Understanding Risk and Strategic Management

In simple words Risk means  to any event or situation that could lead to a negative impact on an organization’s objectives or roadmap. It can be attributable to both internal and external factors, For instance, economic downturns, technological disruptions, regulatory changes, and natural disasters, are the external factors. These are factors that are beyond the control of the entity. On the other hand, there are internal risk such are machine failure, employee strikes, production loss etc. A well managed an entity can greatly avoid these risks.

Strategic management is the process of setting long-term objectives for an organization and developing plans to achieve them. In simple words a well drawn strategy serves as a roadmap for the business. A good strategy is formulated based on 4 factors 

• Strength
• Weakness
• Opportunities
• Threat

It involves studying the external environment, evaluating the organization’s internal strengths and weaknesses, and making strategic decisions about resource allocation, market positioning, competitive advantage, etc..

Risk and strategic management are interconnected because the strategic choices made by an organization can determine its level of exposure to certain risks. For example, a company that expands into a new market may face increased risks related to cultural differences, regulatory compliance, and competition.

The Importance of Risk Management

Effective risk management offers numerous benefits for organizations, including:

• Improved decision-making: Understanding the risk profile of your business is a valuable input for making the right decision. For instance, your business is into export of wooden furniture. There is a new legislation coming up further restricting the export of wooden products. Now this input or knowledge of  existence of risk helps you to strategically cut down on exports and focus on dominating domestic markets
• Enhanced resilience: A business that has clearly identified its risk and is prepared to manage it has better resilience to bounce back. In the unfortunate event of the risk manifesting, the business also knows to tackle it well
• Increased profitability: In business, we say higher the risk , higher the returns. But risk must always be well calculated and within the capacity of the business. Once risk is managed it would open up venues for better profits
• Enhanced reputation: More over, an entity that survives risk would stand in the business for longer and will be very credible and trustworthy.

Key Steps in Risk Management Strategies

• Risk Identification and Assessment:
  • Identify potential risks: The first and most important step in risk management is identifying the risk. Only once we identify the risk , we can handle it . There are various identification techniques like SWOT analysis, PEST analysis, etc.. that can be employed to identify risk. It needs to be further classified as external and internal
  • Assess risk likelihood and impact: Once risk is clearly identified , one must understand what is the likelihood that such risk will manifest and if so what would be the impact on the entity
  • Prioritize risks: Based on the above study , risk would be ranked . For instance, a regulatory risk that might put the entity out of business will have to be prioritised over an operation risk that might contribute to a longer production cycle. 

Here are a few techniques for managing the risks identified

1. Risk Avoidance:
   • Eliminate or reduce exposure: This means we totally give up doing the activity that can lead to risk. For eg: if there is a risk flood (external risk) in the location identified for setting up your factory, this risk can be altogether avoided if a new location identified
2. Risk Mitigation:
   • Reduce the impact: Here the focus is reducing the impact of risk. For instance waterproofing important documents or machines from the above examples if flood hits the factory
3. Risk Transfer:
   • Shift the burden: Here the risk is addressed by a third party. For example the earlier factory takes insurance against natural disasters. So that any loss suffered from the floods is borne by the insurance company
4. Risk Acceptance:
   • Acknowledge and prepare: Finally its acceptance. This means we acknowledge the possibility of risk and be well prepared if it materialises. Its more like a contingency or disaster recovery plan 

Risk Management Frameworks

To implement effective risk management practices, organizations often adopt frameworks that provide a structured approach to identifying, assessing, and managing risks. Some common frameworks include:

• COSO Enterprise Risk Management (ERM) Framework: A comprehensive framework that provides a five-component approach to risk management.It was established in year 1992 and shed lights on various risk factors commonly seen in a business
• ISO 31000: An international standard that provides guidance on risk management principles, processes, and practices.This standard helps in establishing a good risk management framework within the entity to address any risk
• NIST Risk Management Framework (RMF): A framework developed by the National Institute of Standards and Technology for managing cybersecurity risks.This standard focuses on cyber security and risk associated with such environment . This is an important framework is present IT driven business environment.

Importance of Continuous Monitoring and Improvement

Risk management is not a one time activity.It must be adopted as an ongoing process that requires continuous monitoring and improvement. Risk must be actively managed on each day of operations. Ensuring the risk is managed each day helps in greatly avoiding its manifestation or helps in bouncing back if it does occur. Organizations should regularly review their risk assessments, update their risk management plans, and measure the effectiveness of their risk mitigation strategies.

There is no business that is free from risks 

Conclusion

Risk and strategic management are essential components of a successful business. No business is free from risks. The success of a business depends on how well it manages the risk

By understanding the key concepts, strategies, and frameworks, organizations can easily  identify, assess, and mitigate risks, improve their decision-making, enhance their resilience, and create a business of high value. 

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