The many facets of risk: internal auditors need to consider the variety of perspectives business functions have for managing risks.

Author:Barnier, Brian
Position:Risk Watch

Feeding the world is the great legacy of Cyrus McCormick, whose invention of the mechanical grain reaper in 1832 was the first harvesting productivity improvement in 1,000 years. Shortening harvesting time decreased the risk of missing the narrow window for harvesting ripened grain. To grow sales, he produced reapers of higher quality than competitors. Perhaps a greater innovation was the widespread introduction of equipment financing to enable farmers to buy a reaper before they received the money from their harvest. For this, McCormick had to manage credit risk.

McCormick's innovations illustrate that fisk always has been a multifaceted concern for companies, with each facet's methods refined over time. Practically every role in any organization is directly or indirectly related to risk management. Different industries and professions have long-standing methods for managing risk. To be conversant in how the organization addresses risk, internal auditors navigating today's complex and interdependent business environment must be able to understand the risk management views and calculations used by many different disciplines.

Many Perspectives

Over time, organizations have created a plethora of functions that manage business risks from their own point of view.

Product and Market Research Researchers look at risk by product or market life cycle. For example, missing customer needs, mistakes in product design, poor messaging, insufficient trial or repeat purchases, product extensions, upgrades, and delays in discontinuing a product are all risks that product managers routinely face. Mathematically, a key formula is "expected value of perfect information." Product managers are constantly asking themselves, "What is the risk (probability) of missing an insight if we don't invest more in research?" New Products Management by Merle Crawford and Anthony Di Benedetto is a key resource.

Strategy and Competitive Analysis Strategic professionals look at risk in stark terms--the potential of having business value diminished by failing to understand dynamics in competitors, customers, and products (including substitutions). They are constantly asking, "What am I missing?" and looking for ways to overcome structural blindness. For strategists, the risk that springs from change creates opportunity. Taking risk and managing it better than competitors is the ultimate competitive differentiator. This is illustrated by popular books such as Jim Collins' How...

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