Organisations that fail to implement robust Risk Management face significant internal and external threats. Every organisation takes risks but just the same, business decisions also come with risks.
Risk Management is a dynamic process. It pivots, shifts focus as internal and external influences change, but it also requires collaborative thinking (and engaged communication) across an organisation. Success is easily measured, as businesses safeguard their success by committing to a strong Risk Management strategy – they know what success would look like, which factors could cause failure, what that failure could cost (financial, operational, organisational), and then how they would respond to obstacles that block their path.
The challenge now for Executive Management Teams are to guide their organisations in the transition from a reactive, crisis response mode, and integrate strategic Risk Management to strengthen resilience in the future. By partnering with other core operational functions, risk has a key role to play, and the most important actions will be to revisit risk governance, improve risk culture, and integrate resilience into the strategy process, with more advanced foresight capabilities.
What are the main Business Risk causes?
Risks come in different forms. With considering all possible risks that a business faces in its day-to-day activities, this can be extremely overwhelming. But assessing the impact of each type of risk and by validating a ‘level of risk’ scale can help prioritise where to invest your time, energy, and focus on risks that have the greatest potential to impact your business.
Business Risk causes can be arranged into four (4) categories:
1. Natural Causes
Risk may occur due to natural causes, since nature is an independent element that impact the operations of a business. This may include natural disasters such as earthquakes, hurricanes, typhoons, floods, etc. Yet, an organisation’s defence against these risks is simply by taking out insurance coverage and this reduces the effects of these disasters on their activities.
2. Human Causes
Business risk due to human causes refers to the impact of human factors that affects the operations of an organisation. This may include employee issues, strikes, ineffective team management, poor decision-making, lack of communication, or changing customer choices.
3. Economic Causes
Economic causes may contribute to risk that limits businesses from reaching their financial goals and due to a change in the market. This may include increased cost of raw materials and labour, competition, market regulations, government policies, or increasing interest rates.
4. Physical Causes
Physical causes results in damage of business assets. This may include technology changes, outdated machinery, mechanical defects, or employee accidents.
How Risk factors impact an organisation’s objectives?
Risk factors are elements, circumstances, or causes which could disrupt an organisation’s operations, business activities, growth or its stated goals and objectives. These objectives may be numerous in type, etc, depending upon the business sector that the organisation operates within.to business. Subsequently, the number of risk factors falls into the same uncertainties and impact of unforeseen or assumed risks.
As already mentioned above, examples of risk factors vary from business to business, but objectively they can be grouped into two (2) categories:
1. Internal Risk Factors
Internal Risk is a risk that exists within the organisation. It is widely known as any risk that can be identified and managed by that same organisation. It can be very damaging to your organisation and therefore, it is important to understand how to ‘identify’ the risk, ‘assess’ the risk, ‘treat’ the risk, ‘monitor and report’ the risk.
Internal Risk will most typically fall into the following three (3) categories:
Human Risk
- A Human Risk encompasses any situation in which employees fail to perform their jobs correctly and due to lapses in judgment, performance, or skill set deficits.
- The importance of Human Risk may not always be limited to individual employee’s acting outside of their Role Descriptions but an employee not being informed of Company Policies and Procedures can also contribute to this risk category.
Physical Risk
- A Physical Risk is when an event or incident occurs that causes damage or loss to your organisation’s assets (e.g., buildings, equipment, or employees).
- Physical Risk can take many different forms, including injuries to employees from improper training, lack of safety awareness, building maintenance, or theft.
Technological Risk
- A Technological Risk refers specifically to errors in the workplace caused by faulty technology, IT hardware, or outdated equipment (e.g., an IT Server going offline, IT Hardware upgrade problems, or bugs in your SaaS environment).
How do you prepare for Internal Risks?
Internal Risks must be managed effectively since they are a significant source of risk and because they are more controllable. The best preparation for Internal Risks is to ensure that your overall Risk Management Plan includes both internal, as well external ones.
This results in having dedicated Policies and Procedures in place for preventing, assessing, monitoring, communicating about, and managing Internal Risks – thereby ensuring that everyone involved knows their role!
2. External Risk Factors
External Risk is a risk that you have no control over. These are often referred to as events with low predictability but high impact that can cause major disruption for your organisation. External Risks are extremely dangerous to the operational activities because they can expose an organisation to many varied factors that cannot be controlled or predicted.
External Risk will most typically fall into the following three (3) categories:
Natural Risk
- A Natural Risk is a threat related to natural disasters and other uncontrollable events (e.g., floods, thunderstorms, earthquakes, cyclones, etc.)
Political Risk
- A Political Risk is any unexpected change brought about by governmental action or inaction (e.g., legislation, compliance, or trade policy).
Economic Risk
- An Economic Risk refers specifically to financial matters within a country and rather than between two or several countries.
- Economic Risks are usually caused by fluctuations in monetary value due either directly or indirectly through market movements or forces (e.g., inflation or deflation).
How do you prepare for External Risks?
While some External Risks may seem unavoidable due to their nature (e.g., floods, storms, earthquakes, etc.), others can be mitigated by simply adjusting internal Policies and Procedures by responding to these events. Because of the unpredictable nature of External Risks, it is essential to include within your Risk Management Plan and itemise how you plan to respond to them (if they occur).
When it comes to planning for External Risks, there are several steps to take and questions that need to be answered:
- Identify the Risk: What are you trying to protect against?
- Identify the Impact: How would a particular event affect your organisation’s performance?
- Identify the Likelihood: How likely is it that this event occurrence will happen?
- Identify the Consequences: What would be the consequences of an event occurring, and how severe would they be, and what would the impact be for your organisation?
Why monitoring and managing Business Risk factors are important?
Managing strategic Risk Management is an essential activity for all businesses, whether you are launching an innovative solution to market or just trying to stay ahead of the market competition. Understanding the dangers and their potential impact helps empower Executives (and Leaders) at different hierarchy levels to make smart, consistent, and well-informed decisions.
Monitoring Business Risk and impediment to operational areas
There are numerous factors that affects business risks and share similar circumstances, even though risks continue to change (with time) and varies from business to business. Hence, to successfully eradicate and manage risks, it is crucial to understand these factors that have the potential to affect business risk.
Product diversification minimises risk
This is one (1) major factor that can have a profound impact on an organisation when it comes to business risk. If a business is entirely dependent on only one (1) product or service, then the risk begins to multiply – there is no room to navigate through and reduce risk levels. This is in direct contrast to an organisation firm offering multiple products or services.
Demand for a product or service influenced by economic conditions
If the demand for a product or service is heavily influenced by economic conditions, the business risk is greater. An organisation selling essential or staple goods might face a relatively ‘low’ business risk. This is because the demand for their goods will remain stable, regardless of economic conditions. When a product is extremely sensitive, then its demand is susceptible to risks.
Business size and market competition intensity
To both survive (and thrive) as a Start-up or small business, the risk is greater considering the challenges for its business size. Because to be competitive against established businesses, it will need a long time to adapt to competitive industries and its market sector. It simply just takes time to establish a brand presence and grow market share.
Also, the business risk is greater if the level of competition is too high. A Start-up or small business will naturally take time to expand its market footprint (if at all) and remain competitive as the business matures. However, this can vary from industry to industry but if your business has a ‘niche’ product or service, the opportunity is promising.
High fixed cost business structure
An organisation that has high fixed costs will automatically incur greater levels of business risk. This is due to ‘time-related’ costs and has nothing at all to do with the business’s products or services. A business with low fixed costs or a cost structure consisting of variable costs equates to lower business risk and compared to a business incurring higher fixed costs.
Summary
The key to organisational success is to stay on top of your strategic Risk Management.
In the future, adopting effective governance to overcome Risk Management ‘silos’ and strengthen opportunities will become increasingly vital for the progressive state of any organisation. By fostering integration with core asset, operations management, and effective leadership strategy, CEOs and CFOs can drive the organisational transformation and growth needed to futureproof operations and unlock their full performance potential.
Without identifying risks, it will be difficult to successfully define your organisational goals and objectives and thereby planning strategies for achieving them. It is “best practice” to integrate Risk Management with your strategy formulation and business planning processes. Understanding and managing risks allows you to control, and often mitigate the financial, operational, organisational, legal, and other consequences associated with risks.
But importantly, taking an integrated risk-based approach will involve moving from a traditional compliance focus to creating the agility and ‘right fit’ corporate culture to adapt (and change) to evolving business cycles. This helps accelerate the much-needed transition to more sustainable business operations, productivity improvements, and an engaged employee base.
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