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A significant shift has been noticed in the way companies manage their risks nowadays. Unlike in the traditional paradigm, the modern-day risk management is focused on commodity price risks, interest rates, and currency exchange rate risks. Such changes started in the 1990s, whereby businesses began employing a mix of speculative and pure approaches to risk management (Tate, Ellram, Schoenherr, & Petersen, 2013). These companies hoped to find a better model for risk treatment. Since this was never a permanent solution to the problem, a more holistic approach had to be developed. Thus, Enterprise Risk Management, which is a comprehensive model, has been introduced. The traditional model was only confined to personnel, pure loss exposures, liability, and property, all of which were pure risks. Presently, this paradigm addresses all these pure risks as well as strategic, speculative, and operational risks. All this has been informed by the changes in technology and more sophisticated threats that had not existed in the past. A consideration of the causal factors can help an individual understand this aspect profoundly. Consequently, this will contribute to understanding the currently employed risk management tools and the desired outcomes.
Causal Factors for Change
Several factors have been influential on the need for a change from the traditional to the modern risk management approaches. Enterprise Risk Management is one of the main models that are used in contemporary business world. The change of aspects in the business environment has prompted a shift from the traditional risk management designs to more improved ones. Various types of pressures in the company setting have been instrumental in such turns as well. Some of them are the unfortunate occurrences in the internal operations of the firm, whereas others are external factors such as regulatory changes and compliance needs (Baxter, Bedard, Hoitash, & Yezegel, 2013). If some unfortunate internal circumstances happen to threaten the success of the company, the management will have to counteract their effect by seeking adequate risk management schemes. Employing the best approach to risk management is deemed by some chief executive officers as a way of creating a competitive advantage. Consequently, such managers strive to engage a proactive approach in developing risk management capabilities. Thus, the goal is to achieve growth aspiration levels and possibly attain economic objectives. A more risk-conscious way becomes necessary as it is instrumental in increasing the firm’s value and making appropriate decisions.
Small business enterprises might still be forced to use traditional approaches to risk management. Nevertheless, their growth and expansion will prompt them to consider more holistic designs to create a stable environment for their business operations. Furthermore, such a move requires the adoption of the approach that will be more suited to modern-day challenges. Indeed, this will be imperative to keeping resonance with current business environment, which will allow the interconnection with others in the same industry. Only the firms with a profound understanding of modern risk management tactics are seemingly more successful (Farrell & Gallagher, 2015). In effect, this tempts other firms to reconsider their risk management approaches that require a shift from the use of more traditional tools. In line with this, Enterprise Risk Management is good at developing thoughtful mechanisms of addressing risk from a variety of areas such as technology, operations, and finance. Employing this approach, companies view risks from the strategic framework and enterprise level. According to the principles of the Enterprise Risk Management paradigm, which is more modern, risks are neither bad nor good. However, a firm should prove the cognizance of the same and prepare for its reaction to such a circumstance should they happen in the future.
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Consequently, this raises concern about the nature of risks that could be comprehensive of this design. Based on the traditional approach, this paradigm presupposes aspects such as operational and strategic risks. Strategic risks engross uncertainties concerning the firm’s goals and objectives as well as its weaknesses, strengths, opportunities, and threats. Operational risks involve those emerging from business operations such as manufacturing and service delivery to the clients. Due to the decline in market capitalization in 2010, an investigation and analysis of this issue revealed that operational and strategic risks were its leading causes. They contributed to 80% decline, which prompted many firms to start seeking a more holistic approach to risk management (Gatzert & Martin, 2015). Since this had a potential risk of overturning many firms’ competitive advantages, they were compelled to adopt a more comprehensive Enterprise Risk Management. This method was deemed as a reliable way of assuring the firms’ market share and competitive advantages. Enterprise Risk Management covers aspects that are aligned with the long-term business goals and objectives. These include finance department checks and balances, and information technology security systems. Moreover, they are ingrained in the firm’s mission, vision, goals, and objectives. Any company adopting this design is likely to enjoy a long-term success that can be sustainable as well.
Risk Management Tools
The effective implementation of modern design implies the use of particular risk management tools. Such tools are used to benchmark, evaluate, and improve the functioning of the system. The Enterprise Risk Management Diagnostic is one of those devices. The use of this tool enables the company’s leadership to understand its current risk management capabilities. All of this is comprehended from the perspective of the organization’s weaknesses and strengths. Consequently, a holistic evaluation of the efficiency of the firm-broad risk management is performed (Bromiley, McShane, Nair, & Rustambekov, 2015). The functioning of this tool is structured within the framework of five elements. Such aspects engross natural ownership, risk culture, risk appetite, risk organization, and governance, along with risk-related decisions and procedures. Due to the quest for developing initiatives, this tool gives an insight into the best global practices by the use of peer benchmarking and self-assessment.
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Other tools, in this case, are Cash Flow at Risk Models and Risk Culture Diagnostic. Notably, the former assists in evaluating present capabilities in system functionalities and consistency. The technologies applied by the firm are critical in this case. Fundamentally, the goal is to develop desirable industry practices and conform to the regulatory requirements. In this case, the obtained results will give a foundation, on which investment and development ideas will be generated (Lam, 2014). From the standpoint of the Risk Culture Diagnostic tool, this will analyze the past risk occurrences in the organization. The cause of such risks in the past will be identified by the use of the firm’s culture. In effect, the risk culture will have to be adjusted to mitigate possible risks in the future and enhance the overall performances of the company.
The expectation of any company that employs a holistic approach to risk management is to achieve its goals and objectives. In some cases, a firm might be forced to use this design as a way of showing compliance with trending business regulations. If the firm’s leadership has a profound understanding of possible risks, it will be inevitable that the administration will seek adequate risk management measures. In this case, the desired outcome is to preserve the company’s competitive advantage along with finding a long-term success (Bromiley et al., 2015). If the firm grasps risks well, this will enable it to pursue the available opportunities that lie within the realms of its goals and objectives. In this regard, Enterprise Risk Management facilitates a more consistent and reliable risk management approach. The firm’s ability to react to any risk is never known until such a situation occurs. However, adequate preparedness is rather critical to the success of the business.
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Given the demands of modern risk management designs, all workers are expected to participate in the execution of its requirements. The employees’ behavior and mindset should be geared towards possible mitigation measures (Baxter et al., 2013). Consequently, this is expected to be ingrained in the company’s culture to enable every worker to be focused on the same approach. Particular benchmarking and the elements of the firm’s culture should be highlighted so that every employee could subscribe to the plan. In actual sense, the implementation of this scheme cannot be the work of a particular person in the organization because this will not work. Therefore, this should be the role of every stakeholder, so employees will have to play an outstanding role in this case.
To conclude, risk management landscape has changed significantly. Companies have decided to adopt more holistic approaches to pure and speculative risks. The shape taken by the present risk management paradigm can be understood from the perspective of desired outcomes, risk management tools, and the causal factors for particular changes. In this line of understanding, the Enterprise Risk Management paradigm has helped facilitate the evolution, aimed at accommodating aspects that were neglected in the traditional model. In custom approach, only pure loss exposure, personal risks, liabilities, and property were targeted. At the same time, contemporary approach extends to incorporate strategic and operational risks. In this case, the aim is to realize the organization’s long-term goals and objectives. Furthermore, there is a need to comply with the changing regulations on the matters of risk management. With the use of modern approaches, it will be possible for companies to discover, scrutinize, moderate, and screen the likely occurrence of uncertain events that can hinder their prosperity.
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