Monday, 13 April 2015

Basic Risk Types


Today we look at the Basic Risk Types that exist within an organization.

If you are asked to classify the number of possible sources and combinations of risk that there are it would be impossible as risk revolves around the very nature of the effect.

However, a basic classification of risk is differentiated in terms of the risk level on which it impacts within the organization. A second classification is the very nature of the risk, its origin and characteristics, and if the risk is dependent upon or linked with other risks. The classifications are listed below.

·     Strategic risk
·        Change or project risk
·        Operational risk
·        Unforeseeable risk
·        Financial and knowledge risk
·       Internal and external risks
·        Speculative and static risks
·        Risk interdependency

Keep in mind that these classifications overlap. In this video AIG and Fortune Knowledge Group invited a panel of subject-matter experts to discuss the complex risks facing corporations and the communities in which they operate. From these discussions, a series of videos was produced to help corporate risk managers visualize their own potential losses, improve their level of preparedness for major loss events, and ultimately, preserve their business continuity.


Strategic Risk

An organization develops its strategy at the corporate level. It makes an assessment of the current market conditions and will then forecast the organizational changes required that will occur in the market over a period of time. 
This is a great video example by INTEL to bring the point home:

BUY NOW 
This video demonstrates INTEL’s current assessment of its market. Its proposed strategy will include the development and introduction of faster computing and interconnectivity in the form of a suite of wireless services such as device charging, data transfer, and enriched cloud based services to name but a few. So what is the strategic risk element? Well, it is reasonable to say that their strategic decision to develop these products and services could be wrong (which I personally doubt).

This video demonstrates INTEL’s current assessment of its market. Its proposed strategy will include the development and introduction of faster computing and interconnectivity in the form of a suite of wireless services such as device charging, data transfer, and enriched cloud based services to name but a few. So what is the strategic risk element? Well, it is reasonable to say that their strategic decision to develop these products and services could be wrong (which I personally doubt).

The long-term performance of an organization is dependant on risk relating variables such as the market, corporate governance and its stakeholders.

The market can change at relatively short notice and is universally known to be highly variable, especially when companies operate in another country where economic characteristics can change.

 Corporate governance risk relates to the reputation of an organization and its ethics within which it operates. An organization’s desire to maintain that reputation can sometimes be at the expense of innovation or development of new products and services.


Shareholders, business partners, customers and suppliers attitude can change quickly if dividends fall, it is therefore incumbent on the organization to manage its stakeholder risk.

Other examples of strategic risks include but are not limited to:-
1.     The original strategic plan may have been correct but internal organizational changes may have
a.     Compromised the plan leading to a loss of efficiency.
b. The required changes in operational processes may not have been introduced
c.      The planned changes may not have delivered what was required.
2.     The strategic plan might have been incorrect
a.     Incorrect market assumptions were made
b.     The market environment may have been incorrectly assessed
c.      Adequate resources may not have been available
d.     The plan is not conducive to the organization
3.     The original strategic plan may have been correct but was compromised due to external changes
a.     A significant change in the external environment
b.     The emergence of new competitors
c.      The release of new competing products
d.     A change in statutory controls

Strategic risk is time dependent and more complex and difficult because it is applicable over a long term and has to be modeled and assessed respectively, as such, it is more difficult to manage than operational or change/project risk which are designed and implemented within a relatively short timescale.

Lets have a look at this video from CMOE partners which helps you understand the fundamental difference between operations and strategy:











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