What Are the Risk Management Strategies in Business Organizations?

The success in applying good risk management strategies in the business is determined by ability to identify and assess the uncertainty events and prioritize them. Risks need to be evaluated to ascertain their probability and severity. The risks may be enormously damaging with very high cost implications that may plunge the business into financial constraints. Similarly, an event may be low in cost liability but the rate at which it occurs may be too high that the long term cost implications is detrimental to the financial obligation of the business. Depending on the probability of uncertainties' occurrence and the severity of the effects of risk, expressed in monetary terms defines the model of strategy to be applied. The US department of Defense, through the Defense Acquisition University, points out the risk management strategies as; Avoid, control, accepts and transfers (ACAT). In the corporate world, the risks management strategies are clear marked as; avoidance, reduction, sharing and retention.

Risk avoidance

As may be defined by the composite index, a risk may be too costly to bear. This implies that the magnitude of the damage that is caused by the uncertainty event may cost a business a penny and plunge it into financial 'pinholes'. For example an area that has a political instability may cause the business operations to be terminated due to the perceived dangers that pose as a threat to the existence of the business in such environments. High competition in the market may also be another uncertainty that may prompt business withdrawal from a particular market. Risk avoidance means the assessment and evaluation of the probability and severity of the unfortunate events, the cost implications and then making the decision to avert the business from incurring such damages.

Risk reduction

The threat posed by an event may be significantly impact on the business. The business accepts to put up with part of the liability and transfers some of the liability to another party. The business usually adopts measures that are aimed at reducing the magnitude and extend of severity or the probability to incur the losses. A business may evaluate that the cost of producing a product is too high due to partial process expenses. Obtaining the raw materials from another company may be too expensive and costly to afford. For instance, a business with unstable financial back up and market strength may not invest widely in product manufacturing. The management decides to offer part of the manufacturing process to another company. The business only acquires semi-finished goods and does the final finish-up process. For example, in the motor vehicle manufacturing, a business set up may focus on the selling, assembling and mechanical servicing of the motor vehicle relegate the ideal manufacturing to another company. It only sources for semi-finished motor vehicles and does the finish up.

Risk sharing

This can be defined as the transfer of uncertainties to another party thus evading the burden of the risk. It is usually adopted where the business regards the probability and severity of the risks too high to bear. For instance, a fire outbreak in the business premises may burn down the whole of physical assets, business documents, equipments, or even injure or cause death to the workers. The damage that may be caused by this kind of risks may be too extensive to afford. Therefore, the management opts to insure the business from fire and the insurance companies accept the responsibility of the costs of damage that may be incurred. The business transfers the risk to another party which is the insurance company.

Risk retention

This is the case whereby the business uncertainties are evaluated and assessed to ascertain that their impacts to the business are minimal, controllable and costs are affordable. The other methods of risk management are considered inappropriate, in applicable and perhaps expensive to apply in this context. For instance, the cost of financial mismanagement within the business organization may not warrant such actions as withdraw of the business venture, sharing of the risk and reduction, but the management is able to apply mitigation measures to monitor and control the probability of occurrence as well as the extend of financial damage it may cause to the business. The business accepts to take liability of the damages in case the unfortunate event strikes.