Risk management is an essential part of any business, and there are four basic strategies that can be used to manage risk. These strategies are avoidance, reduction, transfer, and exploitation. Each of these strategies has its own advantages and disadvantages, and the best approach for a particular business will depend on the type of company, its structure, complexity, resources, and team talent. When it comes to avoidance, this is a risk management strategy that involves completely eliminating the possibility of a risk occurring. An example of this would be not investing in a particular asset if the risks associated with it are too high.
This approach is often used when the potential losses from a risk outweigh the potential gains.
Reductionis another risk management strategy that involves making risks more manageable. This can be done by taking steps to reduce the likelihood or impact of a risk. An example of this would be implementing a quality management system to reduce the chances of products being manufactured to incorrect specifications. Another example would be using a digital solution to manage regulatory requirements and mitigate the risks of non-compliance.
Transferis a risk management strategy that involves transferring the risk to another party.
This is usually done through insurance or contracts. The insurer agrees to assume financial responsibility for covering the risk in exchange for payment of premiums. When claims are submitted, the insurer confirms whether the conditions for providing contractual payment for the outcome of the risk are met.
Exploitationis a risk management strategy that involves increasing the chances of a positive risk occurring. This can be done by allocating sufficient and efficient resources to take advantage of an opportunity.
This approach reduces the uncertainty associated with a positive risk by ensuring that it occurs. When choosing a risk management strategy, it's important to consider the type of company, structure, complexity, availability of resources, and team talent. Risk matrices can be used as a visual aid to assess the likelihood of hazards occurring and the severity of their potential impacts. It's also important to develop what-if scenarios to test various responses to hazards and prioritize responses based on the magnitude of the problem. The four basic risk management strategies – avoidance, reduction, transfer, and exploitation – can help businesses identify, evaluate, and implement effective risk management plans. The best approach for any particular business will depend on its individual needs and circumstances.
Companies should also consider developing contingency plans in case any of these strategies fail or do not provide adequate protection against risks. Overall, effective risk management requires careful consideration and planning. Companies should assess their individual needs and circumstances before deciding which strategy is best suited for them. By taking into account all potential risks and developing appropriate strategies to manage them, businesses can ensure their long-term success.