When structured efficiently, the acceptance of strategy risks can create highly profitable operations and improve your compliance with legal, regulatory and reporting requirements.
There are likely to be many advantages and disadvantages of enterprise risk management because it gives you greater awareness of the risks facing your organisation and your ability to respond effectively. This should provide you and your employees with an increase in your operational efficiency and effectiveness while boosting your confidence about your company’s ability to achieve strategic objectives.
However, there can also be a downside to enterprise risk management, as it has inherent limitations. For example, human judgment in decision-making can be based on past experience, false assumptions or sheer gut feeling, resulting in simple errors or more serious mistakes.
Insufficient understanding of what enterprise risk management is might overlook your sector’s business and economic climate, which can result in conflicting data or an overly conservative approach to risk… and missed opportunities. To be effective, enterprise risk management should assess the risks inherent in specific business objectives, anchored in key value drivers.
Remember: strategy-related financial risks in business are inherent in companies’ strategic objectives. For example, financial institutions such as banks or credit unions take on risk when lending to consumers, while pharmaceutical companies are exposed to strategy risk in their R&D development for new products.
Companies exposed to substantial financial risks can mitigate the potential for negative consequences by creating and maintaining infrastructures and solutions such as trade credit insurance.