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Risk: Seeing around the corners

mckinsey.com

It is not always possible to anticipate the effects of unexpected events that occur throughout the business cycle.

But those who routinely examine the way risks propagate across the entire value chain are better prepared for second-order effects.

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Risk along the value chain

Most companies only examine the most direct risks facing a company and tend to neglect secondary risks that can have an even greater impact.

Companies need to learn to evaluate aftereffects that could weaken whole value chains.

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All differences in business models can create the potential for competitive risk exposure. This does not mean that a company should imitate its competitors, but that it should consider the risk when they have different strategies.

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Supply chains

Risk analysis focuses all too often only on direct threats. The classic domino effects linked to supply chains include 

  • disruptions in the availability of parts or raw materials
  • changes in the cost structures of suppliers
  • shifts in logistics costs

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Indirect risks can also hide in distribution channels. It may include the inability to reach the end customers, new distribution costs or redefined business models. 

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The most complex domino effect is the responses from customers.

The shift in buying patterns can create a typical cascading effect. Another is changed demand levels.

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Effects on a company’s risk profile

Considering the impact of a risk on a company and how it propagates through the valued chain can help management think through the change. For example, the risk posed by carbon regulation on the aluminum industry.

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