|
Risk Management
Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses.
The potential return from any investment is generally depending to the amount of risk the investor is willing to assume.If you’re a traditional risk manager, you’re expert at coping with the three familiar categories of business risk: hazard risks (fire, flood, earthquake), financial risks (bad loans, currency and interest rate swings), and operating risks ( the computer system goes down, the supply chain gets interrupted, an employee steals). You’ve probably been working with insurance companies, finance and security experts, and other specialists to reduce the levels of risk your business faces in each of these areas and to develop hedging strategies to minimize potential losses.
These traditional kinds of risks remain extremely important. But today, more and more company leaders are beginning to focus on a different set of risks that can be even more dangerous. These are the strategic risks your business faces.
Strategic risks target one or more of the crucial elements in the design of your company’s business model. In some cases, they shatter the bond between you and your customers. In other cases, they undermine the unique value proposition that is the basis of your revenue stream. In still other cases, they siphon away the profits you depend on. And sometimes, they destroy the strategic control that helps your company fend off competition. In the worst case, a major strategic risk can threaten all these pillars of your business.
Not all businesses face every form of strategic risk (technology risk, competitor risk, customer risk, brand erosion, industry risk, project failure, etc.). But every business faces some. In fact, strategic risk comprises most of the total risk most companies face.
Here are a few examples of the kinds of strategic risks that most companies today are grappling with:
Project risk. Think back to the last major project your company initiated (R&D project, new product launch, market expansion, acquisition, IT project). What were the odds of success at the outset? What is the true success rate of all your company’s projects in the past five to ten years?
If you assess them honestly, the true odds of success at the outset of most major projects are less than 20% - which means the risk of failure is greater than 80%. The new risk management asks: Can those odds be changed? How? What specific moves have other companies made to radically alter the odds in their favor? Which of these moves can you use to dramatically change the odds on your next project, or even on your entire portfolio of projects?
Customer risk. Has your business ever been surprised by its customers - by sudden, unforeseen shifts in their preferences, priorities, and tastes? When this happens, the revenue base on which your company is built can erode very quickly. But there are companies that have found specific ways to beat customer risk. How have they learned to get inside the minds of their customers, anticipating surprises before they happen? What growth breakthroughs did they create? Can you adopt their methods successfully? The new risk management is focusing on answering questions like these.
Transition risk. When technology or business design shifts transform an industry, as many as 80% of incumbent firms fail to survive the transition. But a handful of companies have not only beaten transition risk, but also turned it into an enormous growth opportunity - and a few have done it successfully more than once. What lessons do these survivors have to teach the rest of us? Here is another area where the new risk management is deeply involved.
These three examples just skim the surface of the kinds of challenges posed by strategic risk. (Our new book, The Upside, delves into the seven chief forms of strategic risk in significant detail.) But they’ll suffice to illustrate the range of new problems risk managers can learn to think about in order to help their companies better navigate the new age of volatility that all of us are living through.
Of course, strategic risk has always existed. But it has not always been high on the list of leadership challenges. In more stable periods, everyone knew there were dangers that could threaten the viability of their companies’ business model, somewhere out in the indefinite future. But they usually weren’t considered big enough or likely enough to worry much about.
Today risk has moved to the top of the agenda. As everyone intuitively senses, our world is becoming a riskier place, featuring greater risks, more frequent risks, and more kinds of risks.
Add your comment:
More articles in this category
Asian Coal-Bed Methane Brews As a Potential Hot Energy Play
Massive stores of methane gas buried deep inside Asia's coal beds could be shaping up as the next hot energy play. Trillions of cubic meters of clean-burning methane are trapped in Asia's coal deposits. The gas -- which produces lower levels of air... More »
Freecreditreport
Freecreditreport Today, residents of the Washington area and the rest of the East Coast can finally order one free copy a year of their credit report from each of the three national credit bureaus. The annual free credit reports were mandated by... More »
Air Freight Forwarding Companies Involved In Price Fixing
A worldwide investigation has been launched into alleged fuel price fixing by the air freight forwarding industry. Eleven major freight carrying airlines are being accused of trying to fix fuel price surcharges for freight forwarding flights. Amongst... More »
20 Possible Reasons Why Your Business Is Failing
1. You don't offer free original content.2. You don't use a signature file on your e-mails.3. You don't offer free software.4. You don't have your own domain name.5. You don't offer a free contest or sweepstakes.6. You don't test and improve your ad... More »
Business Law Today
Business LawEach and every person in this world must have at least once thought about opening some sort of Business to increase his or her income. No matter if you are thinking about opening a small family business or a larger company, you cannot do... More »
Bookmark this Article:
|