Definition: Enterprise risk management (ERM) is a strategy or practice that businesses use to identify all possible business risks and the best ways to mitigate or eliminate them.
What Does Enterprise Risk Management Mean?
What is the definition of enterprise risk management? In laymen’s terms, ERM seeks to first identify all the potential sources of risk. The term ‘risk’ in this definition is not just limited to financial concerns. This could encompass Public Relations issues, international tensions that may affect production, a shift in public attitude, and even change in climate. Essentially, anything that is a danger to the well being of a company in any aspect would fall under this category that the company is seeking to prevent.
Businesses use this to strategy to anticipate any potential problems before they arise, so they can develop a method of mitigating or eliminating the threat, thus maximizing the organization’s outcome. This is a critical feature for an organization because some risks such as expulsion from the market via competing firm in the industry could threaten the company’s entire existence. By identifying potential risks, organizations put themselves in the position to develop a strategy for mitigating these risks and possibly avoiding calamity altogether. Often, businesses will hire individuals specifically for this purpose under the job title ‘enterprise risk managers’.
Example
Bob’s Bakery is a small business that recently came into existence within the last year. Being a prudent business owner, Bob has decided look at any potential threats in his business to increase his organization’s chances of longevity and provide the best possible outcome in the long-term. After careful analysis, Bob sees that a new wave of gyms have opened up in his town and are promoting a healthy lifestyle that condemns eating the type of food that Bob produces.
Bob understands that if the gym’s marketing campaigns are effective, his revenues will be seriously affected. Now that Bob has identified this threat, he can strategize ways to preemptively counter the gym’s marketing campaign before it begins to have a serious effect. After a couple of weeks of planning, Bob decides to introduce a sugar-free pastry section to his menu for customers that want to enjoy pastries without incurring as many harmful health effects from consumption. In this way, Bob has effectively addressed the potential threat and mitigated it to some extent.
Summary Definition
Define Enterprise Rise Management: ERM means a business method for analyzing possible dangers to eliminate them and identifying possible opportunities in an effort to exploit them.
