Considering Internal and External Risks
The risks you face in business are driven by a range of internal and external factors. Of course, some of these factors are within your control, but others may be harder to manage because of outside influences.
Processes and procedures
Risks caused by internal factors usually relate to the decision-making processes and procedures already in place within an organization. For instance, if your business has inadequate technical support, you risk losing customers who don’t get the help they feel they need.
Maybe the internal factors you face relate to investment decisions and HR management. Or your business may risk losing market share because it decided not to invest more in research and development.
External factors, on the other hand, are linked to forces outside your organization’s control. Volatile markets and fluctuations in exchange rates — both of which may increase the cost of importing supplies — are typical examples.
If you’ve ever had to cancel an event due to rain or snow, you’ve experienced the external risk factor of natural events. Increased competition and new regulations can also pose a risk to your organization.
Internal and external factors
Of course, some risks may involve both internal and external factors. Let’s say your organization is planning to acquire one of its main competitors.
Your organization’s communications procedures may be an internal factor in this scenario if an ineffective communication plan means you can’t ensure your business strategy is executed properly by the acquired company.
You may face an external factor if the acquired company has any undisclosed liabilities or debts that are then be passed on to your company, increasing the risk that it will underperform.
Once you can categorize risks according to the internal or external factors that drive them, you’re better placed to make informed decisions about how to handle them. You can also group risks according to their particular category.
There are financial risks, such as changes in exchange rates or budget cuts and operational risks, such as defective equipment or supply chain problems. You may also encounter strategic risks like increased competition or changes in the industry and hazard risks, including workplace accidents or damage to machinery or property caused by bad weather or natural disasters.
Categorizing risks in this way enables you to focus on the areas that are central to your organization’s success and it also helps you generate ideas about what the potential risks may be.
Knowing the internal and external risk factors helps you get a clear understanding of the risks facing your organization, as well as what you need to do to lessen their impact — or avoid them altogether.