Business risk is the probability of loss inherent in a firm’s operations and environment that may impair the firm’s ability to provide returns on investment. Because competitive strategies are based on assumptions and analysis about present conditions, the probability of risk and uncertainty escalates when one extrapolates into the future.
Signficant strategic risk events usually take the form of exogenous shocks to firm’s demand side. Demand may collapse and prices and volumes may fluctuate wildly. When these exogenous shocks hit, the market value of a firm may be seriously impacted. Firms may then spend huge amounts of time and resources trying to recover the market value that has been lost through events they did not prepare for. This is why strategic risk management has become such an important issue for all firms to consider.
In our practice at ALCG, we help firms undertake strategic risk assessments, leading to the formulation and implementation of a risk management plan. The risk assessment is prefaced by building a comparative risk profile for the client firm relative to its main competitors. The risk assessment then identifies, evaluates, and prioritizes the business risks that could impact the client firm’s ability to compete effectively and accomplish its strategy. From the assessment, a risk management process is developed and installed to provide the firm with the ongoing capability to manage and treat risks, and a risk management plan implemented.
Many firms develop risk management plans but fail to create a business process for risk management. This is a critical mistake. In the absence of a risk management process, a firm has little capability for successfully implementing a risk management plan. A risk management process ensures that resources and procedures are in place, that responsibilities and accountabilities have been determined, and that there is a management-level process in place to continually review, assess, and manage risk.
Uncertainty and risk are real. A business must be shockproofed against risk. Risk management should be a key element in every business process system.