Risk is one of the ever-present phenomena in business operations. Subsequently, business managers must assess the probability of a risk occurring and the likely impact that it will have on business operations. Such knowledge gives business managers insight on the most effective strategy to implement to minimize the negative impacts of the risks. Enterprise Risk Management (ERM) is among the many ways through which an organization can minimize the effects of risks. ERM entails “the process of coordinated risk management that places greater emphasis on cooperation among departments to manage the organization’s full range of risks as a whole” (Hampton 93). Wal-Mart, which ranks amongst the Fortune 500 companies, has integrated ERM to ensure that it manages risks effectively. This paper analyzes how Wal-Mart has implemented its ERM system.
Wal-Mart formulated a comprehensive corporate ERM plan to ensure that ERM is implemented successfully as illustrated herein.
- Risk identification– The firm undertook a comprehensive analysis of its operations to identify areas that could result in a risk. In a bid to ensure that all the possible risks were identified, the firm held a five-hour risk-identification workshop, which was attended by all the organization’s senior managers. During the workshop, the senior managers were required to identify all the aspects that might hinder the attainment of the set business objectives. However, the firm ensured that the senior managers had a comprehensive understanding of the business objectives. The risks were categorized into internal and external risks. The external risks were identified from external business environments such as the legal, economic, political, technological, and social environments. On the other hand, the sources of internal risks identified are related to the firm’s operational, integrity, financial, and strategic processes.
- Risk mitigation– During this stage, the firm ensured that five of the most important risks to the firm’s operations were defined comprehensively. The employees that are most likely to be affected by the risks were requested to participate in identifying how the risks could be minimized by creating project teams. The teams were charged with the responsibility of suggesting how the risks can be eliminated.
- Action planning– In this step, the project teams design simple project plans that identify the task to be undertaken and the duration within which the task should be completed coupled with the persons to undertake the task. The firm gave the project team sufficient time to implement the action plan.
- Performance metrics– In this step, Wal-Mart evaluated the effect of the implemented plan on the identified risk. This step entails analyzing the outcome of the plan. During this stage, the firm is in a position to identify the gap between the target and the actual performance.
- Evaluating the shareholder’s value or return on investment– This step entails analyzing whether the action plan culminated in improvement in the shareholders’ value.
Critical success factors of ERM
To be successful in any endeavor, one must satisfy certain prerequisites and the same principle applies when implementing ERM. Regardless of how well an organization professes to embrace ERM, there must be certain basics to attain success. One should accept that having the basics in place does not guarantee success; however, a lack of these basics certainly hinders success. Critical success factors in ERM are as follows.
- Senior management support– ERM success factors primarily involve senior management support. The support must be directed at the organization or program and includes the necessary resources for the effort to be successful. Without this support, the initiative is just another efficiency exercise that does not go to the root of consolidating and addressing the overall enterprise risk. There may still be solid efficiency gains, but not at the level of an overall risk-management solution.
- Cross-functional staffing– The resources provided must be organized properly into cross-functional groups. The individual risk-based organization outlined above is organized in such a way that it addresses the risks that occur in the various specialized areas. The firm’s employees are not adequately motivated and trained to enhance their capability to deal with risks associated with their jobs. As a result, they address the key areas of their world rather than those of the organization. Cross-functional staffing provides a holistic approach to addressing risk issues for the department to understand more than a specific discipline. Without cross-functional staffing, each group will probably maximize its specific efficiency without maximizing overall efficiency.
- ERM culture– Organizational leaders need to integrate the ERM culture into their organizational corporate culture. There is a “very strong correlation between taking culture into account and successful ERM implementation” (Lam 81). Some of the traits that the firm should consider in developing the ERM culture include accountability, developing a sense of openness, being proactive, innovativeness, incorporating performance-oriented activities, a collaboration between the various internal and external stakeholders, adaptability, and resilience.
- Effective communication organizations’ management teams should develop and nurture effective internal and external communication amongst the various stakeholders to promote the level of collaboration. The communication system should be seamless to minimize possible implementation challenges. Effective communication will aid in enhancing information sharing, hence increasing the likelihood of implementation success. Furthermore, effective communication will also aid in eliminating resistance, which might emanate from internal sources such as employees. Communication will make employees part of the implementation process (Moeller 65).
- Incorporation of operational and financial risks– Organizations should ensure that they leverage the available information on operational and financial risks. This move aids in minimizing implementation costs, which might be increased by the occurrence of losses associated with possible financial and operational risks.
- Effective risk identification– The effectiveness with which firms in different economic sectors implement their ERM systems is also dependent on the potency with which organizations identify new risks. Consequently, organizations must evaluate information from different sources to identify possible sources of risk. This aspect will aid in the formulation of effective risk mitigation and elimination.
- Integration of effective risk management techniques and methods– Implementation of ERM is subject to the specific implementation methods and techniques that an organization has integrated. Subsequently, organizational managers must ensure that the implementation techniques and methods are operational to aid in minimizing the occurrence of possible implementation failures (Fraser and Simkins 388).
This paper has identified risk as one of the major hindrances in an organization’s ability to attain its objectives. Therefore, organizational managers must implement effective risk management mechanisms such as ERM. To develop sufficient competitiveness, Wal-Mart has integrated a comprehensive ERM as illustrated above. This implementation has played a critical role in enhancing the firm’s competitiveness over the years. However, several critical factors as illustrated above should be taken into account to ensure that ERM is effectively implemented.
Fraser, John, and Betty Simkins. Enterprise risk management; today’s leading research and best practices for tomorrows executives, New York: John Wiley, 2009. Print.
Hampton, John. Fundamentals of enterprise risk management: how top companies assess risk, manage exposure, and seize opportunity, New York: AMACOM. Print.
Lam, James. Enterprise Risk Management: From Incentives to Controls, Hoboken, Wiley. Print.
Moeller, Robert. COSO enterprise risk management; is establishing effective governance, risk and compliance processes, Hoboken, NJ: Wiley, 2011. Print.