The Importance of Risk Management

In the modern world of globalization and development, where it seems that each and every individual has room for self-realization, the number of businesses grows remorselessly and rapidly.

However, there is another side of the same coin, as always, and in this case, it is those companies which are not strong enough to face the reality of the current market with all its risks and pitfalls, those who are lacking SOMETHING which is so vital in order to stay afloat – effective risk management.

If one examines the life cycle of any business, it is evident that there is a certain tendency at work: namely, the more success a company has, the higher the level of risk and responsibility.

This applies to different fields and businesses, since no company, even if extremely successful, is insured form potential risk or misfortune. The objective of this article is to give some insight into risk management, the types of the most frequent risks, as well as the solutions that may be available to prevent undesirable events.

Day by day, the market is changing, and demand, over the long-term, is never stable, new laws are accepted and often the tastes of potential customers shift away from the ones they used to have before. This creates the imperative that companies or – to be more precise, managers – must develop strategies to maintain flexibility and adjust to the continuous changes.

However, in order to create a successful strategy, they have to understand what they are fighting or, at least, from what they are trying to protect themselves and their brainchild.

According to World Finance, there are several types of risk. Among them are compliance risk, reputational risk, financial risk, market risk, strategic risk, credit risk, and others. All of them may have a detrimental effect on any given company if no measures are taken to remedy the situation. Therefore, it is wise to have them analyzed and be prepared to face them if this becomes necessary.

One of the most frequently mentioned risks in any field of business is reputational risk. In today’s market, reputation is part and parcel, which is obvious since if not all, then most customers tend to buy reliable products. Based on this, it is vital for every company to fight for its reputation and keep in mind a trivial saying that is nonetheless true: “It takes years to build a reputation and only five minutes to ruin it”.

Reputational risk itself poses the possibility of losing the company’s reputation due to reasons as unpleasant as clients, the side effects of faulty products, negative comments, etc.

For instance, in the case of medical device companies, reputation plays an even bigger role. Since people tend to care particularly about their health, they prefer not to experiment when it comes to medicine and, therefore, they trust reliable and familiar companies/brands. This is exactly the circumstance in which reputation is a decisive point. Hence, it is undoubtedly vital to take measures for creating and protecting “the name” of one’s company.

However, as analysis has shown, this does not always depend on a company itself. In the modern world of social media, corporate misadventures (not necessarily real ones) can be spread relatively fast, threatening the reputation of a company, which leads to the loss of revenue, customers, and reputation itself. In such cases, it would be wise to consider having, for instance, a Google Alert which would notify the staff whenever the company’s name is being mentioned in the media. This will decrease the probability of being unaware of the reputational risk.

A well thought out and thoroughly analyzed business plan is essential to success. However, what if your perfect plan no longer fits current conditions? What if your strategy has become outdated, and suddenly? This is called strategic risk. In other words, it is a risk that one’s company becomes less effective and, as a result, a company may have issues in reaching goals or even just functioning.

The possible reasons for this risk include eventualities such as a powerful new competitor, technological change (which is quite likely in the modern world), simple changes in customer’s tastes and demand or any other large-scale changes. Once a company cannot change its strategy and adjust to new conditions, failure is inevitable.

The best way to manage risk is to attempt to spot it and plan accordingly before it happens”, according to David Rowland, head of marketing at Engage EHS. This is why risk assessment is now so important to a business. With a proper risk management system, you can make plans, spot potential risks, and then do everything you can to minimize their impact.

One of the most famous examples of strategic risk is the case of the well-known company Kodak. Back in the 1980s, when one of Kodak’s engineers invented the digital camera, the company was on top of the film and photography market. However, Kodak managers were convinced that this digital innovation was not going to pose a threat to their established business model or pose a deadly threat their entire business.

Due to this reason, Kodak failed to exploit the opportunity to develop its engineers’ digital innovation and implement a new strategy, which led eventually to the company’s bankruptcy. Even though Kodak is still present in today’s market, it is not as successful or powerful as it could have been if its managers had adjusted themselves and their strategy to the shift in the market.

Another type of potential risk is compliance risk. Nowadays, almost every field of industry is heavily regulated. Moreover, there are dozens of requirements to follow fairly strict rules and regulations, which sometimes may lead to confusion, missed compliance issues and general risk, as a result.

Compliance risk is defined as the risk of not conforming to essential regulations. Coming back to the medical sphere, one of the unavoidable regulatory challenges is the FDA, which is devoted to establishing requirements concerning all medical products, classified by associated risks.

In the case of not meeting the published regulatory standards, the company exposes itself to the risk of being “disqualified” from the market. This, of course, would lead to a complete loss of cash flow and net income, resulting in bankruptcy. Unfortunately, the only possible solution to avoid this problem is to continuously follow the published regulations and keep eyes wide open in case of any changes.

However, even if we were to imagine the market as an easy-going environment, a simple place devoid of complications, it would not follow that there would be no possibility for risk to happen. The reason for this is that your own company can also be a source of risk. A simple mistake by staff, a technical failure or any other unexpected problem in everyday operations, all of these are the constituents of a risk called strategic risk.

It refers, first of all, to the internal problems of a company. And since they are not expected, they may be hard to predict and, as a result, hard to deal with. In general, this refers to anything that interrupts a company’s core operation. As mentioned before, it can be a people failure or a process failure.

In either case, there is a way to prevent or even solve a problem, for instance, by having more secure processes with double authorization or a good, secure electronic system. However, sometimes it can also come from external sources such as weather (natural disaster), power cut, etc. – things that you cannot control under any circumstance.

Therefore, it is quite complicated to get ready for operational risks and probably the only good advice here would be to be prepared for anything that comes up and have either a plan B or a relatively quick solution for any issue that arises.

The last type of risk that this article will cover is product level risk, which is connected with the quality of the product itself and the effects it may have on potential customers. Referring to one of the previously mentioned examples, the medical industry, this is probably the most important issue in developing medical devices, which has a direct connection both to reputational and compliance risks.

It is the risk that is associated with the safety and efficacy of the medical device when used by or on the patient. Furthermore, this risk may be divided into two groups: short-term and long-term risk. In the case of short-term risk, we associate it with immediate injuries or side effects as soon as the product is used.

Concerning long-term risk, we talk about cases when the product continuously affects patients in a negative way, and this is the sort of thing the previously mentioned FDA is concerned with. As is also the case with compliance risk, protecting your business from potential issues hinges on awareness of all the requirements and possible misadventures and taking responsibility for your own product.

Taking everything into account, it is evident that the number of risks is high (even assuming that we have not included all possible mishaps). Moreover, it is very likely that the number will increase in the future, due to further development and change.

Therefore, it is vital for companies to analyze their potential problems with the help of consultants or a Chief Risk Officer and not be afraid to face them. This is one of the ways to create and maintain a strong and successful company and keep it on an even keel.

How to manage risk, return, and impact investing goals with Glenn Frommer, discover here.


Author: Valeriia Tsytsyk
Photo: Shutterstock

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