The nature and importance risk management to businesses - Assignment Example

?The Nature and Importance of Risk Management to Business 0 Introduction Risk management is extremely significant to all business organisations. The global crisis in 2007, which stopped the credit market in 2008, had resulted to a severe panic among organisational leaders. Such problem was deemed as the result of failure of the principles as per time in monetary institutions (False & Simkins, 2010 - cited in McShane et al., 2011, p. 641). The problem may be the result of departmentalising of risk control and uncoordinated within the organisation. Apart from that, risk has been regulated by organisational managers that concentrated on pure risks--hazards. However, the crisis commenced to generate another paragon--business risk management--that replaced the conventional risk management, specifically in the scope of large monetary organisations at the core of the crisis (Hampton, 2009, p. 66 - cited in McShane et al., 2011, pp. 641-644). The objective of business risk management is to coordinate regulation of all types of risks encountered by an organisation, with relevance of risks to organisational management, auditing, supply chains, distribution frameworks, information technology, or human resources (McShane et al., 2011, p. 644). This paper endeavors to depict the nature and importance of business risk management, to exemplify the notions with models, and to justify that business risk management is a process which benefits large corporations rather than small to medium enterprises. 2.0 Glossary Hazards. Hazard is any origin of possible destruction, harm or unfavorable health impacts on anything or anybody under specific situations at work (Canadian Centre for Occupational Health and Safety, 2009). In business organisations, hazards can also be termed as pure risks (McShane et al., 2011, p. 645). The impact of risk should be fathomed. In fact, hazard risk, as one of the major risk types--alongside with strategic, operational, financial, and legal, does exist in the risk reaction component of business risk management (Kaplan and Mikes, 2012, p. 31). Risks. Risk is a contingent or possibility that an entity will be harmed or will suffer health impact if disclosed to a pure risk (Canadian Centre for Occupational Health and Safety, 2009). A strand of study has engaged organisations not to regulate individual risk. A large firm’s cost of capital must rely only on its framework, not the entire risk of the organisation because investors can omit the manifold risks of single firms by grasping a well-variegated portfolio (McShane et al., 2011, p. 644). 3.0 Risk Management 3.1 Nature Business risk management is a process that can aid the firm determine risk situations and regulate the relevant risks. Nations such as South Africa, United Kingdom, and Australia have been adapting the framework of business risk management. It should be fathomed that risks potentially existed in any type of business organisation because one firm cannot withstand the industrial setting without encountering diversified forms of risks. There is, therefore, a spice to light up the world of business for organisational leaders to remain active. The risks are accompanied with hazards, which can cause harm and can be fatal to any perspectives. Where there are risks and hazards, there should be a proper regulation of business risk management in order to annihilate the cause of its emergence. However, in today’s business environment, it is difficult to determine risk management of organisations because they are not postulated to disclose their business risk management framework (Gates et al., 2012, pp. 28-36). 3.2 Significance What signifies business risk management is that it can be utilised by business organisations to annihilate the emergence of hazards, and eventually omit the danger of its accompanied risks. Additionally, organisations with business risk management schemes can improve its organisational performance initially through enabling corporate executives to regulate the firm better. With the presence of business risk management, companies will be able to stipulate well on its major decisions because the hierarchy of staff of the said organisation will commence to work hand in hand (Gates et al., 2012, pp. 28-37). The communication channel among the members of the organisation and the flow of information will be modified that would result to organisational learning. Most significantly, the organisational leaders will find it easy to explicate and consider the risks in the formulation and implementation of strategic goals. This will not just destroy the risk accompanied in the internal aspects of the company but also on its external side--developing a consistent communication with the external stakeholders of the business (Gates et al., 2012, p. 37). 3.3 Variety of Business Risks 3.3.1 Internal Factors Human Factors. These are the results of human negligence, trade union vagueness, accidents or deaths, and incompetence. In other terms, all human activities fall under this section. This may include supply chain incompetence or debtors’ insolvencies that may impact the overall operation of the business. Technological Factors. The development of technology may deem organisations to decide on adapting with the trends. However, if one firm does not engage in improving production or distribution aspects, then to lose the market is the great risk. Physical Factors. The elements that create destruction to the tangible assets of the firm fall under this portion. The malfunctioning of equipment, fire or theft, and delivery damages, are considered physical factors. This may also tap with remuneration paid by the business to an extra party for intended or unintended damages (Business Knowledge Resource Online, n.d.). 3.3.2 External Factors Economic Factors. These are most salient causes of exterior risks. The field of microeconomics and macroeconomics are factors that must be considered which may bring great risk. The alterations in the economy are defined as dynamic risk, and they are unprecedented. Such risks will bring monetary imbalance to create losses to the firm. Natural Factors. These may result from environmental phenomena that cannot be controlled by the industry or the society. Such events might result to death and impact the business properties. Political Factors. Industrial and trade policies will bring unfavorable scenes to the operations of the business. The influence of government is such a barrier to trade and industrial activities of the firms (Business Knowledge Resource Online, n.d.). 3.4 Pros and Cons of Business Risk Management The pros about business risk management include preparatory situations before taking the right actions, and provision of consistent analysis for continual growth. In other terms, business organisations can be caught at a pace where they are prepared to combat with the associated risks of their activities. For instance, the firm can research the certain situation, the customers, the industry and all of things for them to be prepared (Wee and Morse, 2007, p. 53). However, even if organisations are given enough time to prepare, there are some who are getting stuck on the preparation setting. It must be understood by the business organisations that too long preparations can deem to non application of taking action. The advantage is that, through repetition of events, firms can analyse the things they need to cultivate. However, organisations will also arise from situation wherein they do not know where to start and what to do because some events are totally new. This is the possible risk of uncoordinated organisation. The greatest approach to understanding the future risk is through analysing the past events. That is the great advantage of business organisations. However, the only disadvantage is when business organisations are not willing to give up on habitual matters so they could try something fresh and new (Wee and Morse, 2007, p. 54). The advantage goes when organisations perceive the risk, and the disadvantage is tapped with over focusing on preparations without a thorough understanding of the contingencies. 3.5 Risk Management Process There are six steps to manage risk: (1) defining the circumstances, (2) determine the possible risk, (3) evaluate and analyse the risk, (4) improve alternatives, (5) decide and apply, and (6) assess and monitor (Homeland Security Risk Management Doctrine, 2011, pp. 15-26). Define the Circumstances. When defining the context, these are the factors that need to be considered: organisational goals, institutional policies, decision makers, stakeholders, and available information. Before an organisation stipulates on major decisions, it should first determine the picture and disseminate the idea to every part of the organisation. Determine the Possible Risk. The past events are great source of risk analysis. However, there are unusual things that emerge as risk and the firms should determine these contingencies. The stipulation of scenarios is a major approach to better fathom the emergence of hazards and risks. Evaluate and Analyse the Risk. This step goes to assess the determined risks and analyse the result of the evaluation. For instance, the task associated to this step may include stipulating the methodology, accumulation of facts, implementing the methodology, verifying the facts, and analysing the results. For most large organisations, they have to move back and forth between these tasks because they need to redefine the methodologies used after facts have been gathered. Improve Alternatives. This section may include reviewing the past events. It is because past events provide significant identifiable risks. The next pace is contacting artisans, analysing the optimum practices, and political guidelines; these are all significant for the brainstorming phase. The result of such conduct is a detailed list of actions which should be organised and be assessed well. Projecting the cost of each identified risk is a critical step, which facts should be collated in order to finally annihilate the potential alternatives. Decide and Apply. The next big step is to present the accumulated facts. It should be properly documented for the implementation process. Leaders are required to do management functions, such as planning, organising, leading, and controlling. The most significant thing here is to decide major actions after such implementation is done. Assess and Monitor. From the beginning up to the end, organisational leaders should evaluate their overall progress and monitor the happenings after the implementation process. Before such a pace is done, they should define the metrics on gauging the organisational performance to verify the success of the action plan. Lastly, organisations should understand that communication is a very significant factor in dealing the business risk management process. 4.0 Models and Paradigms 4.1 Risk Mapping and Strategy Grid When business organisations manage a large programme or a small activity, they need to highlight the principal risks of such a project. One of the salient approaches to this conduct is through a visual and concise manner of presenting the risks. Such a scheme is called as Risk Map. In using a risk map, the probability and effects are presented in vertical and horizontal axes, respectively. Each box in the grid is associated with red, yellow, and green colors, which mean high, medium, and low, respectively (see Figure 1) (Expert Program Management, 2011). The identified risks will be presented in the upper section of the grid. Figure 1. Risk Map A strategy grid, however, is used to depict the kind of strategy that should be utilised in each of the identified risks. A strategy grid has four quadrants that depict factory, strategic, support, and turnaround sections. The area of interest for factory section includes business operations, for strategic section arise reputation and brand or products, for support section include compliance and risk management, and for turnaround section arise supply chain, public and support infrastructure of the business organisation (Pun, 2004). Figure 2. Strategy Grid (McFarlan, 1984 - cited in Pun, 2004) 4.2 Risk Priority Grid Risk can be easy to evaluate through collations. It can be done by identifying the risks and comparing each one among others to have a precise view of how significant they are. Each risk is associated with values from one to four to both extremity and likelihood sections. Figure 2 will depict what a risk priority grid should look like. Figure 3. Risk Priority Grid The grid is utilised to collate risks against each other. It would also permit organisational leaders to project the total level of risk at any period of time (Kerlero de Rosbo, 2010). The risk mapping, which is shown in figure 1, has been supplanted by this more succinct way of prioritising risks. 4.3 Risk Mitigating Strategies To lessen the emergence of risk, the hazards should be eliminated. It can be done through evaluating the risks circumstances before risks emerge (Cantoria and Gundlach, 2011). To apply the process of business risks management is an optimum way of mitigating risk. The risk mitigating strategies complement the implementation of the action. For instance, an organisation should revise the plan after significant data have been gathered. The firm should consider expanding of alternatives in order to have manifold approach of lessening the impact of risks. To investigate the after-event of implementing the action plan requires thorough analysis. Such strategy is done to develop the action plan for its re-modification. Written documents should focus on the stakeholders; alongside optimum practices, such as scheduling conventional meetings of every department. The external environment should be considered in the formulation of strategies; having a well-defined policies and safety programs should also be emphasised (Strong and Shane, 2011). 5.0 Conclusion Small and medium enterprises, as well as large organisations, need to manage risks in order to project the success of its activities and verify the solidity of its sustainable development. However, with the given facts and procedures in managing business risks, small organisations are smoothly impacted by the types of risks the relative industry has given. The optimum exposition that would best benefit large organisations in utilising business risks management is because they have more human resources and large operations compared to small firms. Most significantly, the economic changes in today’s environment create a big impact to a certain large company who does not practice business risk management. Not just hazards doom to backfire risks against firms, it also leads to bring a fast-developed cause to bring business to the catacomb of bankruptcy, insolvency and death. References Business Knowledge Resource Online (n.d.) Business Risks: Types of Business Risks. http://business.gov.in/growing_business/types_business.php Canadian Centre for Occupational Health and Safety (2009) Hazards and Risks. http://www.ccohs.ca/oshanswers/hsprograms/hazard_risk.html Cantoria, C.S. & Gundlach, M. (2011) Risk Mitigation Strategies and Risk Mitigation Plan. http://www.brighthubpm.com/risk-management/ 47934-risk-mitigation-strategies-and-risk-mitigation-plan/#imgn_0 Expert Program Management (2011) Visualise Risks Using a Risk Map. http://www.expertprogrammanagement.com/2009/06/visualise-risks-using-a-risk-map/ Gates, S., Nicolas, J-L & Walker, P.L. (2012) Enterprise Risk Management: A Process of Enhanced Management and Improved. Management Accounting Quarterly, vol. 13, no. 3, pp. 28-38. Homeland Security Risk Management Doctrine (2011) Risk Management Fundamentals. http://www.dhs.gov/xlibrary/assets/rma-risk-management-fundamentals.pdf Kaplan, R.S. & Mikes, A. (2012) Managing Risks: A New Framework. Harvard Business Review, vol. 90, no. 6, pp. 48-60. Kerlero de Rosbo, P.G. (2010) Institu Superieur d'ingenierie et de Gestion de I'Environment (ISIGE). Integrated Risk Analysis for Large-scale CCS projects'Iimplementation, viewed 8 January 2013, http://www.isige.ensmp.fr/dossiers-thematiques/ccs McShane, M.K., Nair, A. & Rustambekov, E. (2011) Does Enterprise Risk Management Increase Firm Value?. Journal of Accounting and Finance, vol 26, no. 4, pp. 641-658. Pun, K.F. (2004) A Conceptual Synergy Model of Strategy Formulation for Manufacturing. International Journal of Operations & Production Management, vol. 24, no. 9, pp. 903-928. Strong, K.C. & Shane, J.S. (2011) Risk Mitigation Strategies for Operations and Maintenance Activities. http://www.intrans.iastate.edu/reports/tr-627_risk_mit_w_cvr2.pdf Wee, J. & Morse, O. (2007) Juggling Pros and Cons of Taking Risks. Financial Executive, vol. 23, no. 4, pp. 43-54. Read More