13 Business Risks You Must Be Prepared For
Business risks are the potential threats that can hinder a company's growth and success These risks can arise from different sources, such as economic downturns, operational inefficiencies, legal compliance issues, and more It is essential for business owners to identify and manage these risks effectively to ensure long-term sustainability and profitability
Businesses face a variety of risks, some of which are within their control and others that are not. These risks can hinder the achievement of both long-term and short-term goals. While it's impossible to eliminate all risks, it's important to minimize them as much as possible. This is where risk tolerance comes into play, as it measures a business's ability to handle risk. Different types of risks exist in various areas of business, making it crucial to identify and manage them effectively.
13 Types of Business Risks
1) Competitive Risk :
2) Economic Risk :
In today's business landscape, competition is ubiquitous, making business risks associated with it very common across industries. One such risk is the competitive advantage that rivals may gain over your business by achieving their goals. Additionally, a decline in market share can also be considered a form of competitive risk, since it indicates that other competitors are gaining a larger share of the market.
Economic risk refers to the potential financial losses that a company or an individual may face due to changes in the global economic environment. This risk can arise from a variety of factors such as economic slowdown, fluctuations in currency exchange rates, or government policies that affect businesses. Additionally, industry slowdown and unexpected market changes can also contribute to economic risk.
3) Operational Risk :
Operational risk refers to the potential for failures in day-to-day business operations. These risks can arise from errors in customer service processes, internal processes, or failures within the supply chain or inventory management. Operational risks are pervasive throughout every aspect of a business process and can even persist after the process has been completed.
4) Compliance Risk :
Performing certain tasks may sometimes result in the violation of laws and regulations, even if they are set by the government. This can put the compliance of the organization at risk while following its processes. It is crucial for organizations to take necessary measures to prevent compliance risks as it can have detrimental long-term effects on the overall functioning of the organization.
5) Strategy Risk :
Strategy risk refers to the potential danger that arises when a particular approach is adopted. Such risks are often associated with new industries and products. Even a new company is not immune to the possibility of strategy execution failure. If a recently developed strategy is not implemented effectively, it can put the entire organization in jeopardy. A prime example of this is Cadbury's Silk, which failed to gain traction in the market due to its sticky consistency and inadequate advertising, resulting in poor sales performance.
6) Reputational Risk :
Maintaining a positive reputation is crucial for any organization. If a company experiences a decline in reputation, it can result in significant long-term losses. Common causes of reputation decline include product failures, non-compliance issues, and overall customer dissatisfaction. When customers are unhappy with a product or service, they may blame the company, which can ultimately damage the organization's reputation.
Johnson and Johnson faced a major reputation risk due to the Tylenol incident. Nonetheless, the company demonstrated effective crisis management by recalling all Tylenol batches and issuing a sincere apology, ultimately minimizing the damage to their brand.
7) Project Risk :
Undertaking a new project always comes with a certain level of risk for an organization, and turnkey projects are no exception. While the potential success of a turnkey project is certainly desirable, it is important to acknowledge the possibility of failure. The outcome of the project can have significant implications for both the organization's finances and reputation. Thus, it is important to consider project risk when embarking on any new project.
8) Innovation Risk :
Creating a new product involves a significant investment in both research and development. However, there is always a risk that the innovation may not be successful in the market. It's important to recognize that not every innovative product will be immediately embraced by consumers; the market must also be ready to accept the product in order for it to succeed.
9) Quality Risk :
Prior to Apple's introduction of full touchscreen phones, several companies, including Nokia, attempted to launch touchscreen phones without a keypad. However, these products were not popular among customers and failed to gain acceptance. It was only when Apple implemented the same concept that it proved to be a game-changer for the company.
Product quality is crucial for the success of any product. Customers will always choose a good quality product, even if it is expensive, over a cheaper product that is of poor quality. However, maintaining the quality of the product over time can be a challenge. The standards that were once compliant may no longer be sufficient, which can lead to a decline in product quality and put its reputation at risk.
10) Credit Risk :
If a customer is unable to make a payment for products they have received, this is known as credit risk. This risk not only applies to the company's financials but also to products acquired from distributors. Additionally, if a customer fails to return a product and sales have decreased, this can also result in credit risk.
11) Political Risk :
Organizations are always susceptible to political risk, which can lead to long-term disruptions that alter or even permanently change the organization. Unfortunately, these factors are external and beyond anyone's control. For instance, the demonetization policy introduced in India in 2017 had wide-ranging impacts on various sectors. In response, the use of cashless applications surged as organizations adapted to the new reality. As a result, it's clear that every organization must prepare for potential political risks.
12) Seasonal risk :
Many products and services are subject to seasonal fluctuations in demand, resulting in peak sales periods followed by slower periods. For instance, gym memberships often experience a surge in January each year. While these factors are beyond the control of organizations, they strive to maintain consistent sales throughout the year by promoting their offerings even during non-peak seasons. This helps to ensure a steady flow of business and avoid over-reliance on seasonal spikes.
13)Financial risk :
