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Importance of Risk Management in Organizations

Risk Management And Organizations

Introduction

In business and different organizations’ programs risk play a very major role and it has be to be managed wisely. Risk management is defined as the procedure which includes with the identification, assessment and controlling problems of capital and earnings of an organization. These types of risk problems and risks causes’ monetary unreliability, licit duties, deliberate management delusions, natural disasters and accidents. That is why organizations make alleviation of these threats their top priority. (Theirm.org, 2018)

Organizations Risk Tolerance in Different Environments

Risk tolerance is defined as the degree of variability in investment returns that an investor is willing to withstand. Risk management doesn’t always mean to reduce risk because without taking risks, no of the organization can be operated. The main goal of risk management is to increase risk-reward for a given risk tolerance. (THUNE, 2018)

Importance of Risk Management in Organizations

Different Business Environments And The Likely Risks of Those Environments:

Wal-Mart Stores Incorporate, a big name in the major successful organizations of United States of America. Wal-Mart Stores Inc. has hardened their supply sources policies to include a “zero tolerance policy. They say, as part of the changes to its sourcing standards, some of which will take effect as soon as April 1, Wal-Mart warned its suppliers of a zero-tolerance policy for unauthorized subcontracting, the retailer said in a statement. Like Wal-Mart, many other organizations make different strategies to manage risk in the organization. (Rouse, 2018)

Business Environment

All internal and external environments that modify how the corporation works including all the demand and supply, customers, business orders, management and employees are included in business environment. (Cliffsnotes.com, 2016)

  • Internal Business Environment

It usually defines by ongoing artisan, administration and especially collective lifestyle within the firm. Some components influence the organization and some of elements affect only the manager. (Spacey, 2015)

  • External Business Environment

External environment of an organization includes all the outside impacts or circumstances that influence the operation of business. The business must act or react to keep up its flow of operations. (Toppr.com, 2018)

Risk

The aptitude of losing or obtaining anything of value is basically known as risk. Value includes health, wealth, emotions statuses etc. it could be gained or excluded whenever we take a risk. (Getsmarteraboutmoney.com, 2018)

Types of Risks in Business Environment:

There are many types of risks in the business environment. Some of them are described ahead.

  • Strategic Risk

The risk which arises when an organization’s scheme turns into slight productive and in the result, it scuffles to achieve its objectives.

  • Compliance Risk:

The disclosure of legit forfeiture, financial abandonment, and material loss a firm or an organization faces when it lacks to follow industrial rules and regulations and internal policies of the organization.

  • Operational Risk

Operational Risk focuses on unanticipated failures in an organization’s daily programs and procedures. It can be a technical fault, for example, a server outage, or it can be done due to the people or procedures of the organization. These risks can be solved by authorization of the organization as well as by keeping the payment system stronger.

  • Financial Risk

Financial risk refers to extra costs or lost revenue. It deals with the money flow that moves in and out of our business and in circumstances that the organization could have a sudden loss.

  • Reputational Risk

Reputation is defined as an essential element of an organization whether whatever the business is. If the reputation of the organization is somehow damaged, it wouldn’t be a good situation for the organization. Sudden loss of revenue could happen. Customers would not prefer doing business with the organization.

Threats And Opportunities In Risk:

There are specifically designed strategies to, manage risk factors in an organization. Risk management strategy for any special purpose project is a high-rank plan that deals with tools and methods for identification, analyzing and diminishing negative circumstances (threats) that can molest the project while enhancing positive circumstances (opportunities) that can potentially upgrade the project. (MCCONNELL, 2012)

Risk Tolerance:

Risk tolerance is defined as the rank of risk targeted by an individual or an organization. To manage risk doesn’t always meant to lower risk because taking risk is the foundation whether dealing with personal issues or doing any business project. The main goal is to enhance the risk-reward of the business.

Types Of Risk Tolerance:

Some of the types of risk tolerances are described below.

  • High-Risk Investor:

A high-risk investor is a person who is able and willing to tolerate prospective loses up to 50% of their business in order to enhance their personal gains.

  • Low-Risk Investor:

A low-risk investor is a person who is not willing to tolerate the prospective loss of their capital. They prefer to save their investments such as insured accounts which provides potential returns.

  • High-Risk Startup:

Individuals who are needed to upgrade a startup organization, they need to tolerate a high amount of risk. Business should be this much set that it could give a high level of potential return.

  • Mega Projects:

Mega projects are very high budget projects and are made for public safety. Due to which they have a very low amount of risk tolerance. That is why the organization has to work intensively in order to control risk tolerance.

  • Professional Snowboarder:

These projects are the type of very high budget projects. But it also has a huge risk tolerance level as it needs specific kind of high-level skills in it.

Methods To Measure Risk Tolerance Level

There are no specific methods to measure risk tolerance.

  • Not An Exact Science:

There are different tests by which we can measure the reaction of investors and entrepreneurs when they face different types of risks. These tests are based upon general sense. The different types of tests fall into two categories.

  • Investment Preference Tests:

It is a questionnaire which deals with preferences for selected invested vehicles. It asks questions about financial situations, goals and past experiences. It doesn’t deal with emotional reactions to risk. It is a quite simple type of test.

  • Psychological Tests:

It is an elaborative type of questionnaire with competition to investment preference test. It deals with the questions about emotional circumstances like feelings, behavior or may include hypothetical situations too.

  • Taking Starbucks As An Example Of An Organization:

Starbucks may articulate its risk appetite but this is something explicit in its 10-k for example. If they decided to open and expand in Italy or North Korea may suggest something about their appetite for more risk. Their appetite changed when they bought the Boulange business and started selling alcohol. It would be a change in their appetite if they shifted from corporate stores to franchises (outside Los Angeles).

Develop Skills To Identify And Assess The Risk Profile of The Organization

Risk profile plays an important role in the development of an organization.

Produce a Risk Profile For an Organization:

Organizations need risk profiles because it is a way by which negative effects like risks are being diminished.

Risk Profile

A risk profile is defined as the profile which shows the measurement of willingness to take a risk and the threats which are to be faced. It could be a profile of an individual or an organization too. It also helps an organization in the allocation of resources.

Risk Aversion

Risk aversion is defined as the behavior of consumers and investors when they face risk. It is difficult to take decisions in a situation of risks. It could be due to a powerful entrant, high-tech changes, intruding into the switch in customer’s desire, market, changes in the fare of raw materials, or any number of other extensive stakes.

Methods oF Reducing Risk Aversion:

The three methods of reducing risk aversion are as follows.

  • Get Buy-In From The Top:

In this method, we have to make set some expectations which help the organization as being a benchmark. It helps the organization to decrease risk aversion.

  • Bring In Policy Makers Early:

There should be a strong communication relation between innovators and policymakers of the organization. This would be the best solution to reduce risk aversion.

  • Encourage Innovation:

It includes introducing new inventions and ideas to an organization which encourages the organization to be more successful.

Risk Profiles of The Organization In Different Industries:

Different industries and different organizations do have different risk profiles.

Different Industries:

An industry is a place where raw materials are manufactured into consumer’s goods.  There are different types of industries worldwide; which include Aerospace industries, Chemical industries, Software industries, Technology industries, Pharmaceutical industries and many more. (Revisionworld.com, 2018)

Types of Analysis of Risk Management:

Risk analysis is the process which helps to find and manage risks before implementing different programs and strategies in the organization. The two types of analysis of risk management are described below.

  • Identifying Threats:

It includes identification of the risks and threats that could be faced ahead. It includes human threats like (illness, death, injury etc.), operational threats, reputational, procedural, natural, political, structural and many other types of threats and risks.

  • Estimating Risks:

It deals with estimating and calculating the probability of the occurring event. It can be measured by using a formula i.e.

Risk Value = Probability of Event x Cost of Event

Past data would also help in this procedure.

Risk Profiles of Different Industries:

Following, some of the risk profiles are described (directly taken from the CEOs speech).

  • Risk Profile Of Wal-Mart:

Wal-Mart is always in the span of problems and it is one of the defects of selling every kind of product in one market. Wal-Mart was also sued in Chicago in 2011 as one of its employees complained about harassment. Once it also sued in New Jersey in 2012 for using racist comments for the customer in the store and for many other cases too. It was also sued for bribery and money laundering in Mexico. (Ticosn, 2013)

  • The Risk Profile Of Outfitters:

Gross margin was negatively impacted by increased customer delivery and logistics expense rates, which we believe will likely weigh on gross margin in 2017, as well as by lower IMU [initial markup] and increased markdowns at both Anthropology and Urban Outfitters,” Meyer wrote. (Jim Swanson, 2017)

  • Risk Profile Of NIKE as an Example:

Credit Suisse First Boston said that with Phil Knight stepping down as chief executive, “the risk profile of Nike has increased” as with any executive change, “especially with someone from the outside.” CSFB said, “It is not known what strategy changes might be made, or to what extent Nike’s current management team will remain intact.

SWOT Analysis:

It measures Strengths, Weaknesses, Opportunities, and Threats in an organization. The measurement of these factors is very much important for the organizations as they are going to make the improvement in the strategies of the organization that are made for the working of the organization.

PESTLE Analysis:

It measures Political, Economic, social, Technological, Environmental and Legal (internal and external) environments of the organization. These factors make the affectionate of the organization better and keep them active in a social circle as a must.

Enterprise Wide Risk And its Benefits and Drawbacks

Enterprise-Wide Risk Approach:

Enterprise-Wide Risk Management (ERM) deals with a specific concept which helps to understand and manage risk and its management in organizations. (Jamieson, 201o)

Advantages Of ERM:

It focuses on company resources on managing the upside and downside of risk. It is a less expensive way to organize your company. This sets the organization in making better decisions and setting up a strong strategy for diminishing those risks.

Disadvantages Of ERM:

Its money and time consuming and if the results don’t match the overall organizational objectives, you can get discredited, and take all the blame home. The Risk performances of a risk manager cannot be measured in concrete quantifiable terms. Cost savings are normally hard to quantify and attribute to the risk desk. The same holds true for Auditors, Control Testers and Compliance professionals.

Key Risk Indicators:

A key risk indicator (KRI) is defined as a tool which indicates how much risk is present in an activity. It helps an organization or a company to know about the risk before time. (Metricstream.com, 2018)

  • Examples:

It includes profit, Cost, Cost of goods sold, Sales by region etc.

Innovation Can Be Used To Reduce Risk Aversion in Growing Organizations

For investigating how to reduce risk aversion, we need to define risk aversion.

Innovation:

Innovation is defined as something new or any new method which provides new perceptions to an organization. Innovation improves the old method and makes new methods more effective. (Nibusinessinfo.co.uk, 2018)

Innovation In Business Context:

In the context of business, Innovation means to introduce new ideas in an organization in order to attract customers. Innovation makes the business environment more attractive and more innovative as a must. (Econ-it2.EU, 2018)

Application Of Innovation To Reduce Risks In An Organization:

Following are the applications which are used to reduce risks in an organization.

  1. Innovation needs its own strategy
  2. Innovation within constraints
  • Innovation when the sun is shining
  1. Innovate iteratively
  2. Innovate with customers
  3. Innovation accounting
  • Innovation skills

Innovation Risks:

Innovation risk is defined as the threats which are faced by the organization when it is being innovated. These threats are from the competitors or from the any outsource factor that may disturb the working of the organization. (Hbr.org, 2013)

Types of Innovation Risks:

The two types are described below.

  • Operational – Competition:

Competition innovation risk includes the following stages:

  • Available For Service
  • Journeyman
  • Distinctive Competencies Achieved
  • World Class Delivery
  • Commercial – Uncertain Returns:

When an organization is not able to innovate commercially in the worldwide market. And when an organization is not earning sufficient and uncertain returns in profit.

Availability of Finance:

Finance plays a very important role while encouraging innovation in the organization. Finance supports the organization in terms of providing new and innovative ideas and material for the organization to be achieved properly.

Managing Innovation Risks:

There are many threats and problems which arise in the innovation of the organization. They are to be managed properly on time. If they do not be focused and maintained on time then they are not able to do work properly. (Erm.ncsu.edu, 2013)

Key Risk Indicators:

A key risk indicator (KRI) is defined as a tool which indicates how much risk is present in an activity. It helps an organization or a company to know about the risk before time.

Risks of Innovation:

Following risks are described below.

  • Competition:

It is because of the competition between different organizations in the market. Competition between the environments makes the working efficiency of different organizations better and improved.

  • Uncertain Commercial Returns:

It is due to the return problems. Organizations do not get sufficient returns on their investments. In this regard, they start losing their working efficiency sometimes and may go down in order to become less successful. (Starfishmedical.com, 2018)

  • Availability Of Finance:

It includes scarce resources of the organization. The scare resources are very much helpful for the organization to be managed properly and effectively as a must.

Example of Key Risk Indicators

For example, Kodak is the commanding name of photography. In 1975, some of their engineers invented the digital camera. But they didn’t develop that idea as it was a threat to their business core model.

For Example: If we have a business of different products of an organic farm in California and sell our products to different stores and after a success, we decide to expand our sale to Europe. In all of the European countries, there are specific rules and regulations which are to be followed like taxation policies etc.

For example: If the amount on the check which is to be paid to the customer is written $500,000 instead of $50,000. it would cause a big loss to our organization. These type of errors are included in Reputational Risk.

For example: If one of the clients of our organization, from which we get a big amount of revenue and credit, is being expanded for 60 more days. We would have a financial risk if our client would not able to pay on time. It would take our business in a big loss.

For Example Any negative publicity of the products of the organization or any other embarrassing activity by the organization or its members and officials, or if products and strategies of the organization are being criticized. And nowadays, there is no need of doing any special kind of event to damage an organization’s reputation; it could be done by just some negative comments on Facebook or uncooperative tweets on twitter.

Mitigation Strategies For Threats:

Different strategies are used in different measures. These strategies help in improvement of the organization working efficiency.

  • Administrative Measures:

It deals with Training and Physical security of the organization and its officials.

  • Networking Measures:

Networking hardworking measures include the implementation of network hardware level. (Securelist.com, 2018)

  • System Administrative Measures:

Organizations deals with the implementation of the program in these measures.

  • Specialized Security Measures:

It deals with the application of specialized security software.

Conclusion

Risk plays a vital role in our daily lives as well as in organizations. Without taking risks, no individual or no organization can set their roots towards success. Organizations need different innovations to be encouraged so it could be able to attract the customers and make them retain for a long time. Organizations should make such strategies which would help them to mitigate risk and such threats from their organization. In all the situations of daily life or programs of organizations, we do have both circumstances; threats and opportunities.

A risk manager is a person who takes care of alleviation of risk while diminishing the impact of threats and increasing opportunities. He also designs a high-quality plan of how the organization would manage risks and opportunities during the span of the project. Opportunity is defined as the chance to do something.  Opportunities in the management of projects in an organization are the methods and instruments which helps a risk manager to recognize and comprehend possible developments in the goals and objectives of the project. Threats include all the problems and bad situations that could be occurred in the organization. Threat management in an organization deals with recognizing and diminishing the negative circumstances; that are risks.

Also Study,

Construction Risk Management

References
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