Business Risk Reduction Strategy Explained

Risk management can be analyzed as an identification, evaluation and prioritization of the risk and the consequential minimization, monitoring and control of the possibilities of the risk occurring and/or extend of effects. Risk management is an integral part of the business process due to the fact virtually every business venture is faced with uncertainties that are perceived as threats to its operations. Strategies to manage risks include transferring the risk to another party, avoiding the risk, reducing the effects of the risks, as well as accepting some or all of the liabilities from a particular uncertainty event. The mode of risk strategy adopted depends on the risk probability and the severity as may be defined by the composite risk index. The composite risk index is a function of the impact of the risk event multiplied by the probability of occurrence.

Risk reduction is simply minimizing on the severity of loss or the possibility of the loss occurring. Risk reduction is also referred to as 'optimization' whereby the management has to strike a balance between the effects of the risks and the benefits of the business operation. This implies that the management evaluates the risk cost and the business benefits such as profitability and then analyzes the mitigation measure to be put in place to reduce the risks costs or the occurrence of the unfortunate event while enhancing profitability.

Risk reduction is appropriate in risks that have high cost implications and their probability to occur is relatively higher so that the business organization may not be able to solely bear the burden of the uncertainty and it's forced to strategically minimize on the probability of occurrence and severity of impact of the risk.

Outsourcing is an example of risk reduction whereby a company identifies another firm which can demonstrate higher capacity to manage a risk or reduce the risk and 'relegates' some of its operations to that company in order to minimize on the overall risk that is posed by the business operations. For instance, a business may perceive the cost of manufacturing goods too high and the risks involved so pronounced that it decides to play the role of selling the product to the consumer. This way the business avoids the manufacturing of the product in a bid to reduce the cost of risks that are involved. It however identifies another company that carries out the manufacturing of the product and buys from it, the finished products and sells them to the consumer.

Risk reduction is a strategy that is adopted whereby the business is limited by resources and it has to accept the risk liability and retain it. However, it adapts to other ways to scale down on the cost implications of the risks. Sharing of the risk can also be viewed as a risk reduction in the sense that the overall risk costs are shared between parties so that the 'weight' of cost implications does not overwhelm the business venture resulting to financial constraints.