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Risk Categorization: Internal, External & Strategic Risks

Instructor: Beth Hendricks

Beth holds a master's degree in integrated marketing communications, and has worked in journalism and marketing throughout her career.

Categorizing risks can help a business identify and anticipate potential problems. In this lesson, you'll learn more about internal, external, and strategic risks and what each category represents.

Risky Business

Imagine this scenario: A business owner has discovered that her small business point-of-sale system is coming up short several nights a week. She is confused about how this is happening. Are customers being incorrectly charged? Are employees not correctly trained on how to use the system? Or, is she facing an internal threat from a thieving employee?

There are numerous concerns a business must deal with in its day-to-day operations. Some of those concerns involve organizational decisions or employees; others involve competitors. Still others are strategic decisions that a business owner hopes will benefit their bottom line.

By grouping these concerns into one of three risk categories, businesses can see a number of benefits. Let's talk more about these risk categorizations and how properly deciphering these concerns can help this business owner.

What is Risk Categorization?

Risk categorization is a necessary component of a risk management program. Risks are a part of all of our everyday lives. For businesses, risk management is the process of identifying, analyzing, and working to mitigate risks where possible. Risks to organizations can come in many forms, ranging from financial loss to falling prey to a competitor to loss of reputation. Some risks are accidental and unforeseen, while others can be anticipated and planned for. Regardless, a risk categorization, where you group risks to aid in identifying them and dealing with them accordingly, can be beneficial in a number of ways:

  • Avoiding surprise situations
  • Providing a structured, focused approach to identifying problems
  • Developing more effective risk-mitigation techniques
  • Building better strategies for responding to risks
  • Enhancing organizational communication by including employees
  • Making monitoring of various risks simplified

Devising Risk Categories

Many businesses attempt to deal with risks and mitigate them by focusing on devising rules for dealing with them. Others work to break risks up into manageable categories that help provide many of the benefits discussed above. Here are three commonly-used risk categories:

1. Internal - As a small business owner, you encounter a problem with misbehaving employees. This is easily solved by establishing a handbook with rules that lay out consequences for poor behavior. Internal risks are those things that are controllable or preventable. In the situation with the misbehaving employees, pointing out rules and policies that must be followed is one way to eliminate internal risks. Internal risks should be nipped in the bud quickly.

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