Appendix: Risk Management Process
Introduction
Whether committing to a new venture, such as entering an international market, or simply managing day-to-day operations, companies must be prepared for unexpected events and things not going as planned. The risk management process can help identify problems and implement solutions in the most cost-efficient way. Before committing to a new venture, organizations must conduct a comprehensive analysis, carefully assess potential risks, and develop mitigation plans to address those risks. Risk assessment and planning must be done continuously to protect ongoing business operations and ensure profitability.
What Is Risk?
Risk is the likelihood of unexpected events with an adverse impact on the operations and profitability of an organization (Hill, n.d.). Risk is measured by the probability of occurrence; it is managed by assessing and responding to the possibility of the event through planning and implementing risk mitigation strategies.
Risk Management Process
The risk management process consists of the following eight steps:
Identify issues and set context – understand the intention of the risk management strategy, the size of the organization, and the risk tolerance level within the organization; identify stakeholders, those who are affected by the risk and those who are involved in the strategy selection process (Tysiac, 2012).
Identify key risks – the first step in managing the risk is to identify the risk. Thorough research of the target market is required for this step in the process. Research must be done on existing and emerging risks. Creating a list of all areas that may cause risk and categorizing risk by those areas is a good starting point. For example, risk could be categorized as political, economic, foreign exchange, social, cultural, legal, etc.
Measure risks – risk could be measured by the probability of occurrence and the severity of its impact on the organization. Measuring risk helps decision-makers with the data they need to make informed decisions and manage risk in an effective manner. Risk Assessment Matrix is used to create risk or threat profiles and measure the probability of occurrence and the severity of impact (Vice, 2024).
| Description | Probability | Rank | Value |
| Highly probable | More than 75% | High | 5 |
| Probable | Between 50-75% | Medium-high | 4 |
| Occasional | Between 25-50% | Medium | 3 |
| Remote | Between 10-25% | Medium-low | 2 |
| Improbable | Less than 10% | Low | 1 |
| Description | Rank | Value |
| Catastrophic | High | 5 |
| Critical | Medium-High | 4 |
| Serious | Medium | 3 |
| Marginal | Medium-Low | 2 |
| Negligible | Low | 1 |
Note: The Risk Score, or Threat Profile [TP], is a product of the ‘Likelihood of Occurrence’ [A] and the ‘Severity of Impact’ [B], i.e. TP = A * B
| Likelihood | Negligible | Marginal | Serious | Critical | Catastrophic |
| Highly probable | 5 | 10 | 15 | 20 | 25 |
| Probable | 4 | 8 | 12 | 16 | 20 |
| Occasional | 3 | 6 | 9 | 12 | 15 |
| Remote | 2 | 4 | 6 | 8 | 10 |
| Improbable | 1 | 2 | 3 | 4 | 5 |
Rank risks – ranking occurs based on the results from the risk or threat profile. Risks with higher value take top priority compared to those in the lower ranks. Ranking risk is an important step in the decision-making process as it helps management to allocate time and resources and assess areas that have high threat values (FasterCapital, n.d.).
Assess the desired outcome – this stage of the risk management process determines whether the organization should stop or continue with the venture. The decision is made based on the organization’s risk tolerance level and available resources. If the risk is too high and the company does not have the required resources to reduce or mitigate the risk, it is wise not to pursue the venture.
Develop response strategies – There are four options available to organizations in handling the risk: avoid, transfer, reduce, and accept (VPAF, n.d.).
- Avoidance – eliminate or refrain from activities that carry risks that are costly to mitigate. For example, when a company decides not to pursue a venture that may cause social or environmental damage and could possibly result in lawsuits in an international market.
- Transfer – in this situation, the organization is getting a third party to carry the risk on their behalf. Acquiring insurance is a form of transferring risk to another party.
- Reduce – also known as mitigate, which means the organization adopts some processes or uses methods to lower the impact and the cost of risk. An example of this is signing a forward contract with a bank to lower the impact of foreign exchange volatility.
- Accept – when the threat value is low, and the company can choose to retain the risk because the cost of insurance and or risk mitigation is higher than the cost of retention.
Select and implement strategies – when the organization decides to mitigate risk, it should develop some criteria and develop the strategy (strategies) based on those criteria. The selection must be based on a cost-benefit analysis and must be within the organization’s financial means. When developing a strategy, the organization should also clearly determine who is involved during the strategy selection process and who will be responsible for implementation and execution of the strategy. The details of the strategy must also be clearly communicated to those individuals who are responsible for the execution and implementation of the strategy.
Monitor and adjust strategies – monitoring a strategy (strategies) on a regular basis is critical as the environment and conditions under which businesses operate change on a regular basis, and with trading in international markets, these changes are even more prevalent. Regular evaluation and adjustment of the risk mitigation strategy is crucial to ensure that changes in the target market are being addressed and precautionary measures are placed where needed.
