For risk management, the firms formulate their plans to define what could go wrong with their processes to prevent risks and enhance efficiency. However, using siloed approaches may only benefit particular business units. ERM provides the optimal structure to support collective growth by measuring risks to make a profit. ERM has shared information that enables business units to work together to create risk mitigation plans. This collaborative practice creates an atmosphere of collaboration, eventually leading to better profitability and productivity. The paper emphasizes the need for ERM as a critical practice in organizational settings, identifying key protocols, methods, and structures that must be enacted to effectively implement ERM.
Organizational Strategy and ERM
The higher accessibility of the Internet has significantly changed organizational structures, especially in E-Commerce, where everything is dynamic. This dynamic space has ushered in revolutionary concepts and business plans. The unsuccessful companies that failed to respond to these changes remained stagnant and collapsed and died in the end. Nevertheless, the companies that quickly responded to risk awareness strategies and provided solutions to market needs saw exponential growth (Crawford & Jabbour, 2023). In the last couple of decades, ERM has gained popularity and is becoming more part of corporate strategy for many large corporations. ERM coalescence and corporate strategy must adhere to certain key principles. This entails making sure that ERM is in line with the organization’s mission, vision, and core values; it also provides for some form of oversight from the Board, which will provide a leadership dimension that emanates from the stated strategic plan. Through ERM, current processes should become more effective in achieving the strategic goals set by executives or developed for the Board, and as a result, business units and boards should unite to create a risk culture that promotes organizational growth. Crawford & Jabbour (2023) demonstrate this strength of ERM based on how it can absorb the influence of unplanned crises and offer strategies capable of thwarting continuity within the organization, supporting growth plans. ERM ensures information sharing between business units, increasing risk awareness and minimizing response time for novel risks.
Organizations that struggle to make sound decisions require the adoption of Enterprise Risk Management (ERM) as a foundation for strategy. In the operations of strategy-setting stages by organizations, the risk becomes a major consideration. Informed choices and trade-offs are essential features in strategy formulation. Many organizations find ERM an ideal approach to dealing with decision-making complexity. Ensuring that the chosen and well-thought strategy corresponds to an organization’s goals, mission, and vision, ERM protects against the phenomenon of drifting away (Ricardianto et al., 2023). However, the risk management framework proposed by ERM aims to ensure that strategies, when implemented, do not interfere with an organization’s fundamental vision or values.
Issues faced by organizations that support the implementation of ERM
One of the challenges in implementing ERM in organizations is that there is no understanding of what value addition would come out when integrating ERM with corporate strategy. As Ricardianto et al. (2023) note, it is possible to overcome this barrier by sharing enterprise-wide risk assessments with all business units in order for them to understand how their risks collectively affect the organization. Another challenge is the lack of an agreed framework for defining risk, resulting in different risk assessments by different business units. This challenge can be addressed through clear risks, assessment, and management definitions. Other problems include a lack of effective risk monitoring, poor integration of Human Resources functions leading to siloed employee goal management, and inadequate audits (Crawford & Jabbour, 2023). The solutions to such critical issues included in the process of ERM implementation are as follows: defining relationships with stakeholders for stability advancement and customer base development, focusing on risks for organizational performance improvement, preparing to deal with unplanned challenges, and identifying internal and external risks to make organizational goals attainable.
Methods to use ERM as a Strategy
Strategic tools in organizations such as ERM help them become more competitive and improve their reputation by periodically setting and reviewing the strategy. When employed as a system, ERM allows an awareness of the changing consumer value field, enhancing organizational productivity by recognizing and addressing possible threats and risks. The proper implementation of ERM as a strategy involves using a comprehensive framework to ensure integration across the entire entity to reap several advantages (Kanu, 2020). Some of the vital approaches include extending the scope of opportunity recognition to cover a range of circumstances, both positive and negative aspects, within emerging threats. This method allows management to recognize rising opportunities and problems with risks projected to arise.
More specifically, a universal identification and risk management approach is required throughout the organization while considering their possible contributions to overall performance. As Kanu (2020) observes, ERM is utilized by organizations to attain positive outcomes and prevent adverse surprises by enhancing the capability of an organization to manage identified risks and instituting appropriate responses. Risk identification involves different methods, including workshops, surveys, interviews, SWOT analysis, and simulations. This activity involves the risk management team and drills down to sub-risks and underlying elements through root cause analyses on simulated scenarios that reveal hidden risks needing mitigation.
Protocols for ERM
To ensure successful ERM integration, organizations must adopt a range of protocols that promote employee risk awareness and well-administrated risk management. An important component pertains to considering current frameworks and choosing one that harmonizes with an organization’s mission, vision, and core values. Strong processes must be implemented to quickly identify and report risks, complemented by Standard Operating Procedures writing regarding business continuity and disaster recovery. Regular internal audit procedures should be implemented and reported to business unit heads and top management, further fostering risk awareness (Crawford & Jabbour, 2023). Regular economic risk assessment audits are also necessary to supervise and assess the success of the risk plan. In terms of critical risks, organizations should focus on process improvements and develop mitigation procedures to create a risk management system that is both holistic and proactive.
Framework for ERM
One key aspect in which Enterprise Risk Management (ERM) becomes crucial for an organization’s strategic focus is that ERM penetrates the entire company, ensuring improved overall performance and stability. As Ricardianto et al. (2023) note, extensive research also points out risk as a monadic force balancing strategy and performance measurement schemes among an organization’s units or departments. The ERM framework, which has five interrelated components, starts with organizational governance and culture. Governance lays a rewarding path for responsibilities to be performed well through its central role in defining the organization’s voice and enhancing ERM (Kanu, 2020). At the same time, culture involves the operationalized norms of an organization, including ethical values, observed behavior, and reaction to perceived threats.
The second key element within the ERM framework is Strategy and Objective-Setting, which ensures a strong strategic planning process. As described by France-Massin (2023), this entails the development of a risk appetite that follows procedures and utilizes business targets as a repeated foundation to identify, assess, and address risks. The third component, performance, protects strategic measures and business objectives from external and internal risks in terms of identification, prioritization, and mitigation. Applying diverse algorithms and matrices, risks are assessed based on risk appetite such that it is possible to decide which approaches are applicable and the consequences for an appropriate mitigation process. The fourth element of Survey and Revision is critical in gauging the performance of ERM over the long haul to ensure that appropriate adjustments are made. The fifth and final factor is Data, Communication, and Reporting, which centers on a continuous process of delivering critical information within the organization and uninterrupted usage by internal and external sources. France-Massin (2023) notes that several ERM frameworks, including COSO ERM 2004 and ISO 3100, among others, have turnkey implementation strategies designed to accommodate organizations’ specific needs and objectives.
Conclusion
Conclusively, ERM promotes the success of any organization by connecting risk appetite with strategy, communicating guidelines for informed risk selection, and aligning all cross-business risks while leaving opportunities on hand to optimize capital and enhance organizational performance. Strong reporting, relationship development, and information sharing strengthen ERM to the risk-attuned mentality that improves results to lower failure risks, increases cash flow, and increases growth.
References
Crawford, J., & Jabbour, M. (2023). The relationship between enterprise risk management and managerial judgment in decision‐making: A systematic literature review. International Journal of Management Reviews. https://www.divaportal.org/smash/get/diva2:1791911/FULLTEXT01.pdf
France-Massin, D. (2023). Enterprise Risk Management: A Guide for Employer and Business Membership Organizations to Promote Efficiency and Business Resilience. International Labour Office. Retrieved from https://www.ilo.org/wcmsp5/groups/public/—ed_dialogue/—act_emp/documents/publication/wcms_865180.pdf
Kanu, M. S. (2020). Integrating Enterprise Risk Management with Strategic Planning for Improved Firm Performance. European Journal of Business and Management Research, 5(5). https://ejbmr.org/index.php/ejbmr/article/download/488/281
Ricardianto, P., Lembang, A., Tatiana, Y., Ruminda, M., Kholdun, A., Kusuma, I., … & Endri, E. (2023). Enterprise risk management and business strategy on firm performance: The role of mediating competitive advantage. Uncertain Supply Chain Management, 11(1), 249-260. https://growingscience.com/uscm/Vol11/uscm_2022_116.pdf
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