Risk Analysis Plans for Businesses: Techniques & Examples

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  • 0:00 Risk Analysis
  • 0:54 Risk Analysis Techniques
  • 3:39 Managing Risk
  • 6:03 Lesson Summary
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Lesson Transcript
Instructor: Ubirathan Miranda

Dr. Miranda has a DBA in International Business, and is an author and instructor of international business and risk management.

In the universe of business, risk is an everyday reality. At some point in your career, you will need to make a business decision that involves risk. In this course, we will examine how you can use risk analysis tools to help you effectively deal with risks.

Risk Analysis

Risk is fundamentally made up of two parts: the probability of something going wrong and the negative consequences of that failure. Failures can be caused by people, processes, systems, or events. While there are also positive risks, for the purpose of this lesson, we'll focus on negative risk.

Risk analysis identifies and manages the potential risk that can cause serious problems in your business. The goal of risk analysis is to identify your business's assets and value, identify threats to or any vulnerability in your business, quantify the probability of and impact of threats to your business, and provide an economic balance between the effect of the threat and cost of mitigation of the threat.

Risk Analysis Techniques

The first step in risk analysis is to understand risk context. Since risk doesn't exist in a vacuum, understanding risk in the context of organizational dynamics is important. You should consider the following questions before identifying risk:

  1. Which areas of your company's strategic plan is supported by your business unit?
  2. What are your business unit's strategic goals?
  3. What are the critical services, products, or functions provided by your business unit?
  4. What are the areas of internal/external dependencies or impact of your business unit?

The next step is to identify particular risks to your business. Generally, risk is categorized as follows: human, operational, reputational, legal, market, credit, procedural, technology, political, systemic, country, foreign exchange, and natural. Focus on risks that have the greatest probability to impact your business.

Process mapping is an effective visual tool to identify particular risks in your processes. In a process mapping diagram, you should identify the risk, assign a risk rating (high, medium, low), and provide a control, either to prevent failures from happening or detect them after they occur. Using industry software, you could automate the risk identification and control function within process mapping. Other tools that can help you identify risks to your businesses are SWOT (strength, weaknesses, opportunities, threats) analysis, scenario analysis, and failure mode and effects analysis.

Once you identified the risks to your business, you will need to quantify the risks. To do so, assign a probability of those events happening and the likely cost to fix them. The following formula is used to assign a financial value to a risk: Risk Value = Probability of Event x Cost of Event. For example, your export client called and said that he estimates that there is an 80% chance that his country will raise their tariff on vehicles. You estimate that the raising of tariffs on vehicles will cost you $500,000. So, the formula would be 0.80 (Probability of the Event) x $500,000 (Cost of the Event) = $400,000 (Risk Value). The risk value of $400,000 is high, so now you can now determine how to manage this risk.

Managing Risk

There are several options to manage risk. Let's look at some of these now.

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