Effective management risk is crucial in today’s world of uncertainty. Dealing with uncertainty in the pursuit of value is a constant that applies to all business. It’s a process of dealing with the unknown. Risk involves uncertainty and affects everyone’s decision-making process. It has a direct impact on your strategy and achieving your objectives.
You can’t eliminate or completely avoid risk. No business can grow without taking risks. The famous management consultant, Peter Drucker, identified four types of business risk:
- Risk that is built into the very nature of the business and which can’t be avoided
- Risk that the business can afford to take
- Risk that the business cannot afford to take
- Risk that the business cannot afford not to take
The key to managing risk is having a process for balancing exposure to risks against the opportunities with the goal of enhancing your capacity to create, preserve, and realize value. Risk impacts business objectives which in turn results in a process of aligning objectives to support the strategy.
Every business needs to establish its appetite for the amount and types of risk it is willing to assume. Once this is established consider developing a profile for risk based on risk appetite and how you will respond to risk. Based on the risk profile, you can implement an accept, avoid, or pursue approach in considering a risk response.
Accept means to take no further action on the risk. Avoid means to include steps to remove the risk. Pursue means to act to accept the risk and seek opportunities for increased performance. The steps of accepting, avoiding, and pursuing risk will have the impact of analyzing business performance relative to business strategy and objectives. The idea is to minimize variability in performance.
Monitoring risk performance indicates how well risk management is performing. It also reveals the severity of risk in addition to changes that might be occurring. Based on this information management can then decide on to how best respond to risk. Achieving an understanding of the current and future state of risk management provides baseline information for improving efficiency and effectiveness. By constantly monitoring, businesses take advantage of improvement opportunities.
New improvement opportunities for improved efficiency and effectiveness can occur in any of the following areas:
- New technology
- Shortcoming of past failures
- Organizational change
- Competitive bench marking
- Rate of change
It is essential to understand where there are opportunities for improvement. By monitoring, businesses can then take advantage of opportunity situations that best fit their strategy and objectives. It also helps them develop effective responses to risk based on the severity of risk.