CLASSIFICATION OF INDIVIDUAL BUSINESS RISK
Individual business risk can be low or high impact and low or high likelihood. Here are some examples for a satirical magazine.
| High Likelihood | Low Likelihood | |
| High impact | Legal action for libel. Such a scenario is important as the going concern of the magazine may be threatened | ‘Act of God’ such as fire or flood. Such risks are often ignored or disaster recovery contingency plans made if the cost is not too high. |
| Low impact | The launch of a new newspaper – the magazine’s readership tends to be drawn from the readers of broadsheets. The magazine would be largely unaffected | Events outside the field of media and politics which do not affect the magazine’s stakeholders or costs |
What can management do about risks once they are identified? Clearly what to do depends on the risk and there are an infinite variety of risks. One possible classification of potential reactions by management is as follows:
- Do nothing and hope for the best
- Develop internal controls
- Develop quality controls over production of goods, production of services, staff recruitment
- Join in government schemes like Famine Relief or Poverty Reduction
- Train staff
- Diversify – acquisition, new products, multiple sourcing, adding to customer base perhaps by exporting
- Risk reduction – raising staff awareness of risk, tighter discipline in all areas, physical measures such as sprinklers. Diversified computer systems instead of one complex one
- Transfer of risk – by insurance, sub-contracting, outsourcing
- Avoidance – e.g. leaving a market such as the USA to avoid product liability
In the end, the business of the entrepreneur is risk raking and all risk cannot be removed. The basic economic truism is that there is a correlation between risk and return and high returns are not possible without risk.
