“A ship is safe in harbour, but that’s not what ships are for.”
Differentiation and competitiveness by identifying new market segments or by launching innovative products is hardly possible nowadays. The focus has been reoriented towards organizational model review systematically, developing resilience and creating sustainable business value. Building the risk management system creates value and ensures business resilience by diminishing risks.
A strong risk management system give confidence to approach new business lines opportunities and take more risks since there are enough risk management capabilities integrated within organization. Many people regard risk only as something to eliminate—an undesirable concomitant of managing the resources and capabilities needed to deliver a product or service. But as the economist Robert Merton has often pointed out, one can also argue that companies create value by being better at managing risk than their competitors are. The implication is that if you are better than others at managing a particular risk, you should take on more of that risk.
Sometimes trying to avoid a risk actually increases it, and you can better manage it by being willing to own more of it. The risk-driven innovation has one important advantage over other forms of innovation: It’s much cheaper. Innovating products and technologies often involves generating a lot of ideas and then trimming the list down through discussion, voting, and prototyping. Multiple iterations of prototypes, customer feedback, and experimentation are necessary.
Significant R&D expenditures are often involved. Risk-driven innovation, however, can be approached in a systematic way and with few expenditures, and relatively clear and credible estimates can be made of the potential benefits and costs. A great deal of research has been done on the pricing of risk, and sound methods exist for putting a dollar value on contracts and real options that involve reducing, transferring, or adding risk.
All the functions should integrate well into the firm’s goal to maximize value. Maximizing value translates to maximizing the company’s value. This vision aims to attract market availability (banking, equity, stock exchange, industry) to explicitly recognize the company’s true value created by inputs such as revenues, costs, or sources of financing (debt or equity). This approach replaces the traditional concept of profits maximization, or expected profit maximization, enabling us to introduce risk mitigation elements into the decision-making process.
Value depends on Risk, Cost, Quality and Community Perception; Value = Performance / Cost
It reveals unexpected opportunities for creating value by adding risk—if the company is well-placed to manage it. If you are better than others at managing a particular risk, you should take on more of that risk.
A business risk management plan involves identifying, assessing and developing strategies to manage risks. It is an essential part of any business plan and will help you prepare for, and deal with, risk factors associated with an economic downturn.
During an economic downturn, business risk management involves closely monitoring your business’s performance, identifying any issues affecting it and putting in place strategies to reduce or address these issues. In most cases the best way to monitor performance is to use your financial statements. If you discover, for example, that your sales have dropped, you should analyse the factors affecting sales performance so you know how to address the issue and manage associated risks.
In a world of uncertainty, we regard risk as encompassing the potential provision of both an opportunity for gains as well as the negative prospect for losses. For the enterprise and for individuals, risk is a component to be considered within a general objective of maximizing value associated with risk. Alternatively, we wish to minimize the dangers associated with financial collapse or other adverse consequences. On one hand we must get the mitigation of adverse consequences like failures. On the other hand we should consider the opportunities of gains when risks are undertaken. Let’s identify the overlapping area as the set in which we both minimize risk and maximize value.