
The key question you should ask is what’s at risk if your project or program fails? Is it too expensive to fail? Is it critical to strategizing success? Are there negative impacts that could affect revenue, employee morale, customer confidence, and brand reputation?
If the answer is yes to any of these questions then you are in need of a risk management plan.
Understand risks before they become crises with strategic risk assessment.
Risk assessment is a process of identifying, assessing and prioritizing risks. It’s an approach to risk management that helps you anticipate problems before they become crises. Risk assessments are conducted at all levels of your organisation—from strategy to operations—so when it comes to assessing risk, the earlier you start the better.
Here are some examples of how strategic risk assessment can benefit your organisation:
Risk assessments help you prioritise what needs attention first; whether it be due to severity or probability or both
Risk assessments give insight into how different strategies may affect certain areas within your business (e.g., will a new product launch increase revenue but also increase costs?)
Risk assessments help develop contingency plans so that if something goes wrong, there is already a plan in place on how best to manage it
As earlier stated, the best way to manage risks is with good risk management software (RMS).