According to the famous author, Paul Gibbons, “Business people need to understand the psychology of risk more than the mathematics of risk.” It is common sense that no business is immune to risks. The constantly changing internal (business strategies and policies) and external (such as the economy) factors can hamper the operations of a perfectly running business, leaving the company struggling to make ends meet. If left unattended even small risks can put a company out of business. It is, therefore, important to not overlook these risks and take precautionary measures to avoid the same. 

Risks that an organization might face 

• Economic risk

The changes in the economy can severely impact businesses. Changes in factors like taxes, interest rates, recession, inflation, exchange rates, etc. can affect businesses. While positive changes enable businesses to earn more profits, negative changes in the economy result in reduced profits or losses. 

What can leaders manage?

To manage economic risks, leaders must be prepared for unforeseen events and save money to maintain a steady cash flow. Initiatives that enable high-value customers should be identified and retained. By undertaking operational saving initiatives with a strong rate of interest can also help companies to overcome or avoid economic risks. 

• Competitive risk

Businesses may often become comfortable with their current pace and success. This prevents them from innovating and adapting to the changing market landscape and customer needs. In a situation like this, the likelihood of the emergence of a new competitor is very high. New competitors may use this as an opportunity to offer new products and services that may be missing, leaving the old companies struggling to survive. 

What can leaders manage?

Leaders must continuously look for ways to innovate and improve their products, strategies, processes, and performance. While it is important to outcompete the competitors by constantly offering customers new services and products improving product quality, it is also essential to conduct a market analysis to understand the various market segments, understand customer buying patterns and competition. This will help companies to stay ahead of their competition.  

• Operational risk

The continuous operations of a business can be hampered by a range of external and internal factors including damage to physical assets due to natural calamities, business disruptions and failures due to software and hardware failure, etc. These risks can adversely affect the company’s time, money, and reputation. Additionally, the smooth functioning of the business can severely impact because of these glitches. 

What can leaders manage?

Leaders can prevent operational risks by insuring assets, assessing risks for each operation area such as HR, IT, security, etc., using the Operational Risk Management (ORM) process, training employees, automating operational workflow, and investing in infrastructure. This will help leaders to be equipped better when faced when continuous operations are hampered. 

• Reputation risk

With the increased sensitivity and awareness, it is essential that businesses do not market anything that may be offensive to any particular group or section of society. Additionally, with the wide-reaching impact of social media, one negative review or comment can potentially tarnish the reputation of a well-established company. 

What can leaders manage?

Leaders must understand the expectations of the various stakeholders and manage them to maintain a good reputation for their businesses. Additionally, monitoring and responding to what people have to say about the company online and offline can help address the concerns of the customers and support them with any queries they may have. Leaders may also choose to plan or set a team specifically to manage the reputation of their companies, especially in the time of crisis. 

• Security risk

The digitization of businesses has made processes easier, however, it has also increased the potential risks of hacking, data breaches, identity theft, and payment frauds. Customers trust companies with their personal information and data when they accept the company’s terms and agreements. However, security risks can harm the business’ reputation and create financial liabilities for the company. 

What can leaders manage?

Security risks can be prevented by focusing on fraud detection, security solutions, and investing in employee and customer education. Getting essentials such as anti-virus, firewall, password use, etc. in place along with conducting security audits can help companies to reduce security risks. It is also important to have a procedure in place which will be triggered in the event of loss or a suspected attack. 

Attributes a leader must have to respond to risks

• Flexibility

Effective leadership means being quick to respond to the constant changes without panicking. Leaders who are flexible are likely to develop a positive attitude and think fast to alter or modify their businesses as and when they face challenges and risks. On the contrary, leaders who have a rigid approach fail to adapt themselves and their businesses to the changing environment, succumbing to risks. 

• Problem-solving

Leaders must stand strong in the face of risks and challenges. They should come up with strategic plans depending on the risk or crisis. Setbacks should not prevent a company from trying new things or innovating. It is always a good idea to take calculated risks and approach the problem with a clear and open mind. An effective leader is one who faces the problem rather than runs away from it. 

• Communication 

When a company faces risks, employees are bound to feel insecure. The possibility of losing their jobs, salary reductions, etc. is likely to cause panic and chaos within the organization. It is then important for leaders to be effective communicators and assure their employees that things will get better. Conveying a well-thought-out and devised for the future course and actions of the company will help employees feel relatively safer, by regaining their confidence. 

Conclusion 

Good leadership knows the right balance between risk-taking and risk-management. A true leader is aware of what the organization needs and when the organization needs it. Although no leader can be 100% successful in avoiding risks, awareness and proactive planning are key to be prepared for any potential risks that the organization might face.