9 common risk types in enterprise risk management

Any business model brings a company both opportunities and challenges throughout the course of building and growing. Hazards and risks in particular are hard to avoid, and without a timely response, they can push an organization into a serious crisis. Join Kompa in this article for an overview of the most common types of risk and how to manage enterprise risk effectively!

What is risk?

By definition, enterprise risk refers to the problems, incidents, or unwanted factors in business that have the potential to cause damage to a company's profits, assets, people, and reputation with its customers. Most businesses regularly face financial risk as well as risk in the way they run their various business operations.
Identifying the types of risk and building an enterprise risk management plan is always essential, and every organization needs to be equipped for it. Having a set of risk-handling options on hand allows a business to respond proactively to damaging situations, keep the consequences of risk to a minimum, and improve the effectiveness of its community management.

>> See more: How does risk management help prevent a communication crisis?

9 basic types of risk in business

Legal risk

A business must comply with the law and meet all legal requirements in order to operate legitimately and without interruption. However, because of this mandatory dependence, any change in the law can also disrupt business operations — particularly when the government shifts policy in a direction that works against the company.
For example, if the legal department overlooks something and fails to keep up with a change in the law, it could push the entire company down an unlawful path and cost it competitiveness against others in the same industry. This is therefore a critical type of risk that businesses must watch closely and address quickly and promptly.

Strategic risk

A business builds and plans a strategy in order to carry out a series of activities that meet a particular objective it has set. But when managers and executives do not follow the strategy as defined, the result is unwanted strategic risk.
In addition, a strategy that is not thoroughly grounded in information and an understanding of the market, customers, and competitors — one rolled out on the basis of a narrow outlook alone — is another source of the same kind of strategic risk. For instance, if a business wants to pursue a strategy of scaling up its operations but has no grasp of its own capabilities or of development conditions in the target region, strategic risk is something it will inevitably have to confront.

Reputational risk

The reputation of a brand or business is considered a competitive advantage for growing market share and attracting more potential customers. Once a company runs into an issue that harms its credibility and brand image — leaving many users skeptical or voicing negative feedback about a product or service — reputational risk escalates and can lead to a serious communication crisis.
For example, failing to treat customers with respect during product consultations has a strong impact on a brand's professionalism and reputation. The consequences can be even more severe: falling revenue and, if the situation is left unresolved, possible bankruptcy.

>See more: How to build a strategy to protect your brand reputation?

Operational risk

These are risks relating to management, operations, and working processes within a business. If the systems for managing and monitoring work and project timelines are not clear, rigorous, and strictly followed, operational risk becomes very high, and the consequences include the business falling behind the pace of market growth, incurring cost overruns, seeing profits decline, and experiencing stagnation in its day-to-day operations, and so on.
A business management system covers not only commercial activities, policy-setting, and reward and disciplinary regulations, but also how teams operate, internal communication, and the conflicts that can arise in the course of work. This is also why operational risk is closely tied to people risk within a business. Read on for more details below.

People Risk

One indispensable element of enterprise risk management is human resources. From recruiting and selecting properly qualified employees, through to cases of resignation for any reason, every stage carries the potential to create people risk and to have a profound impact on business performance and on the quality of the products and services a business delivers.
If management and leadership do not pay close attention to training and managing human resources, they may make the mistake of hiring staff who lack the necessary professional competence, have poor integrity, or show no sense of responsibility for the work assigned to them. Typical examples include strikes and mid-term resignations that leave the company short-staffed, leading to declining business results and even creating financial pressure and severe crises.

Security Risk

Information security is critically important to the survival of any organization or business. Security risk involves the theft of customer data, proprietary product and technology secrets, and other sensitive information. In the most serious cases, it can drive a business into bankruptcy or leave it saddled with "enormous" debts if the security breach affects the interests of its partners and customers.
For that reason, upgrading information security systems, network protection, and defenses against malware is more urgent than ever. At the same time, businesses must be careful about the sources of traffic reaching their website and corporate email in order to detect malicious elements promptly and prevent unwanted consequences.

>See more: The role of data in business administration

Financial Risk

This is the type of risk that leaves many businesses "reeling" as they grapple with complex financial issues such as cash inflows and outflows, interest rates, liquidity, and outstanding debts. Financial risk can arise from force majeure factors such as market volatility, shifts in industry trends, and internal business activities.
Depending on the type of financial risk, the level of danger will vary based on how frequently it occurs and the specific characteristics of the industry. Executive management therefore needs to build a financial management plan and seek out business solutions in order to put timely remedies in place and ensure stable, sustainable growth for the business.

Competitive Risk

This type of risk refers to how competitive a business is relative to its rivals. There are many forms of competition, including price competition, competition for talent, and competition on service quality or superior product features. If a business cannot devise measures to strengthen its competitiveness, it risks failing to meet its targets, which in turn affects the long-term growth of the brand.

Economic Risk

Depending on prevailing economic conditions, a business may find opportunities to drive revenue or face pressure on its sales figures. This depends on how the industry market evolves, on the country's economic and political situation, and on shifts in consumer preferences; economic competition is considered a major challenge for any business or organization.
For example, when the market becomes unstable or "freezes" up, the balance between supply and demand shifts, resulting in excess supply while demand remains scarce for lack of buyers. In that situation, selling products and services carries the risk of losses if the business cannot keep its capital circulating.

4 effective ways to manage business risk

Analyzing your business with the SWOT model

To provide an in-depth assessment of business operations, the SWOT model was developed at the Stanford Research Institute in the 1960s and 1970s and has been applied successfully at many large companies worldwide. To this day, many businesses still use SWOT to reassess their value, uncover growth opportunities, and identify latent threats so they can put effective business risk management solutions in place in time:

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  Strengths point to the advantages a business holds and should continue to build on. At the same time, identifying strengths helps a business gauge the scale and level its brand has achieved in the market relative to competitors.
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  Weaknesses point to the flaws or gaps a business needs to address in order to improve and raise the quality of its products, services, and overall operations in the future.
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  Opportunities point to the chances a business has to leverage its strengths in its market, opening up new directions for sustainable growth down the road.
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  Threats are closely tied to the types of risk analyzed above; identifying challenges inside the business or arising from external factors helps the business build appropriate response measures so it can react quickly should the worst happen.

Conducting market research

Conducting surveys of market conditions also helps businesses identify future business risks. From there, you can devise ways to prevent them or minimize the damage to the company.
Market research not only supports sound business risk management with positive results, it also helps a business set the right growth strategy to increase its value and elevate its brand in the eyes of customers and consumers.

Recording risk information to inform strategic change

Businesses need to compile and store information on the types of risk they encounter and how they were resolved, as material for long-term development and growth. If your business regularly faces certain types of risk — financial risk or competitive risk, for example — you can establish protective policies, upgrade operations, or strengthen your workforce to reduce the severity of those risks.

Using Kompa's services – a provider of comprehensive, in-depth business risk management solutions

Beyond advising on ways to address risk, Kompa also offers a range of other solution packages such as brand health tracking, brand reputation management, and 360-degree market research, delivering effective response scenarios that meet business needs. In addition, Social Listening analysis also help detect risks and potential communication crises so businesses can prepare timely prevention plans and strategies before they escalate.

Conclusion

Facing business risks is a common occurrence, and businesses are obliged to step in, resolve them smoothly, restore operations, and drive stable growth. With many years of experience accompanying partners across a wide range of industries, Kompa supports businesses with a variety of effective risk management solutions that minimize threats and pave the way for prosperous growth in the future.