Question
Enterprise Risk Management is more commonly used as a method for identification of risks. Critically assess the benefits of adopting this method of risk identification within a firm.
Students should be aware of what the ERM process covers in terms of identification of risks and the benefits that could arise from its use. ERM process has become more popular as an approach to risk management over the last ten years. ERM covers four areas of risk with the aim of integrating risk management within all the activities of the organisation. The areas covered are strategic, operational, financial and hazard.
These areas can cover the following aspects when considering risk:
Strategic can cover issues such as mergers and acquisitions. This would include consideration of the target company is it right for merger or acquisition. What is the right price to pay for the company and how thorough has the due diligence on the company been. It could cover various aspects of business reputation and what is the possible impact of adverse publicity. What is the competitive position and what are the likely actions of competitors in response to strategic changes. How might this affect the supply of materials and prices of goods?
Operational which can take into account the various risks and perils that can affect aspects of the organisation such as the information technology process, control systems, health and safety, compliance procedures and human capital.
Financial, where the main aspects that risk can affect are economic factors, such as the trends in the economy, changing interest rates, exchange rates, input prices, output prices and labour costs and how these can impact on the organisation. It can include the financial market conditions to examine the impact of volatility within the market or even a stock market crash. Credit aspects with regard to counter party payment and reliability of payment would also have to be considered. The financial risk could also be related to the operational risks in terms of the financial systems that exist within the organisation.
Hazard would look at the following
Property – in relation to theft, fire, vandalism and security
Liability – lawsuits
Environmental – pollution
Natural disasters – storm, floods and earthquakes
Political – war, terrorism
These lists are not exhaustive but are merely indicative students could expand on these. Better answers may consider the different environments that organisation are exposed to and how these can themselves pose risks to the organisation. The key point to make is that ERM is the process of systematically and comprehensively identifying critical risks, quantifying their impact and implementing integrated risk management strategies to maximise enterprise value.
Risk management is thereby focused on the key risks for the organisation as a whole.
ERM starts in Unit 3. Comparison of the key attributes of each approach. Comparison of benefits and limitations of both approaches – in different types of organisation and at different levels (e.g. perceptions come into play a bit here too).
The key things to consider in these questions is to take the book work elements and explain what they mean. The use of real or even made up examples will help illustrate these better and also help you to consider whether you have discussed them in a balanced format.
Structure your answers so that you:
cover the importance and relevance of the problem area/topic in question
describe/define the key points
explain how they work and demonstrate awareness of whether likely to be big or little risks – could be different for different organisations, teams or management(s)
Analyse / assess – this leads on from your explanation. Put the risks in order. The examiner accepts that you are not working in the company so have limited access to data, but expects you to justify the points you make or explain the factors to consider when assessing/analysing. This may revert back to strategic business objectives, risk culture, finance available (budgets), perceptions, resources available.
Conclude – in a line or two – what is the key to answering the question set and why. What can be done in the future/way ahead or mitigations.
Refer to the revision lecture and tutorial questions for revision
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