A Simple Risk Management Framework

In the article that discussed an upside to the downturn in the CPO Agenda, the authors, who discussed the two faces of risk, presented a simple executive risk framework that grouped risks into four categories:

  • Strategic Risk
    This category of risk, which include demand risks, market risks, and partnership risks, corresponds to risks which affect the strategic direction of the company.
  • Operational Risk
    This category of risk, which includes production risks, performance risks, and transportation risks, corresponds to the risks inherent in day-to-day company operations.
  • Financial Risk
    This category of risk, which include commodity market risks, exchange risks, and supplier solvency risks, corresponds to the financial risks inherent in business.
  • Hazard Risk
    This category of risk, which include natural disasters, political unrest, war and terrorist attacks, corresponds to all non-financial, non-strategic, and non-operational risks which can not be predicted.

The advantage of this simple executive risk framework makes it easy to see the opportunity that each risk offers if you capitalize on the opportunity it presents.

  • Strategic Opportunity
    While a strategic partnership might bring with it the risk of intellectual property, it brings with it the strategic opportunity for joint innovation. And where innovation is concerned, the more minds at your disposal, the better.
  • Operational Opportunity
    If product shortage is a risk, product assurance is an opportunity. If a material shortage is likely, redesigning the product to use an alternate material is an opportunity … that will allow you to take control of the market when your competitors fail to deliver.
  • Financial Opportunity
    If unexpected commodity cost increases is a risk, then a price monitoring and control strategy that allows you to lock in low prices for the long term when the market conditions are right is an opportunity.
  • Hazard Opportunity
    If natural hazards pose a risk, the identification of geologically disparate sources is an opportunity. While your competitors could lose a significant portion of their supply, you’ll just keep on truckin’.