Enterprise Risk: Types & Strategies

Instructor: David Whitsett

David has taught computer applications, computer fundamentals, computer networking, and marketing at the college level. He has a MBA in marketing.

What kind of risk exposure does a business enterprise have, and what can they do to mitigate risk? In this lesson, we'll discuss types of enterprise risks, how they're measured, and what businesses can do to minimize potential harm.

What Is Enterprise Risk?

Some business risk is easy to identify. We put sprinkler systems in buildings and buy insurance policies to protect against fires. Retail stores put magnetic detectors at entrance doors to detect shoplifters and prevent theft. But some enterprise risks, which are risks that would cause losses or put the ability of the business to function properly in jeopardy, are not always as easy to identify.

Types of Enterprise Risk

There are many types of enterprise risk that a business might face. Here are a few examples:

  • Compliance - A company has to follow relevant government health, safety and privacy regulations and can be fined if they do not. For example, physicians have to comply with HIPAA (Health Insurance Portability and Accountability Act) rules to protect patient privacy.
  • Financial - Businesses have to account for things like non-payment (bad debt) or a rise in interest rates on business borrowing.
  • Operational - Businesses have to handle operational issues, such as a power loss, theft, or a breakdown of an important machine in the plant.
  • Strategic - Enterprises face many strategic risks. For example, they have to consider what happens when they introduce a new product that is an utter failure or when a new competitor enters the market and undercuts prices by 20%.

There are certainly other types of risks - reputation harm (bad social media buzz), safety (for our workers and clients), or even a breakdown in our supply chain. Even a positive risk (sounds funny, I know) is possible - what if our new product takes off like a rocket? Developing a policy for dealing with all of these types of risks is known as enterprise risk management (ERM). ERM is about the ability to understand and control the risks and developing a strategy for dealing with them while still generating acceptable returns.

Reducing risk while still generating an acceptable return is the goal
Risk arrow

Risk Assessment and Mitigation

Risk assessment is a lot of just-in-case planning. What do we do if something happens and is it worth worrying about? Given the fact that there are multiple categories of risks to plan for, we have to prioritize our efforts and put in place routine procedures and policies to minimize exposure. We have to look at our processes, our people and our technology and determine our risk appetite, which is the level of our willingness to accept risk.

One suggested mitigation strategy for dealing with risks is to put a framework in place that could include the following elements:

  • Governance and Policies - Put in place to oversee risks
  • Risk Data and Infrastructure - Mechanisms for making sure we have good information to manage risks
  • Measurement, Evaluation and Communication - Determining what happened and reporting on it
  • Stress Testing - How to evaluate the measures put in place or determine what could hurt us

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