Risk Management Models

Published on 28 July 2010 by in Risk Management

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In the 2007 article, “Strategic risk management: Creating and protecting value,” Beasley describes Enterprise Risk Management (ERM) as, “an emerging business practice […] that emphasizes a top-down, holistic approach to effective risk management for the entire enterprise” (p. 26). As Beasley explains, ERM is distinguished from traditional risk management because ERM “strategically [considers] the interactive effects of various risk events with the goal of balancing an enterprise’s portfolio of risks to be within the stakeholder’s appetite for risk” (p. 26); whereas, traditional risk management is a “silo […] approach, where risks are often managed in isolation, with minimal oversight [of affects to the enterprise as a whole]” (p. 26). Beasley describes an ERM framework known as, “The Return Driven Strategy Framework,” and describes how the framework could have helped in several real cases where risks became issues.

Beasley describes three real-world events where a breakdown in traditional risk management resulted in issues for businesses. The first case concerned a retailer that was unable to expand operations because individual locations had accumulated ill will from local governments due to violations of local ordinances. The individual stores were assuming risks that had small impact for the store, but large impact for the enterprise. The second case described a scenario where a consumer product company’s sales contracts contained delivery times that would not be met if the information technology disaster recovery plan were activated. Fortunately, the company had an ERM process that identified the gap and remediated the situation prior to an issue occurring. The third case described by Beasley involved a fire at a supplier’s factory that impacted two manufacturers. One manufacturer had an effective ERM process and survived the disruption to its supply chain; the other manufacturer was not prepared and exited the market.

Beasley describes a framework for ERM called the Return Driven Strategy. The Return Driven Strategy framework consists of 11 core tenets and 3 foundations that enable companies to “identify flawed strategies” (Beasley, 2007, p. 30). Beasley explains that the Return Driven Strategy framework would have enabled the retailer in the first case to, “[align] employee engagement and incentives with the overall higher-level growth strategy of the company,” and avoid the issues that prevented expansion (p. 53). In the second case, the company’s ERM process successfully identified the gap between sales and IT; and, Beasley asserts that the company was aligned with the Return Driven Strategy and, thus, realized the benefits. In the third case of the factory fire, the manufacturer with an effective ERM process survived a catastrophic event from a critical supplier while the company without an effective ERM process ceased operations within that market, which is a strong statement regarding ERM.

Beasley’s 2007 article, “Strategic risk management: Creating and protecting value,” makes a strong case for the benefits of ERM. Beasley provides a framework for implementing ERM known as the Return Driven Strategy and provides concrete examples of how the framework did or could have performed in three cases.

References

Beasley, M. S., Frigo, M. L., & Litman, J. (2007). Strategic risk management: Creating and protecting value. Strategic Finance, 88(11), 24. Retrieved from http://proquest.umi.com.library.capella.edu/pqdweb?did=1278145811&Fmt=7&clientId=62763&RQT=309&VName=PQD

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