Many of today’s businesses are highly complex requiring a detailed understanding of how external factors can impact internal business matters. Fully understanding business risk requires additional focus on a more than one component of a business, but the behaviour of the business and environment it operates in as a whole.

An example of this is Volkswagen’s decision to avoid real world compliance with emissions standards by installing a defeat device that was utilised in over 11 million cars in model years 2009-2015. This scandal not only hurt VW’s reputation and sales but also impacted the automotive industry as a whole with a 17% drop in the stock market, redundancies, lasting reputational credibility of all auto manufacturers, especially the VW group including Audi, Porsche and Lamborghini.

Risks can often be predicted by the likelihood of an event occurrence as well as considering the consequence of the event. Cascading risks and extreme events are the result of highly interconnected situations (i.e. projects, businesses, even families), making the impact of these events more significant for businesses, propagating throughout all facets of operations and geographies.

While some risks can be predicted, there are circumstances referred to as ‘black swan events’. These are ‘unknown unknowns’ in which are unexpected because they could not be considered as plausibly likely to occur. Unknown events such as external factors pose significant risk which can have cascading effects. Understanding cascading risk is vital to the survival of any business as the smallest risk of one department can cause major risk for the business overall.

Risks are all arounds in our daily lives and decision making processes. Having insight and understanding into management of risk is key to making good life and business decisions.

Author: Milica Dobrijevic

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