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Risk and business are hand-in-hand. One cannot hope to earn income unless he or she is willing to accept a certain amount of risk. When someone invests their money into a business, in stocks, bonds or lands they are dealing with risks that can either increase their value or decrease their value in the future. Risk strategy is the concept used to describe how businesses, people or organizations manage the risk around them. However, the investor must understand that risks are more global then they have ever been in the future. The first step in managing risk is to know what your risks actually are. For example, let us assume a person wants to purchase land a few miles from his or her home and start a farm. Even though there is risk involved in this purchase it would appear from first sight that all of the risk is local. How can you get more domestic then a small farm? However, what the investor may not realize is that the success of the farm depends in part on the international markets. The U.S. currently exports 43% of its current farm products to Asia and China’s grain is beginning to compete with that grown in the U.S. (Shalet & Albert, 1997). Even if this farm plans on selling grain to other farms in the area that have livestock it is still subject to international forces. The farmer may be able to grow his or her grain for $1.00 per bushel but if Asian grain moves into the market for 99 cents then this farmer would loose money and likely close his or her farm. Therefore, even a local operation is subject to global risks and events. A domestic approach the farmer may consider is to diversify his or her products with the assumption that if the price of grain goes down on the market it is unlikely that the farmer’s chicken will also decline at the same time. This concept is called diversification. The more diversified the farm the more likely the organization can avoid major catastrophes associated with one product or another. If one product becomes unprofitable it is doubtful that the three other products would do the same at the same time thereby reducing risk. Diversification doesn’t solve all risks associated with domestic farming. For example, the other risks a farmer might consider are the price of fuel (Barron, 2008) which is related to an increase in global trade (Dingwallsmith, 2007). When international trade increases the use of fossil fuels also increases which raises the prices. Since domestic farmers use a lot of fuel for their tractors and equipment the cost of fuel may hamper or damage their profits. Domestic farmers are therefore subject to other issues such as a rising dollar, credit availability, fuel prices, equipment costs and much more that are tied to the global economy. In these cases diversification isn’t going to be of much help to the farmer but the farmer could use hedging to reduce these costs. If the farmer used a certain amount of his or her profits to invest in the oil companies then as prices increase the farmer can also reduce his or her loses with the profits in oil. A domestic risk strategy doesn’t work well in an environment where nearly all of the other business inputs are subject to international pressures. Thus it makes more sense for the domestic farmer to take a global risk strategy approach that will help him or her reduce the risk of loss and declining profit margins. By jumping into the global risk management mindset farmers can set up their businesses to handle fluctuating international markers and global risks before they have a significant impact on the domestic market and the farmers operation. Lessons: 1.) Local economies are tied to global economies. 2.) Diversification of products can reduce risk. 3.) Hedging the major inputs into a business can help reduce risk. Dingwallsmith, R. (2007). Downswing stokes cautious stance. Fund Strategy, 118. Shelet, L & Albert, C. (1997). Asia’s meltdown: most unassuming victim—the U.S. farmer? Black Book.
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Murad Ali is a three time book author, a business professor and a human resource manager. He runs the following sites: (Business Articles) www.themodernbusinessworld.com (Dating Articles) www.datingdesires.blogspot.com (Website Marketing) www.article-agent.org (Free article directory) www.article-agent.net
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