When a SWOT analysis is conducted, it identifies the strengths, weaknesses, opportunities, and threats of a business. The threats portion represents your risk, and can be presented in any area of the business. It’s important to build strategic plans and diversified options around risk to manage and mitigate it appropriately, so you can ensure your business is not adversely affected going forward.
It is vital that you maintain a clear picture of where your business stands in relation to risk in all areas of the business, to limit unexpected and sudden negative outcomes.
Areas of Focus
This is a fairly common option when the risk does not have a high probability of actually happening, or when the expense is minimal if it does occur, or when the cost of mitigating the risk outweighs the cost of the risk itself.
A more common strategy is limiting the company’s exposure to risk through action. This often combines a bit of risk acceptance with a bit of risk avoidance.
One example may include when a company accepts that some computer hard drives may fail due to technology obsolescence, but instead of just accepting that risk, they choose to avoid a portion of it by running additional backup drives that mitigate long periods of downtime and the loss of data.
This is the opposite of risk acceptance. It is the action of actively avoiding exposure to the risk. This strategy can be the most costly option, as it often translates to experiencing higher immediate expenses to reduce uncertainty and the risk of loss going forward. One example may include when a company chooses to buy a brand new machine instead of accepting the small amount of risk associated with their older machine potentially breaking down during the year.
Transferring risk involves outsourcing it to a third party. For example, if you are trying to do your own payroll, but mistakes are made in regards to tax or human resource regulations, it may be a better choice to outsource this risk to an outside vendor specializing in this service to mitigate that risk.
Everyone falls on a spectrum of either being risk tolerant or risk averse. It’s never just one or the other, but rather a “tendency” for any individual or company to make different decisions based on the same line of facts.
Often, those that are risk tolerant are more willing to accept higher downsides in their efforts to achieve even higher upsides. In a similar fashion, those that are risk tolerant are typically more willing to take bigger risks, not needing to see gains in the shorter term.
Those on the risk averse end of the spectrum represent the opposite, typically choosing to opt out of initiatives that expose them to sizable downsides, and having a strong need to realize gains from initiatives in a shorter time frame.
Risk that is not addressed grows over time. This dynamic element of risk is another piece that is important to keep in mind. Weighing the pros and cons of risk on an ongoing basis is critical to managing it. For example, when a machine is new enough, it may likely be accepted that that small chance of its breakdown is not worth trying to mitigate (i.e. accepting risk). However, at year five, it may make more sense to implement enhancements or tuneups to mitigate that risk (i.e. reducing risk), and at year ten, it may make more sense to buy a new machine outright (i.e. avoiding risk).
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