Redefine risk management with an Anticipatory Strategy

There is inherent risk associated with doing business, regardless of the industry you are in or your organization’s size.

Risk brings common questions, such as “What if a new competitor arises who steals your customers away?” and “What if market conditions turn unsavory and your ROI suffers?”

These are the worries and wonderments that keep many business leaders up at night.

In light of recent challenges like the COVID-19 pandemic, the significance of risk management activities has become more pronounced. Organizations are reassessing their practices to better navigate these uncertainties.

The fact of the matter is that staying ahead of competition comes with taking risks. Of those risks, some of the most profound innovations always emerge. This makes taking risks a necessary evil of sorts, as staying stagnant and comfortable where you are at allows your competition to leap ahead by miles. Staying firmly rooted where you are will keep you there!

Suddenly, those questions that risk avoidance presents you become very real.

What is risk management?

Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect an organization. It involves a thorough analysis of risks’ likelihood and impact, followed by the development of strategies to minimize potential harm.

Effective risk management is essential for businesses to operate smoothly and successfully. It helps protect an organization’s reputation, minimizes financial and operational losses, encourages innovation and growth, and enhances decision-making processes. By proactively managing risks, businesses can navigate uncertainties with greater confidence and resilience.

The risk management process

The risk management process involves several critical steps that ensure comprehensive risk handling:

1. Risk Identification: The first step is to identify potential risks that could impact the organization. This involves a thorough examination of internal and external factors that might pose threats.
2. Risk Analysis: Once risks are identified, the next step is to assess their likelihood and potential impact. This helps in understanding the severity of each risk.
3. Risk Evaluation: After analyzing the risks, they are evaluated to determine their level and prioritize them for mitigation. This step helps in focusing on the most significant risks first.
4. Risk Mitigation: Developing and implementing strategies to minimize harm is crucial. This involves creating action plans to reduce the likelihood or impact of risks.
5. Risk Monitoring: Continuously monitoring and reviewing the effectiveness of risk mitigation measures ensures that the strategies remain relevant and effective over time.

By following these steps, organizations can establish a robust risk management process that helps in identifying, assessing, and mitigating risks effectively.

What is your biggest risk in business?

Innovation may seem like the biggest risk of all that you can take in business. What if the new product your team developed does not work as you had hoped? What if your consumers do not react favorably to your changes?

The riskiest ventures are what yield the most opportunity. I am not saying all of this to induce fear. I want to empower you and your team to look for risk management opportunities!

It is up to you as a business leader to both manage risk and mitigate risk. Because the goal is not risk avoidance, you must find ways to take calculated risks through effective Anticipatory strategies.

Risk analysis and assessment

Risk analysis and assessment are pivotal components of the risk management process. This phase involves evaluating the likelihood and impact of each identified risk.

Organizations need to identify the potential consequences of each risk, assess the probability of their occurrence, and determine the overall level of risk.

This thorough analysis helps in prioritizing risks, ensuring that the most critical ones are addressed first. By understanding the potential impact and likelihood of risks, businesses can develop effective mitigation strategies that safeguard their operations and promote sustainable growth.

Risk response and treatment

Developing and implementing strategies to minimize harm is a crucial aspect of risk management. Here are the primary approaches to risk response and treatment:

1. Risk Avoidance: This involves avoiding activities that could lead to risk. By steering clear of high-risk activities, organizations can prevent potential threats.
2. Risk Transfer: Transferring risk to another party, such as through insurance, helps in mitigating the impact of risks. This approach ensures that the financial burden of risks is shared.
3. Risk Reduction: Reducing the likelihood or impact of risk through proactive measures. This can involve implementing safety protocols, enhancing security measures, or improving operational processes.
4. Risk Sharing: Sharing risk with other parties, such as through partnerships or joint ventures, helps in distributing the risk burden. This collaborative approach can lead to more effective risk management.
5. Risk Acceptance: Accepting risk and developing contingency plans to manage potential consequences. This approach is suitable for risks that are unavoidable or have minimal impact.

By employing these strategies, organizations can effectively respond to and treat risks, ensuring a balanced approach to risk management.

The power of being anticipatory in managing risk

As mentioned, when a new product or service is developed and introduced to the public, risk is involved.

But while many organizations recognize this fact, just as many spend their time trying to avoid it instead of taking steps to manage risk effectively.

A strategy focused on avoiding risk and a strategy focused on risk evaluation for the sake of innovation are two significantly different concepts. The first of those two strategies limits any significant opportunities. Conversely, a risk management strategy that focuses on innovation involves anticipating the future to minimize risk and to actively identify and seize opportunities with confidence.

Enterprise risk management (ERM) is crucial in this context. This supports business strategy and ensures resilience by anticipating and managing a broad spectrum of risks, including both negative threats and positive opportunities. Risk management teams play a vital role in this process, shifting from traditional risk management to a more collaborative enterprise risk management approach. These teams are responsible for understanding and managing risks holistically, which is essential for minimizing financial losses and aligning with overall business strategy.

Any strategy based on uncertainty is high risk, but strategic decisions based on certainty are low risk — or at least a much lower risk than those you are completely unsure about.

Identifying certainties in project risk management

Again, remember that the goal of an effective risk management strategy that prioritizes innovation should not be to eliminate risk entirely but to focus on certainty where possible.

This should be executed in a way that allows your organization to confidently pursue innovation in a more confident way. The only way to find certainty in taking risks or in an uncertain marketplace is to be Anticipatory. You do this by identifying and differentiating between Hard Trends and Soft Trends.

Hard Trends are those future certainties we know for a fact will occur, like Baby Boomers aging out of the job market in the coming years and our increasing reliance on disruptive digital technology.

Soft Trends, on the other hand, are those future maybes that might happen, like our current tendency toward remote work and flexible scheduling. These are trends that are not set in stone and have the ability to be influenced in various ways.

Hard Trends being future certainties mean that you can look to these and effectively improve your risk management efforts. Knowing that without question, Baby Boomers will exit the workforce sooner than later means taking a risk on something regarding that future fact is suddenly much less risky.

Without identifying this Hard Trend, you are merely assuming this example to be true or false. This creates a tone of uncertainty behind it that guides you to inaction and, ultimately, risk avoidance.

By basing decisions and innovations on the foundation of Hard Trends, Soft Trends, and leveraging the certainty they bring in decision making, business leaders are better able to manage risk. This also allows them to uncover opportunities that enable their organization to innovate with ease!

Risk management standards and frameworks

Risk management standards and frameworks provide essential guidance on effective risk management practices. Here are some common standards and frameworks:

1. ISO 31000: An international standard for risk management that provides principles and guidelines to help organizations manage risk effectively.
2. COSO: The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework for enterprise risk management. It offers a comprehensive approach to managing organizational risk.
3. NIST: The National Institute of Standards and Technology (NIST) framework focuses on risk management in the context of information security. It provides guidelines for protecting information systems.
4. COBIT: The Control Objectives for Information and Related Technologies (COBIT) framework is designed for IT risk management. It helps organizations manage and govern their IT environments effectively.

These standards and frameworks offer structured approaches to risk management processes, risk analysis and assessment, risk response and treatment, and risk monitoring and review.

They help organizations develop effective risk management practices and ensure compliance with regulatory requirements, ultimately enhancing their ability to manage risk and innovate confidently.

Anticipatory risk management – case studies and risk reduction measures

I always prefer to connect these principles I teach to real-world examples.

Let’s take a look at a few organizations that base their innovations in certainty, effectively implementing an Anticipatory strategy to risk management:

Nintendo’s market risk analysis

Nintendo began as a playing card company in 1889, and their success in this market continued for many decades.

But in the 1960s, Nintendo recognized that the playing card industry was declining with the rise of digital technology. They realized that the digital age would only continue to increase in prominence and become widespread across the world — a Hard Trend.

Staying stagnant would undoubtedly lead to disruption. Nintendo worked to identify risks with staying the course of printing playing cards, realizing that would spell disaster for them.

Instead of relying on this cash cow that had worked for them in the past, they embraced the digital age — and the risk associated with it — releasing their first video game in 1972. This allowed them to cement themselves as leaders in a new industry through careful risk analysis.

FedEx managing risks in their industry

Before FedEx, traditional mail and shipping services were slow and inefficient.

Customers had grown used to it, but that did not mean this process was the end-all-be-all of delivery. Founder Fred Smith recognized that the traditional way of delivering packages was a Soft Trend. Essentially, he found that it could be changed and made more efficient with an Anticipatory approach.

Would this bring with it potential risks? Of course! But changing gears in the mail and shipping industry appeared to be a risk worth taking to Smith.

Through careful risk analysis, he noticed that customers were not sold on traditional mail delivery. As a result, Smith introduced “express” mail delivery, which was a revolutionary new concept that disrupted current notions of mail delivery at the time. This has transformed the shipping industry as we know it.

Amazon Kindle and the enterprise risk management process

While Amazon has been a world leader for some time, the introduction of the Amazon Kindle is another prime example of being Anticipatory with the risk management process. With the foresight that their online storefront gave them, Amazon understood that consumers wished for quick and easy access to goods without having to leave the comfort of their own homes.

Amazon then expanded their convenient services to include online purchase of digital books with the Amazon Kindle. This became a global success that also demonstrated their ability to manage financial risk effectively.

They looked to the Hard Trend that their business essentially created, being that customers prefer convenience, and started to apply it to all other products and services they provide.

In a way, identifying risks associated with staying the course regarding book delivery helped open the door to tremendous future opportunities they are now known for!

Redefining your risk management practices

While we cannot be 100% certain that any innovation we pursue at our organizations will work or be uniformly accepted by the market, Anticipatory risk assessments put us ahead of the curve.

By leveraging Hard Trends and Soft Trends to gain advantage, organizations have the ability to increase their certainty while managing risk in the process.

You will not completely eliminate risk with these strategies; however, you will effectively manage risk and transform it into calculated risk. That calculated risk allows you to develop a structured risk management process that then improves future innovations.

A comprehensive risk management plan is essential for any organization looking to outline how to identify, assess, and mitigate risks. The path to innovation becomes a seamless, less stressful experience for you as a business leader!

I always encourage clients and colleagues of mine to consider developing an appropriate risk management program for their organization, one that focuses on an Anticipatory strategy.

As a result, you will better solve strategic management errors within your risk management process and create a more seamless internal innovation system that focuses on positive risk.

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