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Trends in Risk Management
Risk Management Trends
Risk is a part of every business decision that is made. The companies that learn to manage those risks are those that become successful. Companies are influenced by different kinds of risk, and as the domestic and global economies change so do the risks that exist in those economies. Many different trends have existed in risk management because of the changing business environment and global competition that exists in business. New trends will develop as the environment continues to change as each company tries to gain a competitive advantage over the others. Risk management will also have to change to combat the different types of risk that will evolve because of the competition and other factors. The companies that can learn to diversify, hedge, or control losses based on the newly developing risks will gain a competitive advantage over the companies that cannot. The new trends that companies need to be aware of are E-commerce security, environmental risks, and financial system collapse.
The Internet has become one of the leading ways of reaching markets that companies could not before. The world is building up their infrastructure and more homes have computers with Internet capabilities. Companies can set up online storefronts and reach anyone who has a computer with an Internet connection. This is much cheaper than trying to enter markets through foreign direct investment, joint venture, or other methods of entering foreign marketplaces. The Internet does pose problems for the companies that use it for business. Cyber-crime and identity theft are among the major risks. Cyber-crime is an illegal activity committed on the Internet. Copyright infringement is a source of cybercrime in which a perpetrator will download digital information and sell it. The criminal could download music, videos, movies, and software and then produce copies and sell them for a profit without the consent of the company. This will cost the company to lose revenue in that area because the thief does not incur the costs that the company has and can sell the pirated products at a discount. Identity theft is becoming a new trend. Hackers will attempt to steal confidential information from customers and set up accounts using their information to purchase things. The hackers will rack up large amounts of debt in the people’s names and the burden to pay the debt will be on customers who did not know anything was wrong. The liability could be on the company that had the security breech.
Risk management teams will have to perform cost/benefit analysis before the company launches business on the Internet. The pros of the Internet are reaching a large customer base and entering new markets with little cost. The Internet will reduce or eliminate country risks, political risks, exchange-rate risk, and control risks that exist with joint ventures. The Internet also has its cons, which are cybercrime and identity theft. These cons increase the risks of lawsuits, bad reputations, and increased costs to update or modify online security systems regularly. E-commerce is becoming a very important part of many businesses. Companies may look to the governments to control or monitor the transactions of the Internet to help prevent cyber-crimes and identity theft but with the vast amounts of information available on the Internet it will be impossible. The security measures and costs will continue to be the responsibility of the companies that use E-commerce.
A trend that is developing in business is going green to save the environment and energy. Fears of the effects of global warming and the destruction of the environment are becoming factors in the decisions that businesses are making. Using environmental friendly products will help preserve the environment. Companies are trying to find ways to cut down on pollution and destruction of forests with the going green theory. Companies are responsible for the communities they operate in and all companies have social responsibilities. The U.S. Government has place regulations and restriction on the amount of pollution companies are allowed to emit into the atmosphere. These regulations are causing many companies to downsize or outsource their production facilities. The costs to modify existing facilities to meet the regulations are increasing. The companies implementing green products into their operations are creating a competitive advantage because more regulations and restrictions will be implemented. The companies that have failed to start implementing green products will become overwhelmed by the initial costs of going green and conforming to any future regulations. Companies should start implementing green systems before they are forced to in the future because this will help spread the costs over time.
Risk management will have to conduct a cost/benefit analysis on implementing green products and systems into their business model. The pros of going green for a company are future savings, social responsibility, environmental awareness, and customer’s confidence in the companies spending to help save the environment. The company can also create a competitive advantage over the companies waiting until regulations force them to convert. The cons involved with going green are high initial costs to implement green systems, no guarantee government will regulate, and higher costs will be passed on to the consumer making products more expensive than the competitors that do not implement going green. The U.S. companies are at a disadvantage to the foreign companies that operate in different parts of the world. Other countries do not have the same restrictions and regulations as the United States. Until all governments impose similar restrictions on pollution the companies operating in the U.S. will be at a disadvantage. To save the environment by going green all the countries in the world will have to participate or the system will not work.
Financial System Failure
The United States has just been through a recession that was caused by the financial systems in America. The banks were lending out more than they were allowed to and many clients defaulted on their loans. This caused a crash in the housing market and put many financial institutions in jeopardy of failing. The Government had to bail out many of the major banking and insurance companies to keep them in business. Many businesses rely on the banks to hedge against risk, short-term loans for continued operations, and money market accounts. The companies rely on the insurance companies to control losses caused by risks. If the Government would not have bailed out many of the major institutions, they would have went bankrupt or downsized operations to limit options for businesses. Companies will have to figure out new ways to spread out the risk of the financial institutions and insurance companies. The company will not be able to do a majority of their business through one lender or insurance company.
Risk management will have to conduct a cost/benefit analysis of using multiple banks and insurance companies. The pros are secured future funding, diversified risk against financial system failure, and multiple rates and services to choose from. The cons are decreased discounts from spreading out funds, increased complication to track funds, and more fees and higher premiums because of using multiple institutions. The distress caused by the financial systems was a problem in many industries. Companies will have to protect themselves against any future problems that may occur. Finding new methods and techniques to diversify against financial system failure will be a difficult task for risk managers. The managers who develop new ways to protect their companies against this risk will create a competitive advantage over the others.
Risk managers must be aware of any new risks evolving in business. The way they manage the new risks could be the difference between success and failure. Innovation has been the driving force in business for many years. Risk managers will have to find innovative ways to manage the new risks or their company’s future sustainability could be in jeopardy. A new trend in risk management in the future is E-commerce, which involves cyber-crime and identity theft. Environmental risk that involves companies going green to preserve the environment and financial systems failure are other risk management trends that could become prevalent in the future. These are only a few of the trends the managers of risk management will have to analyze and control to protect the future of their company’s success. The managers who can mitigate and contain new risks in the future will be the managers with job security and a part of a successful business.