Businesses have to deal with all types of risks few of which could become serious trouble for the company and lead to profit loss or even total business failure. Large firms generally have an exclusive risk management department taking care of all financial needs, but small businesses don’t always focus on risk management.
The first part of risk management is to understand that what type of risk you are facing. A business might face different risks such as operational risk, compliance risk, strategic risk, reputational risk, and financial risk. Learning to deal with different risks is important as identifying the proper risk helps evaluate the proper solution.
Strategic Risk
Every business owner is aware that to run a business having a well-built strategy is important. But sometimes, even the best plans fail to work properly. This type of risk is called a strategic risk. Strategic risks occur when a company’s plan fails to produce any efficient results, and in return, its progress and development get delayed.
It might be that a company is going through any technological changes or a new, more powerful competitor has entered the market, or it could be any one or two of the reasons for inefficient production, which are changes in consumer’s demand, rise in the price of raw material, or any other change on a commercial scale.
Failure and Success of Strategy risk
A good example to consider is Kodak. Kodak had a dominant place in the photography market but failed to adopt their engineer, who developed the digital camera back in 1975. The digital camera’s idea was a threat to the core business model by Kodak and went ignored. If they had adopted the new technology, they would have thrived even more as a company in a market they were already dominating. Kodak contributed to their demise by not planning for innovation and embracing changes and invention.
Eventually, this gross oversight and inability to assess strategic risk correctly led to bankruptcy for Kodak. The company survived and is finally out of bankruptcy but has become a much smaller company focused on imaging solutions. However, if Kodak had assessed the strategy risk and accepted the innovation, they would still dominate the photography market.
Dealing with a strategic risk isn’t necessarily an alarm for disaster. Think about Xerox becoming synonymous with the photocopier. When laser printing was invented, Xerox, in stark contrast to Kodak, embraced the new technology. Xerox managed to move forward and boomed into a multi-billion dollar business, showing that you can have a positive and lucrative outcome if you properly assess strategic risks.
Operational Risk
Operational risk points to an unexpected failure in the daily operations of a company. The reason behind such failure can either be technical issues or human error. In few cases, the operational risk can occur for more than one reason.
For example, one of the employees at a company writes a wrong amount on a check, giving out $10,000 in place of $1,000 from the business account. This means human error and technical error could have been saved with a more secure payment procedure. The solution could have been to cross-check every payment through another employee or use an automated system.
In few cases, the operational risk can occur due to events outside of anyone’s control like a natural disaster, trouble with the website host, or a power outage. No matter the operational risk, it can interfere with the business’s daily operations, and it requires a solution.
Conclusion
When it comes to risk assessment, it is crucial to identify the type of risk you are up against and deal with it accordingly. There is a difference between how you deal with strategic risk instead of operational risk so understanding the difference is crucial to achieving success.
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