Contents
- What is risk management?
- Why is risk management necessary?
- What types of risks exist?
- How is risk managed?
What is risk management?
Risk management is the process of identifying potential risks and developing strategies to manage them in the context of a company or project's development. Although the term "risk" is often perceived negatively, in the framework of risk management, it does not always signify an undesirable situation. Risks create uncertainty, which can have both negative and positive consequences. For example, investing in a young startup can lead to significant profits or, conversely, substantial losses.
It is important to understand that risk management does not eliminate all risks. This is impossible, as risks are present at all stages of business operations. Moreover, by avoiding risks, a company limits its opportunities for growth and development. Risk managers do not only focus on eliminating risks but also on managing them: minimizing negative consequences, finding compromise solutions, and even accepting risks as an integral part of the business.
Why is risk management necessary?
Risk management is necessary not only for addressing unforeseen situations but also for ensuring overall stability and security of the business. Risk managers analyze and prevent even minor risks daily, performing routine tasks to protect the company. In their activities, they collect and process extensive data on various aspects of the business and the factors influencing it. This allows for the prompt identification of problems and adjustments to the business strategy.
For example, one company outsourced the creation of advertising materials to freelancers, as maintaining in-house staff proved too costly. However, as a result, the advertising was often delayed, which, although seeming like a minor issue, actually posed a serious risk of significant losses in the long term. Risk managers were able to assess the potential losses and concluded that maintaining an in-house team would be more beneficial.
Furthermore, risk research helps companies adapt to changes and prepare for future challenges. This data-driven approach is one of the most effective in modern business. A case in point is Netflix, which, noticing the competitor YouTube, abandoned plans to release a device for downloading movies and focused on streaming content, which became the foundation of its success.
What types of risks exist?
There are numerous factors that can place a company in a situation of uncertainty. These risks are classified according to various criteria. For instance, according to D. Rumsfeld's classification, risks are divided into four categories:
- Known knowns — risks that are known and measurable;
- Known unknowns — risks that are known but difficult to assess;
- Unknown unknowns — risks that are unknown, and therefore cannot be managed;
- Unknown knowns — risks that are known but may be overestimated or underestimated.
Additionally, risks are classified as internal and external, controllable and uncontrollable. Controllable risks are those that the company can influence, whereas uncontrollable risks are factors beyond its control, such as an economic crisis.
How is risk managed?
The risk management process involves several stages:
- Risk identification. Risk managers analyze data to identify both internal and external threats. Various tools are used, such as SWOT analysis.
- Risk assessment. All identified risks are documented and evaluated based on the likelihood of their occurrence and potential damage.
- Application of management tools. Methods are divided into four main categories: avoidance, reduction, sharing, and acceptance of risks.
- Monitoring and adjustment. After implementing a plan, risk managers collect data to analyze its effectiveness and make adjustments as needed.
For example, the company Excite in 1999 decided not to acquire Google, which was then valued at only $750,000, a decision that now appears to be a serious mistake. Effective risk management not only helps minimize losses but also allows for the use of risks as opportunities for growth.