Risk Analysis Models All Leaders Should Know

When COVID-19 began rampaging across the U.S., every business — no matter the sector or industry — had to examine and/or rethink its strategy. In short, the pandemic highlighted the value of preparing for the unexpected through risk analysis and management. Risk analysis is the strategic process of assessing the likelihood of an adverse event and working to minimize future negative unforeseen effects.

While risk analysis may not be able to avert natural disasters or preclude catastrophic events, this proactive measure improves preparedness, which can help mitigate the impact of dwindling sales, credit crunches, supply chain disruptions, and other fluctuating conditions — all of which are the realities of COVID-19.

The strategic use of risk analysis models can help leaders make better, more informed decisions in virtually all instances to save time, money, and — ultimately — the entire business.

Let's take a closer look at two risk analysis models with which all leaders should be familiar.

 

The SWOT Risk Analysis Model

The strength, weakness, opportunities, threats (SWOT) risk analysis model can be integral in assessing your organization's current position prior to deciding on a new strategy. By using SWOT to assess four critical areas of your business, you can understand what's lacking, reduce the likelihood of failure, and chart the best path forward. Once you effectively analyze the four quadrants, you'll be ready to create a versatile plan that works to protect the business and prevent failure.

 

Strengths

The strength quadrant has an internal focus and represents the advantages your business has over other competing organizations. Whether it's your manufacturing process, dedicated staff, or superior product, your strengths represent what drives your business and sets you apart from the field. You can get started by analyzing the following:

  1. What strengths does the business possess?
  2. What are the unique resources and capabilities the business has?
  3. What functions does the organization do better than the field?
  4. What is your unique value or selling proposition?
  5. What do other businesses perceive as your core strengths?
  6. What do customers say you do well?

 

Weaknesses

The weaknesses quadrant takes an internal look at the functions where there is room for improvement. It's important to examine the weaknesses because these areas tend to be even more pronounced in times of adversity. Typically, the weakness analysis is viewed through a comparative lens focused on your top competitors, exploring how and what they are doing to better attract and retain clientele. You can begin by discussing:

  1. What weaknesses does the business have?
  2. What functions does your competition perform better?
  3. What does the competition perceive as your weakness?
  4. What complaints do you hear most often from customers?
  5. What objections do you hear most often from prospects?
  6. How do your profit margins stack up to competitors and your field?

 

Opportunities

The opportunities quadrant represents current external trends or openings that are available to help the organization bolster profits, increase market share, or even emerge in new markets. It's vital to explore all opportunities — even those that are easy to spot, which may open the door to new avenues for business growth.

For example, if you are a manufacturing business, the pandemic may have created the opportunity for you to produce face masks, face shields, and other in-demand PPE. Businesses that use the opportunities quadrant properly can deepen market share and foster long-term growth. To explore opportunities in this risk analysis model, start by asking:

  1. Are there trends that present a business opportunity?
  2. Can you package your services/products differently to demand a higher price?
  3. What are the avenues available to evolve your strengths and weaknesses into opportunities?
  4. Is there a niche market of which you're currently not taking advantage?
  5. Are your customers asking for something that you could but don't offer?
  6. Is there talent you could hire to make a difference?

 

Threats

Regardless of which risk analysis model you use, it's vital to accurately assess and prepare for threats. Threats can be described as any factor outside the organization that poses danger to its success. This analysis can include what your competitors are doing as well as whether your business is particularly exposed to challenges (such as cash flow problems) that could make you more vulnerable. You can begin scrutinizing potential threats by inquiring:

  1. Are there any conditions or trends that could negatively impact your business?
  2. How do your weaknesses impact the threats?
  3. What are your competitors doing that may negatively affect you?
  4. How sound is your business financially?
  5. Are your employees happy, engaged, and supported? Can they easily be recruited by direct competitors?
  6. If a supplier or manufacturer stops offering materials you need, do you have a strategy?

 

PEST & PESTEL Analysis

The political economic social technological (PEST) model represents the analysis of the macro-economic, external factors that can impact your business. An adaptation of PEST is PESTEL, which accounts for environmental as well as legal factors. These factors are becoming increasingly prevalent in today's global economy.

In either case, the goal of this analysis is to gain a holistic view of your strategic positions and operating conditions. Utilizing the PEST risk analysis model opens the door to a range of benefits and can be useful for informing other tools, including SWOT.

This model takes into consideration how the following factors can impact your product, organization, and success:

  1. Political factors: All of the regulations, global issues, tax policies, legislation, laws, foreign trade policies, political stability or instability, corruption, consumer protection laws, etc.
  2. Economic factors: Seasonal factors, growth rates, stock market, international exchange rates, economic trends, inflation, taxation, interest rates, monetary policies, credit availability, cost of raw materials, etc.
  3. Social factors: Attitudes about racial injustice, demographics, religion, imports, lifestyle trends, health, family structure, etc.
  4. Technological factors: Competitor technology, social media, communication infrastructure, intellectual property regulation, automation, competitor development, cloud-based platforms, emerging tech, etc.
  5. Environmental factors: From climate change to the responsible sourcing of raw materials, and more
  6. Legal factors: Trade regulations, health and safety laws, employment legislation, and even laws regarding intellectual property

 

Combining Risk Analysis Models With Big Data to Chart the Best Path Forward

Today, we're experiencing events that no one would've predicted. While the political, economic, social, technological, environmental, and legal factors may all change, the expectation for business leaders remains consistent — they must guide organizations through all impediments to profitability.

Fortunately, risk analysis models are available to help business leaders be more prepared for identified as well as unidentified threats. When risk analysis models are combined with big data, organizations are better equipped to not only make it through risks, but optimize risk exposures, improve performance, increase profits, and accelerate growth.

 

Author bio: Paris Stringfellow is Assistant Research Professor in Clemson University’s Department of Industrial Engineering. Her research focuses on understanding human behavior in cyber-physical-social systems — such as how people make decisions under uncertainty, modeling system risk and human error, and improving system resiliency through user-centered design. She is Director of the Risk Engineering and System Analytics Center at Clemson and serves as an instructor in the Masters of Engineering in Risk Engineering and System Analytics online degree program.



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