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.

Risk along the value chain

Risk analysis focuses all too often only on direct threats. The classic domino effects linked to supply chains include <ul><li>disruptions in the availability of parts or raw materials</li><li>changes in the cost structures of suppliers</li><li>shifts in logistics costs</li></ul>

Supply chains

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.

Effects on a company’s risk profile

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.

Customer response

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.

Competitors

<div>It is not always possible to anticipate the effects of unexpected events that occur throughout the business cycle.</div>But those who routinely examine the way risks propagate across the entire value chain are better prepared for second-order effects.

Considering risk

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.

Distribution channels

The financial crisis has reminded us of the valuable lesson that risks gone bad in one part of the economy can set off chain reactions in areas that may seem completely unrelated. In fact, risk managers and other executives fail to anticipate the effects, both negative and positive, of events that occur routinely throughout the business cycle.