Types of Risks in Business

Risk in business implies to any kind of uncertainty that can negatively affect the business. In business risk can turn up at any point of time such as increase in the level of competition, financial risk and more. In order to reduce risk, organizations have implemented different strategies to overcome the risk at economic, social and political level (Brustbauer, 2016). Implementation of risk management in business organization helps business to save their important resources such as money and time. The essay will elucidate on different types of risks that results from economic, social, political and technology. It will also help to understand the importance of risk management in business organization.

In the recent days, professionals defined the terms as per the type of risk such as exposures, anticipated variability and more. Depending on various factors risk professionals have differentiated between pure risk and speculative risk in order to understand the subject more clearly. In case of pure risk in business organizations, there is no chance of any gain from the loss and this consists of pure loss (Chance & Brooks, 2015). For instance, fire risk can be classified under pure risk, from which there is of chance of gain. On the other hand, speculative risks refer to the situation in which there is a chance to gain from the loss through risk management. One of the important key management approaches that is used by business organizations is the Enterprise Risk Management (ERM). This concept identifies all types of risks that takes place in business organizations and accordingly the ways to mitigate the risks are devised (Slovic, 2016).

Economic risk in domestic and global business is associated with financial investments or any economic factors that might affect an organization in a negative way. Economic risk in business organizations can result from different factors which includes fluctuations in the exchange rates, economic sanctions and more (Clark & Tunaru, 2015). Apart from this other types of economic risks that can affect domestic and global business includes risks related to reductions in the product prices, risk in the increase in prices of the raw materials and more. The international business risks associated with the expansion of business in new markets are related to the import of raw materials, tax issues in foreign countries. Foreign business can experience economic risk in foreign markets, as political instability can be more in emerging markets. Therefore, in order to expand business in emerging markets, it is necessary to evaluate the market conditions in terms of investment, political stability and financial conditions. Apart from this, frontier markets are also susceptibility to economic risk as these kinds of markets are generally found in countries which place restrictions on foreigners to invest in businesses of those particular countries.

Economic Risk in Businesses

As per the International Risk Management Institute, political risk consists of the exercise of political power which might have a negative impact on the business. For instance political risks in global business, consists of Government of the legislations of a particular country might prohibit trade with other countries which can lead to the reduction in the amount of sale of the product in that particular market (Hopkin, 2017). It is to be noted that the political risk to business organizations can result from various factors that include issues related to macro economics such as increase in the interest rates and social issues that consist of civil unrest. While in domestic business, interventions of Governments actions such as seizing company’s assets can make it difficult for business to acquire their financing resources. Apart from this, political instability in global business is one of the important risk factors that affect business in a negative way. Other political risks can affect foreign business by not allowing business organisations to convert their money into foreign transactions, importing and exporting products. Political risk can have a severe effect on business organizations as it can lead to the closing down of the business operations.

Emerging technologies in the recent days have proved to be beneficial for domestic and global business as it helps in reducing cost, promotion of products and services in a much organized way, targeting new customers. However, will all these advantages; businesses sometimes are prone to technological risks such as fraudism, scams and more. Inspite of its advantages in businesse security, risks remain one of the most important concerns for most of the businesses. As per a recent data, there are many disadvantages associated with the online business that results to poor growth of business in domestic and in global markets (McNeil, Frey & Embrechts, 2015). For instance, in terms of online business, food industry cannot earn any substantial profit, as foods cannot be preserved for longer period of times and in doing so, food industries might result to losses.

Socio cultural risk relates to different business decisions and strategies that might affect the business in terms of location and businesses entering foreign markets can experience risk because of cultural and social factors such as language barriers, lifestyles, economic condition and more (Olson, 2015). Other socio cultural risks relates to the opening of business in the vicinity of heritage sites. This can lead to various problems and indirectly can affect the business. Religion is also an important factor that might affect the business. In the case of introduction of new products in the market religion can reduce the sales of the products, if it does not comply with the religious beliefs of the potential customers of that particular location.

Political Risk in Businesses

Financial structure is one of the most important parts of the business as finance helps businesses to expand its market growth, hiring employees. In case of financial risk, company might suffer a huge set back such as a high debt in market, reducing profit and thereby growth (Reason, 2016). This should be mitigated with the help of risk management where managers need to manage assets tactfully and with the help of pricing tools the various companies can limit the budget of the interest margin. Financial risk management will help to integrate budget and the allocation of resources in an effective way.

Economic risks can result from high rates of recession in the country. For example, in 2008, UK experienced recession that resulted in unemployment and as a result consumers started spending less in products. In order to deal with risk management, Tesco has reduced its product prices and offers free delivery and as a result has maximized its product portfolio (Sadgrove, 2016). Apart from this, Lexis Nexis Entity Insight has an effective risk management strategy which was implemented by Tesco in order to reduce the risk faced by it and also to maximize its profit.

In the recent days many organizations face health and safety risk that might result from unhealthy work culture, increase in carbon footprint and more. This might lead to injuries and accidents among the employees in workplace. For example, Granite Construction has faced severe health risk that might result to accidents and injuries among employees and increase staff attrition (Shinkevich et al., 2016). As a result of health and safety risk management, with the implication of ERM, the industry analysis of the risk factors, and reduction of it with less harmful substances, the amount of risk faced by the companies have considerably reduced. Furthermore, it has also redesigned its workplace with planting trees all around, introduction of new equipments and more. This strategy helps the industry to retain skilled staffs and reduced employee turnover.

Conclusion

From the above discussion it can be deduced that risk is a very common factor and every business, be it small or large. experiences various types of risks at any point of time. Therefore, in order to reduce risk in business organization, risk management is a necessary step to maximize the risk and also helps business to save their resources. Prior to this, Enterprise Business Organization is one such risk management approach that is used by businesses to reduce their risk.

References

Brustbauer, J. (2016). Enterprise risk management in SMEs: Towards a structural model. International Small Business Journal, 34(1), 70-85.

Chance, D. M., & Brooks, R. (2015). Introduction to derivatives and risk management. Cengage Learning.

Clark, E., & Tunaru, R. (2015). Emerging markets: Investing with political risk.

Hopkin, P. (2017). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

McNeil, A. J., Frey, R., & Embrechts, P. (2015). Quantitative risk management: Concepts, techniques and tools. Princeton university press.

Olson, D. L., & Wu, D. D. (2015). Enterprise risk management(Vol. 3). World Scientific Publishing Company.

Reason, J. (2016). Managing the risks of organizational accidents. Routledge.

Sadgrove, K. (2016). The complete guide to business risk management. Routledge.

Shinkevich, A. I., Lubnina, A. A., Koryakov, A. G., Mikhailov, V. G., & Vodolazhskaya, E. L. (2016). Economic aspects of risk management of stakeholders activities. International Review of Management and Marketing, 6(2).

Slovic, P. (2016). The perception of risk. Routledge.