Question

This is a problem from Risk Management book by Scott E. Harrington

1.Advice Mr Raju about the different approaches of risk prevention techniques along with a risk management methods.

This is not required a case. The name is used only to advice a Person assuming he is a manager of a company

Answer 1

Business risk comes in a variety of tangible and intangible forms over the course of the business life cycle. Some risks occur during the ordinary course of corporate operations, while others are due to extraordinary circumstances that are not easily identified. Regardless of a company's business model, industry or level of earnings, business risks must be identified as a strategic aspect of business planning.

If you’re a business leader, then you already know the importance of risk control. It’s imperative that your business has a formal policy to limit the loss of assets and income.

Here are the 6 techniques associated with risk control.

1. Avoidance

   Avoidance is the best means of loss control. This is because, as the name implies, you’re avoiding the risk completely. If your efforts at avoiding the loss have been successful, then there is a 0% probability that you’ll suffer a loss (from that particular risk factor, anyway). This is why avoidance is generally the first of the risk control techniques that’s considered. It’s a means of completely eliminating a threat.

2. Loss Prevention

   Loss prevention is a technique that limits, rather than eliminates, loss. Instead of avoiding a risk completely, this technique accepts a risk but attempts to minimize the loss as a result of it. For example, storing inventory in a warehouse means that it is susceptible to theft. However, since there really is no way to avoid it, a loss prevention program is put in place to minimize the loss. This program can include patrolling security guards, video cameras, and secured storage facilities.

3. Loss Reduction

   Loss reduction is a technique that not only accepts risk, but accepts the fact that loss might occur as a result of the risk. This technique will seek to minimize the loss in the event of some type of threat. For example, a company might need to store flammable material in a warehouse. Company management realizes that this is a necessary risk and decides to install state-of-the-art water sprinklers in the warehouse. If a fire occurs, the amount of loss will be minimized.

4. Separation

   Separation is a risk control technique that involves dispersing key assets. This ensures that if something catastrophic occurs at one location, the impact to the business is limited to the assets only at that location. On the other hand, if all assets were at that location, then the business would face a much more serious challenge. An example of this is when a company utilizes a geographically diversified workforce.

5. Duplication

   Duplication is a risk control technique that essentially involves the creation of a backup plan. This is often necessary with technology. A failure with an information systems server shouldn’t bring the whole business to a halt. Instead, a backup or fail-over server should be readily available for access in the event that the primary server fails. Another example of duplication as a risk control technique is when a company makes use of a disaster recovery service.

6. Diversification

   Diversification is a risk control technique that allocates business resources to create multiple lines of business that offer a variety of products and/or services in different industries. With diversification, a significant revenue loss from one line of business will not cause irreparable harm to the company’s bottom line.

   Risk control is a key component in any sound company strategy. It’s necessary to ensure long-term organization sustainability and profitability.Here are the four key potential risk treatments to consider

Here are the four key potential risk treatments to consider.

Avoidance

Obviously one of the easiest ways to mitigate risk is to put a stop to any activities that might put your business in jeopardy.

However it's important to remember that with nothing ventured comes nothing gained, and therefore this is often not a realistic option for many businesses.

Reduction

The second risk management technique is reduction - essentially, taking the steps required to minimise the potential that an incident will occur.

Risk reduction strategies need to be weighed up in terms of their potential return on investment. If the cost of risk reduction outweighs the potential cost of an incident occurring, you will need to decide whether it is really worthwhile.

Transfer

One of the best methods of risk management is transferring that risk to another party. An example of this would be purchasing comprehensive business insurance.

Risk transfer is a realistic approach to risk management as it accepts that sometimes incidents do occur, yet ensures that your business will be prepared to cope with the impact of that eventuality.

Acceptance

Finally, risk acceptance involves 'taking it on the chin', so to speak, and weathering the impact of an event. This option is often chosen by those who consider the cost of risk transfer or reduction to be excessive or unnecessary.

Risk acceptance is a dangerous strategy as your business runs the risk of underestimating potential losses, and therefore will be particularly vulnerable in the event that an incident occurs.