Risk is a reality of doing business wherever you might be in the world. While business owners and companies do their best to minimize risk, it is impossible to get that risk down to zero. There will always be some risk when you do any type of business. This is a fact.
“Competing successfully in any industry involves some level of risk,” Harvard Business School Professor Robert Simons, who teaches the Harvard Business School’s online course Strategy Execution, told HBS Online. “But high-performing businesses with high-pressure cultures are especially vulnerable.”
Because of this, businesses are always concerned with mitigating their risk. They do this through risk management.
Risk management is a continuing systematic process of anticipating what might go wrong and proactively implementing measures to keep uncertainty at a minimum or at least at a tolerable level. This process involves three basic steps: (1) identifying risks; (2) assessing risks, which involves analysis and evaluation of threats; and (3) controlling or mitigating uncertainties, which includes monitor risk control and treatment of loss exposures. The goal is to optimize success, and risk management achieves this by minimizing threats.
Risk management services may refer to any of the following or a combination of these.
Strategic Risk Management
Strategic risk management deals with your business strategy or the big picture. This involves monitoring new competitors and adjusting your strategy to stay ahead of the pack. In addition, it also means regularly researching the market and looking out for market changes.
“Any firm operating in a competitive market must focus its attention on changes in the external environment that could impair its ability to create value for its customers,” Harvard Business School Professor Robert Simons advises.
For instance, business executives who responded to the Global Risk Survey of PricewaterhouseCoopers International Limited (PwC) said that they consider keeping up with the speed of digital and other transformations as a significant risk management challenge.
According to HBS Online, three things pose or cause strategic risk. These all involve different types of pressures on the business. The first one is pressures due to growth, which happens during rapid expansions that lead to gaps in staffing or industry knowledge. The second one deals with culture pressures, such as internal competition and resistance from higher management. The third one has to do with information management pressures, which often leads to decentralized decision-making.
Operational Risk Management
Operational risk management deals with preventing and/or preparing for interruptions to the flow of the products and services of the business because of errors or mistakes in internal operations. This could relate to mistakes in decision-making and tech issues. Examples include labor strikes or problematic products sent or delivered to customers.
To mitigate the operational risk of a business, it needs to implement rules and procedures that remove or minimize fraud, mistakes or errors. In addition, it has to create plans on how it intends to keep running during emergencies.
Reputation Risk Management
Reputation can make or break a business, so it’s really important to be in good standing with your customers and the rest of the community. To do this, a business should implement measures that allow its employees to always provide its customers, suppliers, and other stakeholders a positive experience. In addition, a business must also develop a plan that outlines how it will handle bad or negative publicity.
Legal and Compliance Risk Management
The risk of getting sued is always at the back of every business owner’s mind. So, it’s essential that a business must train its employees to understand and follow laws and regulations. It should also keep up to date with any new rules as these are always changing. In particular, businesses must be extra careful with how they handle customer data protection.
Financial Risk Management
Anything related to money is covered by financial risk management. Financial markets can be unpredictable, so changes in market prices as well as interest rates can pose a risk to businesses. Financial risks also include liability judgments and cost of claims.
To mitigate financial risk, businesses must take advantage of financial tools to help reduce or minimize risks, especially when they’re dealing with loans and investments. They should also have a plan set up detailing how employees will handle sudden fluctuations in costs or prices.
Perimeter Risk Management
Again, preventing losses is the main goal of risk management. Aside from those already mentioned above, there’s also a risk of intruders entering the premises of the business and causing havoc to its operations and security of employees.
This is where perimeter risk management comes in. Securing business premises and assets can deter those with bad or illegal intentions from completing their mission. So, it covers theft, arson and other criminal actions. It can also protect the business against espionage, activists, sabotage and other threats.
Perimeter risk management can refer to more than the physical security of your business and its assets. Some sources also include risks related to weather and political changes. In any case, perimeter risk management aims to prevent losses without getting in the way of day-to-day business operations.
Why Risk Management is Important for Businesses
Risk management is critical for businesses who want to continue reaping profits without issues. The most important reasons for implementing risk management in your business include minimizing losses and protecting the reputation of the organization. However, risk management can also enhance decision-making and encourage growth and innovation.
According to PwC, 83% of business strategies zoom in on growth, despite risks and mixed economic signals. Thirty-nine percent (39%) of business executives who answered PwC’s Global Risk Survey also said that they are making better decisions and achieving sustained outcomes thanks to consulting risk professionals early.
In addition, businesses that have risk management measures in place are two times more likely to expect faster revenue growth and five times more likely to deliver better business outcomes and stakeholder confidence.
“Risks may not be pleasant to think about, but they’re inevitable if you want to push your business to innovate and remain competitive,” says HBS Professor Eugene Soltes in Strategy Execution, Harvard Business School’s online course.
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