Managing Business Risks
Potential challenges face businesses on a daily basis, and every company has to be ready to address and manage potential risks that can negatively affect the bottom line of the company. Starting a new business or expanding an existing one increases the eventuality of a company encountering these risks. One way of managing risks involved in a business is by categorizing based on the risks involved. This study will highlight the possibility that XYZ Corporation will face business risks in its quest to expand. It will also give an in-depth discussion on risk categorization by dividing them into risk quadrants. By categorizing the risks into risk quadrants, an organization can come up with a risk map that enables it to identify, qualify and quantize the size of risks that could affect an organization’s ability to attain its business strategy.
Before considering the risks involved to invest in a particular line of business, it is crucial to develop a broad understanding of risk management. A risk may be defined as the possibility of an outcome that was not desired during the initial investment stage (Dionne, 2013). Risks vary from minor risks to severe business risks that have a huge impact on the output of the organization. In their quest to expand their business from the manufacture of swimming and supplies to a business that deals with other ventures, XYZ Corporation should have a risk management strategy to help the encounter negative outcomes that may arise. In order to have a perfect risk management strategy, it is good to identify and understand the types of risks that XYZ Corporations may encounter as they seek to expand. The basic steps to follow in risk management are risk assessment, risk categorization, consider the available options for handling the risks and implementation of the chosen strategy. Risk assessment is the determination of whether there is a possibility of the risk occurring risks. For XYZ Corporation to expand to the production of new products, they will be venturing into a new line of business and a completely different market. There is a possibility that the following risks may arise.
Using the four risk quadrant model, these risks can be categorized to give a better overview of the risks and to assist in determining other risks related to business. The model categorizes the risk as a hazard, operational, financial, and strategic (Verbano & Venturini, 2013). The hazard risks arise from the property, personnel liability, or dangerous situations that may arise in the workplace. XYZ Corporations is familiar with the hazards involved in swimming pool construction. However, any new business they venture into is faced by hazard risks as liability arising from property or employee injury may arise. Before deciding which new products they want to produce, XYZ corporation should consider physical hazards, equipment hazards, chemical hazards, biological hazards, ergonomic hazards, and psychological hazards that may affect employees or other people interacting with the organization.
Operational risks arise due to failed or insufficient procedures, policies, and systems. These are risks that occur due to employee, failure, and incompetence, system failures, embezzlement, fraud, and criminal activities, as well as any other operational eventuality that has the potential to disrupt the running of the business (Mitra et al. 2015). XYZ corporation should be aware that there are unseen risks that will always arise during the process of production. Once the organization has settled on the type of products that want to introduce into the market, some risks will arise from the system and the people working for the system. For instance, if employees sabotage the operations of the organization, a situation that is highly unlikely but possible, the organization will be negatively affected. The risk factors associated with operations, especially for a new venture, are quite a number, and XYZ Corporations should put in place measures to manage such unknown risks.
Financial risk arises from market forces on financial assets and liabilities. These risks arise from the possibility that an organization may lose capital. Such risks may include credit risk, liquidity risk, and lack of cash for operations (Buchner, Mohamed & Schwienbacher, 2017). XYZ Corporation may lack the finances required for the expansion. There is a possibility of a financial shortfall as XYZ Corporation seeks to expand its production base to new products. For effective expansion, the corporation must ensure that it has identified the financial muscle required to make sure that the shareholders of the company continue to receive profit even as the company expands (Chan & Wong, 2015). If the targeted venture may be more significant than the corporation’s financial might, XYZ Corporation may sink into credit. Furthermore, the corporation may venture into a new business that will not make a profit as per the market forces. It is, therefore, imperative for the management to be very keen on the business venture they choose.
Strategy risk is the possibility the business strategy adopted will result in risks for the organization (Hopkin, 2018). During the execution of the planned strategy, XYZ Corporation faces the risk that some of the planned outcomes will not be possible. The corporation faces a product risk where deciding the products they want to venture in and translating the decision to production is the difficult part. With thousands of business ideas on ventures the corporation can get into, it I difficult to decide which idea will be the best to implement and one that will result in profits for the organization. There is a potential risk also in identifying a market for their new products. The market risk also involves how their potential customers will know of the existence of their products and how the new products will reach the market. The team required for the production of new goods may be inadequate, inexperienced, unskilled, or not willing to handle the new challenge. Managing human resources during this period of expansion is, therefore, another major risk XYZ Corporation may face. There is a possibility that the management of the corporation may get so mired in the details of the new business plan to the extent of them overlooking the execution risk. The new products XYZ corporation brings to the market will face competition from existing products and other new products. The company is at risk of losing potential customers to competitors who may be enjoying economies of scale.
By categorizing the risks into risk quadrants, an organization is able to come up with a risk map that enables it to identify, qualify and quantize the size of risks that could affect an organization’s ability to attain its business strategy. XYZ Corporation should put into consideration all these factors before deciding on the venture they get into as they expand. They should also come up with a good risk management strategy to cushion the organization from losses in case the risks occurred.
Buchner, A., Mohamed, A., & Schwienbacher, A. (2017). Diversification, risk, and returns in venture capital. Journal of Business Venturing, 32(5), 519-535.
Chan, N. H., & Wong, H. Y. (2015). Simulation techniques in financial risk management. John Wiley & Sons.
Dionne, G. (2013). Risk management: History, definition, and critique. Risk Management and Insurance Review, 16(2), 147-166.
Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating, and implementing effective risk management. Kogan Page Publishers.
Mitra, S., Karathanasopoulos, A., Sermpinis, G., Dunis, C., & Hood, J. (2015). Operational risk: Emerging markets, sectors, and measurement. European Journal of Operational Research, 241(1), 122-132.
Verbano, C., & Venturini, K. (2013). Managing risks in SMEs: A literature review and research agenda. Journal of technology management & innovation, 8(3), 186-197.