A restaurant's risks aren't the same as an accounting firm's, just as an industrial equipment manufacturer faces different threats than a software developer. But every business doing risk management planning—no matter what it is offering—faces at least five hazards related to those offerings. Namely, their development, production, marketing, financial viability and capacity to sustain growth.
“I think that's a really good list," says Dan Zitting, chief product officer at Vancouver enterprise governance software provider ACL.
That's not to say Zitting doesn't see additional perils, such as threats from fraud and cybersecurity. But this list of universal menaces can serve to encourage business owners to learn basic skills for risk management planning.
Development Risk
Development risk is perhaps the first risk a business faces. It's the danger that the company won't be able to devise viable product or service offerings.
But the risk continues throughout a business's existence as it adapts to changing market needs. And it calls for attention during risk management planning at any stage, Zitting says.
“It's easy to come up with lots and lots of ideas," he says. “It's also easy to pick the wrong ones that won't have the market impact you're expecting."
—Dan Zitting, chief product officer, ACL
When Robert Hessel founded Tampa, Florida-based Source 1 Solutions in 2011, he chose an already well-developed offering—designing, installing and supporting commercial card access, video surveillance and security alarm systems from a major corporation.
Now the company's CEO and author of Safe City, Hessel says being an authorized security systems partner was a key part of their risk management planning.
“For us, it made sense to align ourselves with a company that was a recognized brand," he says.Â
A key part of risk management planning is making sure the offerings you try to develop will advance long-term company strategy, says Zitting.
“There's this whole universe of things we can develop," he says. “Before we pick, why don't we stop, step back and ask what the business objective is? Based on that analysis we can choose development projects that are more likely to result in achieving the objectives."
Production Risk
Production risk is the risk that a company won't be able to manufacture or otherwise create an offering in sufficient quantity and quality.
Failure to address production risk during risk management planning can be a common reason new offerings fail, says Doug Ringer, a Fort Collins, Colorado-based business consultant on product development and other business issues.
“It's a very controllable risk," he adds.
The solution, Ringer says, is to have the people who will be responsible for producing a new offering working alongside those who are developing it.
“It sounds obvious, but I've seen places that never involved manufacturing until the design is complete and prototypes have been shown to customers," he says.
Marketing Risk
Marketing risk is the risk that, even if a company can create a viable offering and produce it in sufficient quantity and quality, it won't be able to market and sell it effectively. Decreasing marketing risk tends to get too little attention in the risk management planning process at many businesses, Ringer says.
“Most product development failures are because there is insufficient market analysis done," he says.
As a result, companies offer solutions for which there is no demand or which entrenched competitors are already adequately satisfying.
Hessel addressed marketing risk in risk management planning with Source 1 by, again, aligning with a large player in the market.
“We made sure everybody was aware we were an authorized partner," he said. “That really helped."
Financial Risk
Financial risk is the risk that an offering that has been developed, produced and marketed effectively won't generate enough profit to sustain the company.
Ringer says one way to defuse this threat is to have the company's top financial officer involved in the process of risk management planning.
“It usually happens when you underestimate what it's going to cost to develop the product and overestimate how much it's going to sell for," Ringer says. “Then you're doomed from the beginning. You need to be conservative on both ends so you protect your financial risk."
Growth Risk
Growth risk is the risk that an offering that survives all the other threats will not prove robust enough to support the company as it grows and expands.
This hazard can manifest itself in various ways, from cash flow that dries up as a business tries to scale up to poor decision-making by managers whose attention is consumed by offerings that are too complex, numerous or fragile.
“Cash flow can kill a company as it's trying to grow if they don't have enough funding behind them," Ringer says. “The other thing that's significant is the ability of the leadership team to execute or get their people to execute on the priorities. There are always going to be more things to improve or fix than there are hours in the day or people."
Other Risks in Risk Management Planning
These five risks may be universal, but they are far from the only ones a business is likely to face. To be effective at risk management planning, company leaders need to rely less on gut feelings and more on objective data and analysis, Zitting says. And they need to remember that some risk is inevitable, and not necessarily bad.
“Good risk management isn't about eliminating risk," Zitting says. “Good risk management is being intelligent about which risks to take."
Read more articles on risk assessment.