Risk control is vital for businesses as it allows them to protect their assets, maintain operations, make informed decisions, comply with regulations, safeguard their reputation, and create a stable environment for growth and innovation.
What is Risk Control?
Risk control involves the methods and strategies implemented to mitigate, manage, or eliminate potential risks that could seriously impact an organisation’s objectives. It aims to minimise the likelihood of risk occurrence and mitigating its potential impact if it does occur.
Risk control and risk management
While risk management encompasses the entire process of identifying, assessing, and managing risks, risk control specifically deals with measures to handle identified risks. It is a subset of the broader risk management process, emphasising proactive steps to mitigate risks effectively.
Can risk control eliminate risks to a business?
While risk control measures aim to reduce the impact and likelihood of risks, it is impractical or impossible to wipe them all out. Some risks may persist due to external factors, uncertainties, or inherent complexities within business operations. However, strategic risk control measures can significantly manage and reduce these risks.
How can companies identify emerging risks?
Companies can identify emerging risks through proactive risk assessment methods, monitoring industry trends, conducting scenario analyses, and engaging in continuous dialogue with stakeholders. Staying updated on regulatory changes, technological advancements, and market shifts helps in recognising potential emerging risks.
Risk control and corporate social responsibility
Effective risk control aligns with corporate social responsibility by ensuring ethical conduct, environmental stewardship, and social accountability. Companies that prioritise risk control often consider not only financial risks but also risks related to environmental impact, employee welfare, and community well-being.
How Risk Control Works
Businesses encounter a wide array of challenges, competitors, and prospective threats. Risk control constitutes a methodical business approach geared towards recognising, evaluating, and readying for various potential disasters (both tangible and abstract) that could disrupt an organisation’s functions and goals.
Fundamental principles within risk control encompass:
- Avoidance. This strategy involves entirely circumventing activities or situations that pose significant risks. For instance, a machine parts manufacturer might avoid using a specific material known to have regulatory compliance issues.
- Loss Prevention. Measures taken to prevent risks from occurring. Implementing stringent quality checks and safety protocols in manufacturing processes to prevent defects or accidents is an example.
- Loss Reduction. Strategies aimed at reducing the impact of risks that are not entirely avoidable. This might involve having backup suppliers to reduce the impact of supply chain disruptions or protecting an important storage facility with roving guards, security cameras, and motion sensors linked to alarms.
- Separation. Dividing critical operations or functions to limit the potential impact of a single risk event. One example of this is a company establishing separate data centres to avoid complete data loss in case of a cyberattack.
- Duplication. Creating redundant systems or processes to ensure continuity in the event of failure. Having backup power sources or redundant communication systems are examples.
- Diversification. Spreading resources or investments across different areas to reduce the impact of risks in any single area. A VC fund focusing on the renewable power industry, for example, might also make educated investments in a bank’s IPO or an Australian bioethanol manufacturer.
Using Risk and Control Matrix (RACM) for Effective Risk Management
A Risk and Control Matrix (RACM) proves invaluable for organisations seeking deeper insight into and improvement of their risk landscapes. This structured tool aids in identifying, evaluating, and handling risks by establishing connections between potential risks and the control measures in place to minimise them. Through the RACM, organisations can visualise and appraise the efficacy of their risk mitigation strategies, enabling informed, data-backed choices to elevate their risk management methodologies.
The RACM involves several key steps:
- Risk Identification. Identifying and documenting potential risks that could impact business objectives, operations, or finances.
- Risk Assessment. Evaluating the likelihood and potential impact of identified risks. Assessing the probability of a supplier’s bankruptcy affecting production or the impact of new regulations on product development are examples.
- Control Measures. Defining and implementing control measures to address identified risks. This may include implementing quality control checks, diversifying suppliers, or investing in updated technology infrastructure.
- Control Effectiveness. Assessing the effectiveness of control measures in mitigating risks. Regular evaluations and performance monitoring ensure that implemented controls are functioning as intended.
- Action Plans. Developing action plans to address any gaps or deficiencies in control measures. Continuous improvement strategies based on assessments and feedback enhance the overall risk control framework.
Example of Risk Control
Starbucks
Starbucks, a prominent global coffee vendor, has implemented diverse risk management strategies to oversee its supply chain vulnerabilities. Given its reliance on coffee sources from various global regions, the company faces potential supply fluctuations and disruptions stemming from weather changes, political uncertainties, or unforeseen occurrences.
To counter these challenges, Starbucks has embraced a diversified procurement approach. This strategy involves obtaining coffee beans from an extensive network of suppliers across different geographical areas. By doing so, the company reduces dependence on any singular supplier or region, ensuring a consistent flow of raw materials and lessening the impact of possible interruptions.
Moreover, Starbucks has established comprehensive supply chain standards under the Coffee and Farmer Equity (C.A.F.E.) Practices. These guidelines encompass multiple facets of coffee production, such as quality, environmental sustainability, and social accountability. Through close collaboration with suppliers and routine assessments, Starbucks ensures adherence to these standards, thereby mitigating the risk of harming its reputation and potential supply chain disturbances.
Additionally, Starbucks leverages advanced supply chain management software to actively monitor its global supply network. This real-time monitoring enables prompt identification of potential risks, allowing the company to take timely measures to mitigate them.
This proactive risk management strategy has played a pivotal role in preserving Starbucks’ reputation for exceptional coffee quality while establishing a robust, sustainable supply chain conducive to its ongoing expansion.
Risk control is an integral aspect of contemporary business administration, allowing enterprises to recognise, evaluate, and diminish possible risks and dangers to their functions and goals. Through risk control methods like avoidance, loss prevention, loss reduction, separation, duplication, and diversification, businesses can reduce their vulnerability to risks and bolster their ability to endure challenges.
DISCLAIMER: This article is for informational purposes only and is not meant as official business advice. AVANTE PARTNERS has no business relationships with any company.