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The Risk Management Process
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What is the risk management process? Well, simply put it is evaluating all factors relating to a business decision that is to be made. You have heard of damned if you do and damned if you don't. That is risk management in a nut shell.

Here is an example:

Company A is being out bid on every project by Company B. Company B has lower manufacturing cost. Company A calculates that if they spend X dollars on building a new factory they will be able to compete with Company B in a big way. Lowering manufacturing cost will increase their profits by 30 percent and the investment will be paid off in only three years. They make the investment.

Company B is making good profits. They calculate the cost of improving their manufacturing cost. When they balance the cost of improvement against profits, the payoff is very low. It would take them 13 years to gain a profit. They do not make the profit.

While Company B is resting on their laurels, Company A is building their new factory. When the factory is completed, Company A competes on a big scale taking away 30 Percent of Company B's profits. By the time they muster the resources to build a modern factory, they have already had a permanent loss in market share.

What If? This is an important question. If Company B staffers had asked themselves what would happen if they did not make the investment they would have been ahead. Although the return would have been small, they would still have been able to compete and keep their market share.

Innovation: Sometimes when we realize that there is not a good investment risk we need to ask what would happen if we did not do things in the same old way. Then what would are profit margin be? How would that help us make a better investment? This is why companies spend money on research and development. Innovation helps reduce risks and increases markets.

Foresight: Smart managers look ahead by asking simple questions like:

What will are market look like in five or ten years? Twenty years?

What are our competitions doing?

What are our customers up to? What are they thinking? How are they changing? Could they switch to other solutions to their problems?

Hindsight: Looking back over past successes and failures can result in useful analysis that can improve a company's performance.

The Product Cycle: Looking at the product cycle will help predict future needs. Products are created, modified, and retired. What will happen when your product dies? What will replace it? What is the cost of retirement? What innovation is needed to develop replacement products?

Conclusion: Risk management is part of life in the business world. Managers should become educated through the many sources available. Failure to do so would be a big mistake.

Fly Old Glory!

Street Talk

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