Risk Management in International Business Strategy - Term Paper Example

How has the adoption of new approaches to risk management changed organizations and the way that managers enact international business strategy? Contents Contents 2 Introduction 3 Discussion 3 Conclusion 11 References 13 Introduction A risk can be defined as the impact of uncertainties and variations on the objectives and functions of a business. These uncertainties may either be positive or negative but if not mitigated and mange properly and managed properly may lead to damages for the organization. Also, if efficiently managed and taken advantage of, some of the risks can actually act as opportunities for the organizations. Risk management is the process of coordination of the different activities that are aimed at controlling and directing the organization with regard to the imminent and potential risks related to the organization. This includes the management of both the internal and external risks that are or that may be faced by the organization. Risk management is an important part of strategic management because the process involves the management of existing and potential adverse impacts as well as the realization of opportunities present in the broad business environment. This report deals with an analysis of how the adoption of the new age risk management processes have led to changes in the organizations and the ways the managers of these organizations formulate business and corporate strategies by focusing on the management of risk as a significant part of their strategic management initiatives. Discussion Risk management is a process used in domestic and international businesses for the purpose of the identification and assessment of the risks that are currently being faced by the respective businesses and that may be faced in the future by the same followed by developing suitable strategic plans to protect the businesses against the existing and potential risks. Risk in business is generally a term which is used to define the possibilities that in future different internal and external occurrences may lead to losses and harm for the company while at the same time also identifying the fact that the emergence and mitigation of risks may pave the way for new opportunities for these business organizations. Risks are important components to be considered by the managers and planners because, by taking risks, businesses are likely to achieve necessary gains and benefits and also at the same time, the identification and subsequent mitigation of the risks are necessary to ensure sustainability and competiveness of the business in a highly dynamic, competitive and complex global corporate environment. There are many benefits of risk management that have been identified over time. The benefits of integrating risk management processes at all levels of an organization can lead to the development of effective management of uncertainties and adverse events which can have major impacts of the purpose and objectives of the business. Also, the organizations have identified that management of the risks and their negative effects can support the informed corporate and business decision making processes, thereby improving the chances of better strategic management of the company. Additionally, the managers focus on leveraging on the potential opportunities related to the risks in the sector of operation and thus drive higher organizational efficiency by minimizing or controlling the surprises involved in the business management,. It also helps to create higher short term and long term value for the stakeholders of the business, thereby increasing the reliability and brand value of the company among the global stakeholder groups (Power, 2009). There are various types of risk that are faced by businesses functioning in the current business environment. These may encompass strategic risks, operational risk, political; risk, economic risks, environmental risks, financial risks, planning risks, terrorism risks, price risks, customer satisfaction risks, competitive risks and mismanagement risks. The risks faced by companies across the globe can be segregated into five broad categories which are explained as follows: Business risks which are the risks related to the industry or market of a particular organization. Market risks which are the risks associated with the shifts in the external market conditions like interest rates, price fluctuations and exchange rate fluctuations. Credit risks or those risks which are associated with the situations of business not receiving the payments that are owed by the debtor groups. Operational risks which are the risks linked to the internal system failures or human errors in functions like the improper allocation of resources and capabilities. Legal risks or the risks associated with the direct possibilities of different entities involved in the business not being able to meet the contractual obligations. Environmental risks which are the risks associated with the environmental compliance of the various activities and functions of an enterprise. Managing various kinds of risks has become a central part of the corporate and business strategies of companies across the world. The management of risks is mandatory for surviving in the intensely competitive and demanding corporate environment because reputation and brand images take decades to be established while a single incident of risk may lead to severe tarnishing of the image which involves a lot of time and investment to recover from. Therefore, building up a culture of compliance and value addition is necessary which can only be done by offsetting the imminent and potential risks related to the functioning of an organization. The international business strategies are developed with ample focus given on the management of all kinds of risks including financial, operational, logistical and country specific risk for a business. The organizations of the modern integrated corporate world are initiating major changes in order to keep up with the fast changing pace of the business environment and as such are coming up with new business and corporate strategies that help them to mitigate the different kinds of risks that are arising in the way of functioning in a sustainable, profitable and overall successful manner (Schoemaker, 1995). The organizations functioning in today’s business world have identified the need for managing the risks in the most optimum manner and as such are developing innovative and differentiated ways to negate or control all types of existing and potential risks related to the businesses. The risk management processes are aimed at creating value for the business by making the optimal use of the available resources and capabilities, support the decision making processes of the company, act as an integral component of the organizational processes, address the different uncertainties and variations associated with the business functions, consider the human factors adequately and are developed on the basis of the available organizational and market information. Also, the business strategies have to be and inclusive and transparent in nature so that the four types of risk involved in international business management i.e. the political risks, socio cultural risks, country specific risks and the cross cultural risks are adequately managed and dealt with. Therefore, the managers of international businesses are focusing on developing risk management systems which are dynamic, flexible, responsive to changes and iterative in nature and are also capable of ensuring continuous enhancement and improvement according to the changing demands in the external and internal business environment. However, the identification and management of risks should be done in a careful manner so that the risk management process is made most efficient in terms of analyzing the possible risks so that the management of the company can balance and evaluate the potential losses and the possible gains associated with the risks involved in these scenarios. The process of risk management can be used by managers as a technique to avoid mistakes that may lead to financial as well as reputational loses or damages for a company. Thus, today most of the managers use the risk management process as a part of their strategic management initiatives. Mostly, risk management is used by the business managers as a preventive strategy of management which is in contrast to the other management processes which are generally used as reactive measures which are aimed at creating advantageous positions for the respective companies. The changing situations of the international corporate environment are creating new requirements for sustaining a business. Due to this, the identification, assessment and mitigation of the risks that are faced by companies are necessary for consideration by the managers of these companies. This is especially true when the companies are performing in a standard manner and when the external markets are dynamic and growing in nature. The tasks of the risk managers are to identify, predict, assess and formulate measures to prevent or control any kind of losses or damages for a business. As such, the risk managers have to identify the exposures related to potential losses, measure the exposures and decide what steps should be taken to protect the business from the financial damages or other negative impacts that may be caused by these risks or exposures within the company while simultaneously considering the resources and objectives of the respective company and the nature of the risks that are or may be faced by the company in the future years (Beck, 2009). This helps the risk managers to devise the most appropriate risk management and mitigation plans that can help to ensure profitability, growth and success for the business. While companies operating in different industries face different and distinct kinds of risks, the prioritization of risks is mandatory in case of all types of businesses, irrespective of whether it is a domestic or internationally operating business and irrespective of the type of industry it belongs to. However, the complexities of risk involved in internationally operating organizations are more complex and varied in nature as compared to the locally functioning companies (Power, 2004). This is because; the companies operating in international markets have to consider the risks that may be faced because of a number of diverse situations and geographical locations. Not only do these international companies have to consider the operational, technological and strategic risks but also they have to essentially focus on indentifying, assessing and negating the country specific risks associated with each of the geographical regions in which the businesses function (Beckert, 1996). As such, the managers working in the transnational and multinational enterprises have to develop their international business and corporate strategies by including the risk management initiative as an essential component of the whole strategic management process. The level of exposure of the business to the risk is often not the only factor that is to be considering on the current business world with respect to the formulation of international business and corporate strategies. Additionally, various types of risk like political risks, currency risk, socio cultural risks, economic risks and environmental risks have to be considered while developing the business management plans and processes. Figure 1: A risk management framework (Source: Maguire and Hardy, 2013) The risk managers in the international companies consider a number of varied methods for mitigating, preventing and controlling the risk associated with the different units of the businesses and then identify and select the most appropriate and feasible method which can be used for the management of the identified risks. The strategies that are used for mitigating international business risks are based on the consideration of the different elements of risk. For example, the international business strategies are developed on the basis of the consideration of the political, regulatory, financial, cross cultural risks, commercial risks and other country specific risks which are faced by the international companies but are not necessary for consideration for the companies which function within domestic boundaries. These risks include currency fluctuations, foreign exchange fluctuations, political situations, events and climates, cross cultural risk, environmental and legal compliance risks , international tariffs and trade laws and a wide array of unforeseen and unexpected variables that may lead to damages or losses for the businesses (Ahrne, Aspers and Brunsson, 2015). The international businesses face logistical risks like delivery time uncertainties and financial risks which are managed by the organizations by employing different strategies to suit the situations and conditions of the risk. One of the ways to manage the logistical risks is to diversify the supply chain of the company by spreading the procurements and orders among several suppliers so that in case of any kind of business contingency related to procurement back ups are available for maintaining the continuity of the supply. The globally operating companies have to consider different issues like weather, political problems etc. which may exist in different regions of operation. As such, the maintenance of a wide and distributed supplier base can act as a major logistical risk management strategy. The regulatory risks can be managed by adequately considering the local laws, environmental and other business related standards and rules so that the business can adhere to the same and thereby, reduce the risks of incompliant behaviour. Respecting the local customs and culture also remains an important business strategy to function on a global platform (Beck, 1992). Dealing with the foreign exchange risks, interest rate risks and currency fluctuation risks can be done by developing suitable hedging processes used in the futures and options markets and other capital market strategies like arbitration, swapping etc. which may be useful in mitigating the financial risks involved in operating in different countries (Cornelius, 2005). The risk management process also involves the periodical review and monitoring of the risk management procedures and techniques to ensure that the process is meeting the objectives and producing the intended results (Power, 2007). The management of international businesses call for more complicated and carefully devised business and corporate strategies out of which risk management strategies are significant components of business management. Conclusion The management of risks has emerged as one of the main objectives of the enterprises which operate on an international platform. Nevertheless, the international businesses have to find out more advanced and better ways to treat the risks and uncertainties involved in their internal and external business processes to make sure that the organizations can deal with the unacceptable variations in functioning in the most efficient manner. Since, risks are associated with the negative results for the companies, therefore, the concept of risk as a main indicator and measurement of performance is widely used in the strategic business management domain. Conducting business on an international platform has become a mandatory requirement in the intensely globalized, competitive and connected corporate world. However, like the opportunities, the risks involved in the international businesses are also high and complex in nature. Therefore, the importance of risk management processes remains highly profound in such cases. The awareness to risks acts as a pre requisite for managing any kind of company in a profitable and sustainable manner. Therefore, the imperative for enterprises to develop consistent, value adding, flexible and effective risk management program remains very strong because the current economic and political situations in the globe are much unstable and in future also more business risks are likely to enter in the scenario. References Ahrne, G., Aspers, P. & Brunsson, N., 2015. The Organization of Markets. Organization Studies, 36, 1, pp. 7-27. Beck, U., 1992. Risk Society: Toward a new modernity. London: Sage. Beck, U., 2009. World at Risk. Polity: London. Beckert, J., 1996. What is sociological about economic sociology? Uncertainty and the embeddedness of economic action. Theory and Society, 25, 6, pp. 803-840. Cornelius, P., 2005. Three Decades of Scenario Planning in Shell, California Management Review, 48, 1, pp. 92-109.  Maguire, S., & Hardy, C., 2013. Organizing Processes and the Construction of Risk: A Discursive Approach. Academy of Management Journal, 56, 1, pp. 231-255. Power, M., 2004. The nature of risk: The risk management of everything. Balance Sheet, 12, 5, pp. 19-28. Power, M., 2007. Organized uncertainty: Designing a world of risk Management. Oxford: Oxford Books. Power, M., 2009. The risk management of nothing. Accounting, Organization and Society, 34, 6-7, pp. 849-855. Schoemaker, P., 1995. Scenario Planning: A Tool for Strategic Thinking, Sloan Management Review, 36, 2, p.4. Read More