What It Means
Risk taking is the part of business strategy that involves assessing how a business’s decisions will harm or benefit the company. Every business encounters risks, which may or may not be anticipated or controlled by the company. A risk is defined as the possibility of loss, injury, disadvantage, or destruction. A business takes certain risks when it decides to expand into a new territory, for example, since it cannot know at the outset whether it will make enough of a profit in the new territory to cover the cost of expanding the business.
The field of risk management deals with risk taking. It involves identifying and analyzing risks and creating plans to reduce the losses that an organization faces as it conducts business. Risk management involves two main elements: (1) identifying and assessing the risk and (2) finding the right solution to manage the risk. Managers of businesses must first assess the market in their industry and understand its growth patterns when making decisions about new business ventures or expenses. Once a manager understands what the risks are, then he or she creates a plan to reduce the negative effects of risk tasking.
Risk taking is a very different concern for large and medium-sized firms than it is for small firms. Losses can disable and even destroy a small business. For example, a fire, a flood, or theft can destroy the business’s physical property. The injury, disability, or death of an owner can take away one of the business’s most important resources. A lawsuit can destroy the financial assets of the firm. These types of loss can impact profits, negatively affect the daily operations of the firm, impose financial challenges, and ultimately destroy a business. Usually, large firms hire risk managers to oversee their risks, whereas small firms may integrate the tasks of assessing and responding to risks into the many responsibilities of the owner.
When Did It Begin?
Historically, managing business risk was the work of insurance companies, which help businesses protect themselves in case of loss. The field of risk management focused on helping businesses preserve their assets (including finances, physical property, and investments) and secure their earning power within their markets by avoiding costly risks. Risk management did not assess business operations, product development, sales, and business strategy.
In the 1980s the management approach known as total quality management was introduced into U.S. business. This philosophy assessed and monitored all activities of an organization, including product development, finance, marketing, and sales, in order to support the continuous improvements of products. The emphasis of total quality management was using measuring tools and statistical techniques to assess production and quality and to create the data managers needed to make improvements. One of the many results of total quality management was the understanding that the management of risk was an inherent part of total business and product quality. Businesses began to assess their overall mission within the context of risks. Specialists in risk management, called risk strategists, began to combine various approaches to risk management, including thorough investigations of a business’s divisions, education of employees, and models that predicted the risk level of individual projects within the overall framework of the business. Numerous standards and methods of risk management were proposed in the 1980s, giving companies all over the world guidelines for managing their risks to positively affect business outcomes.
More Detailed Information
There are many ways a business can respond when it has identified a risk. One of the most common ways to respond to risk is to take out an insurance policy. An insurance policy requires the insured party to pay a premium (a fee) usually on a monthly basis, which guarantees financial reimbursement in case of loss or damage. For example, a business that operates in an area prone to earthquakes or floods may take out an insurance policy to protect itself financially in the event an earthquake or flood causes damage to the business’s property. Most businesses have theft insurance to help them restore any lost property in case of a burglary. Some companies choose not to employ insurance agencies but instead establish their own accounts, which are drawn on only when there is a loss to the company.
A company can take active steps to avoid or reduce many risks, especially safety risks. Most employees are given safety training as a regular part of business practice. For example, workers in a chemical company who use toxic or harmful chemicals are carefully trained in the handling of dangerous chemicals and emergency procedures. Companies can also avoid safety risks by deciding not to produce certain goods because of safety issues. For example, a toy manufacturer may have the ability to produce a certain toy but decides not to do so because the toy contains a liquid that if swallowed, could be dangerous to a child’s health.
When a business recognizes that a loss may occur as a result of a business decision and still goes forward with the decision, the firm is said to be “assuming” the risk. For example, a pharmaceutical company might know that one of its new drugs might have negative side effects for some people who use it. But after carefully weighing the potential risks of side effects against the overall health benefits the drug may provide, the company may decide to assume the risks and launch the product.
Other aspects of managing risks arise out of planning and prevention strategies. A business may have a plan, for example, to shut down part of its operations or a certain business function for a designated period of time in order to avoid financial hardship to the company. To do this the company must know which functions are critical to the business’s operations and which are not. For example, payroll is a critical business function in most businesses, since employees need to be paid on a regular basis. In contrast, training is a business function that can be suspended for several months without having a negative effect on the company’s financial state. In large firms, each business division prioritizes its individual functions.
The field of risk management has developed strategies for assessing risks in many different types of business situations. In the financial world, corporate mergers and acquisitions involve enormous financial risks and require close management. Many businesses assess the risks of working within certain environments and the types of hazards to which workers and customers may be exposed. Security issues present challenges to businesses, especially since many business activities rely on secure online systems and transactions. In all of these situations, risk management establishes the priorities of the organization and determines which risks are potentially most damaging and most likely to occur.
The introduction of websites and e-mail into daily business life has introduced new levels of risk into all types of businesses. It is common for the most important and sensitive company information, including financial and product information, to be discussed and shared in company e-mails. The potential risks a business takes on by using e-mail are numerous. For example, e-mail provides increased chances that written statements will be published publicly in order to defame or expose someone.
New technological developments have also resulted in security risks that range from hackers who might steal important company information to viruses that can destroy files and computer functionality. Access to advanced designing software allows people to copy the components and design of products easily. If a business’s property is legally protected by a trademark, a copyright, or a patent and another business or group is able to copy pictures, logos, articles or other property, it is a crime known as infringement. For example, a small business that produces a patented household good in the United States many discover that pirated (illegal) copies of the product are being manufactured in China. If customers are able to purchase the pirated product for a cheaper price than the original product, the U.S. business may lose significant revenue. The risks to large businesses of copyright infringements on their products are significant and costly.
"Risk Taking." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Encyclopedia.com. (January 22, 2019). https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/risk-taking
"Risk Taking." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Retrieved January 22, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/risk-taking
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