Between 30% and 50% of small businesses fail due to economic risks. Nonetheless, it isn’t just small businesses that fail — even large enterprises fail due to risks they do not see coming.
JCPenney, a renowned department store chain, filed for bankruptcy in mid-2020 due to heavy debt and declining sales as a result of the COVID-19 pandemic.
Moreover, economic risk is just one of the several business risks that lead to failures. Any risk, from environmental to political, can affect companies of all sizes globally. According to a 2022 Forrester report, 41% of organizations experienced three or more critical risk incidents within a year.
Thus, it is crucial that businesses understand the key risks and develop risk management strategies. This article will explore the main risks companies must be aware of. These include economic, technological, environmental, social/political, health, and strategic risks. In each section, we delve into the current risk management statistics and risk management trends to help ventures overcome them.
Whether you are a business owner or plan to become one, keep reading to learn about the business risks to be aware of in 2024.
Top 6 Business Risks: An Overview
Before we discuss each risk in detail, here is an overview of the corporate risks this article will cover.
| Key Area | Potential Risks |
|---|---|
| Economic | Interest rates, inflation, supply chain disruptions, and global market volatility |
| Technological | Cybersecurity threats, data privacy regulations, technological obsolescence |
| Environment | Climate change, regulatory changes, resource scarcity |
| Social and Political | Labor market dynamics, political instability, public sentiment |
| Health | Pandemic preparedness, mental health support |
| Strategic | Competitive landscape, mergers and acquisitions, reputation management |
Economic Risks
Inflation and Interest Rates
Inflation and interest rates are among the top business risk factors this year. The prices of goods and services in the United States increased by 2.5% in August 2024 compared to August 2023. After months of above-average inflation, the country’s inflation rate has significantly decreased in the last few months.
The table below shows the global inflation rate from 2018 to 2023.
| Year | Global Inflation Rate (%) |
|---|---|
| 2018 | 3.5 |
| 2019 | 3.2 |
| 2020 | 3.2 |
| 2021 | 4.7 |
| 2022 | 8.7 |
| 2023 | 6.8 |
If we take a closer look at the global inflation rate, it was stable in the first three years. Then, due to the pandemic, the rate increased to 4.7%. In 2022, it peaked due to several factors, like the Russia-Ukraine conflict, supply chain issues, and rising energy prices. As central banks implemented monetary policies, the inflation rate started to decrease and reached 6.8% in 2023.
The table below highlights the expected global inflation rate for the upcoming years.
| Year | Global Inflation Rate (%) |
|---|---|
| 2024 | 3.5 |
| 2025 | 3.2 |
| 2026 | 4.7 |
Thus, with the expected declining rates, companies must consider the following strategies:
Cost Management
Businesses are likely to get relief in terms of labor and raw material costs. Nevertheless, they must remain vigilant regarding potential fluctuations in industries like energy and housing.
Consumer Behavior
Companies must be prepared for shifts in consumer demand and preferences. With lowering prices and stability in purchasing power, consumers are likely to augment their spending on non-essential services and goods.
Pricing Strategies
The most important factor is pricing — businesses now have more flexibility in this. They can adjust their pricing downward to continue to stay competitive and increase their demand in the market.
Supply Chain Disruptions
Ongoing Challenges
Geopolitical tensions like the Russia-Ukraine war and US-China trade conflicts have led to substantial uncertainties in global supply chains and increased risks to international business. For instance, the Russia-Ukraine war has impacted energy supplies and grain exports, resulting in scarcity of essential goods and price volatility.
Additionally, the trade conflict between the US and China has caused ventures to reevaluate their sourcing strategies due to trade restrictions and tariffs, further leading to delays in production and increased costs.
Another one of the key business risk factors disrupting the supply chain is natural disasters. Calamities like wildfires, hurricanes, and earthquakes have affected this in the past. For example, the Japan tsunami and earthquake of 2011 left the semiconductor supply chain hanging — sectors relying on the supply chain were greatly affected.
Supplier Diversification
Businesses must avoid relying on a single supplier or geographic area. Instead, they must diversify their supply base across several countries.
Managing Inventory
A balanced approach to inventory management that consists of some level of stockpiling of the necessary materials can improve resilience.
Adopting Technology
Companies must invest in technology like data analytics and automation. When businesses implement AI in their processes, they benefit significantly in terms of supply chain efficiency and visibility improvement.
Global Market Volatility
Current Geopolitical Issues and Trade Relations
Apart from the US-China trade war and the Ukraine-Russia conflict, other ongoing geopolitical issues and trade relations are also affecting global market volatility.
Instability of the Middle East
Current political instability and conflicts in the Middle East play a major role in fluctuations in oil prices, further affecting the global inflation rate and economic stability.
Aftermath of Brexit
The long-term impact of Brexit continues to be uncovered, with regulations and agreements related to trade impacting ventures functioning between the European Union and the United Kingdom.
Potential Impacts
The potential impacts of these threats to businesses involve various aspects, from the global supply chain to the costs of goods and services. Some of these impacts are discussed briefly below:
Augmented Costs
As businesses adapt their supply chains to reduce risks related to geopolitical tensions, they are likely to incur higher operational costs, thus leading to an increase in global inflation pressures.
Investment Decisions
While some investors may flee from volatile areas, others may seek prospects in the regions less affected by these tensions, possibly leading to changes in investment patterns across the globe.
Strategic Realignment
Companies are increasingly adopting methods like nearshoring production in proximity to home markets and diversifying their suppliers.
Technological Risks
Cybersecurity Threats
Increasing Sophistication of Cyber Attacks
By 2027, cybersecurity crimes are predicted to cost the globe over $24 trillion. Thus, companies must be careful when it comes to cybersecurity. Some of the most common cyber attacks on businesses are:
Third-Party Exposure
Several breaches result from less secure third-party vendors that continue to access the primary target’s network. An instance of this is the breach that affected AT&T, which compromised data from more than 70 million customers.
AI in Cyberattacks
The use of machine learning and AI by cybercriminals is ever-rising. They are leveraging it to improve their attack strategies. Thus, organizations must keep their defenses updated at all times.
Ransomware Attacks
The average ransom fee increased over 500% from $400,000 in 2023 to $2 million in 2024. Attackers often demand payments in cryptocurrencies in exchange for not leaking sensitive information.
Importance of Robust Cybersecurity Measures
The following measures should be taken to avoid cyber attacks on businesses:
Collaborate with Cybersecurity Experts
There is no better way than to partner with cybersecurity consultants or firms with the knowledge and expertise required to improve the defenses against threats in advance.
Implement Robust Security Policies
Businesses must create and enforce cybersecurity policies that suggest the best practices for employee behavior, incident response, and data protection with regard to security protocols.
Invest in Security Technologies
Companies must invest in advanced security technologies like encryption tools, endpoint protection solutions, firewalls, and intrusion detection systems to improve their security stance against rising threats.
Data Privacy Regulations
Data Privacy Laws
Data privacy laws have evolved significantly in recent years due to growing concerns regarding privacy and personal data protection rights. Some of the key regulations are:
General Data Protection Regulation (GDPR)
In May 2018, GDPR was enforced in the European Union. It mandates strict guidelines regarding data storage, processing, and collection, placing emphasis on individuals’ rights over their own data.
California Consumer Privacy Act (CCPA)
Since January 2020, the CCPA in California has provided its residents with rights concerning their personal data. People have the right to know what data is being gathered about them.
Health Insurance Portability and Accountability Act (HIPAA)
Enforced in the US, HIPAA deals with handling health-related data by healthcare professionals and relevant entities.
Brazil’s General Data Protection Law (LGPD)
Effective only in Brazil, this law is similar to GDPR.
Risks of Non-Compliance
Reputational Damage
The magnitude of risk is very high here. When businesses do not comply with data privacy laws, they can experience severe reputational damage, leading to customer loyalty and trust loss. Hence, customers are highly likely to consider a competitor who values their data protection.
Financial Penalties
Ventures have to pay massive fines as a result of non-compliance. For instance, GDPR fines can be a maximum of €20 million.
Other risks include legal proceedings, loss of market access, and operational disruptions. Thus, it is best to implement the mitigation strategies shared below.
Mitigation Strategies
Employee Training
Companies must provide continuous training to their employees about data privacy laws and best practices for handling sensitive data.
Regular Auditing
Businesses should conduct regular audits of data processing activities to ensure they comply with relevant laws. This includes reviewing security measures, consent mechanisms, and data collection methods.
Stay Updated with Regulatory Changes
Businesses need to monitor changes in data privacy laws regularly to ensure that there is no non-compliance and, thus, avoid corporate risks of fines or reputational damage.
Technological Obsolescence
The Risk of Falling Behind
More than anything else, businesses risk falling behind — they are not advanced enough to keep up with the shifts and, thus, lose their competitive edge. Some of the critical factors that contribute to this risk are:
Global Rivalry
Globalization has led to competition going from local to international. Businesses that fail to innovate end up outspaced by global competitors.
Evolving Customer Expectations
With customers becoming more concerned about technological advancements, their expectations for services and products change. Companies must innovate continuously to keep up with these expectations.
Boost in Innovation Cycles
Fast-paced innovation implies that products and services quickly become outdated. Technologies like cloud computing, machine learning, and artificial intelligence continually evolve, increasing pressure on businesses to stay current.
Importance of Continuous Innovation and Investment
Businesses must consider continuous innovation and investment in new technologies to mitigate the magnitude of risk associated with technological obsolescence. This can help in several ways:
Improved Customer Experience
Businesses can improve customer loyalty and satisfaction by regularly enhancing products and services. Indulging with customers via feedback mechanisms enables ventures to recognize pain points and prospects for innovation.
Competitive Edge
When businesses ensure continuous innovation, they optimize their current products and launch new features that meet the evolving needs of consumers.
In addition, continuous innovation and investment improve productivity, efficiency, agility, and adaptability and boost knowledge sharing.
Environmental Risks
Climate Change
Climate-Related Risks
You might be wondering how environmental risks, including climate change, could be among the top operational risks. Well, it poses physical and transition risks. The physical ones include extreme weather events, such as wildfires, floods, and hurricanes, which can directly disrupt operations and damage assets. For example, in 2023, financial damages from climate and weather disasters in the United States crossed $92.9 billion, according to the NOAA National Centers for Environmental Information (NCEI).
As the name suggests, transition risks are the results of the shift. You might think of it as long-term climate change. However, it refers to the shift toward a low-carbon economy. This includes evolving market dynamics, technological developments, and policy changes. Businesses that fail to adapt may face reputational damage, litigation, and fines.
Need for Sustainable Practices
The implications of climate-related company risks are significant. Thus, businesses must adopt sustainable practices for their mitigation.
Resilience Building
Forming strategies to improve resilience against extreme weather conditions, like supply chain and infrastructure flexibility improvement.
Sustainable Investments
Investing in low-emission technologies and renewable energy to minimize carbon footprint.
Risk Assessment
Conducting climate risk assessments to comprehend supply chain and operation vulnerabilities.
Regulatory Changes
Sustainability Regulations
Carbon Border Adjustment Mechanism (CBAM)
This EU regulation will be enforced by 2026 and will impose fees on imported goods according to their carbon emissions at the time of production.
Corporate Sustainability Reporting Directive (CSRD)
In effect since 2024, CSRD is an EU regulation that requires large enterprises to disclose the impact they have on the environment, including scope 1, 2, and 3 emissions.
SEC Climate Disclosure Proposal
The Securities and Exchange Commission in the United States proposed laws that require public companies to report their climate action plans and carbon emissions from 2024.
Strategies for Compliance and Proactive Adaptation
Continuous Training
Educate employees on compliance requirements and sustainability practices to lead to a culture of accountability.
Indulging Stakeholders
Partner with stakeholders and suppliers to align sustainability goals and discuss the most effective methods.
Sustainable Technologies
Invest in sustainable technologies, i.e., those that boost energy efficiency and reduce carbon footprint.
Improve Data Collection
Adopt comprehensive systems for monitoring emissions for all scopes to ensure reporting accuracy.
Resource Scarcity
Natural Resource Depletion Risks
Several factors, some of which have already been discussed earlier in this article, can contribute to the company risks associated with the depletion of natural resources. The key factors include:
Geopolitical Tensions
Due to competition for resources, geopolitical tensions may further arise, leading to instability in areas that are rich in resources. This can further disrupt businesses’ operations and supply chains.
Environmental Degradation
We are taking more than we are giving back. Thus, over-extraction can result in ecological problems like loss of biodiversity, soil erosion, and deforestation. These can lead to reputational damage and regulatory penalties for ventures.
Resource Scarcity
With rising population and increasing consumption, necessary resources like freshwater, fossil fuels, and minerals are becoming scarce. This can increase the costs of essential resources and lead to disruptions in the supply chain.
Sustainable Sourcing and Circular Economy
Companies must consider sustainable sourcing to mitigate the top business risks of natural resource depletion. The practice requires businesses to procure goods and services in such a way that takes into account the economic, social, and environmental impacts.
Ventures must also consider transitioning to a circular economy, which means designing products for recycling, reuse, and longevity. This will reduce waste and reliance on fresh materials. Moreover, by adopting such practices, businesses can improve their brand reputation and resilience against scarcity of resources.
Social and Political Risks
Labor Market Dynamics
Changing Employee Market Trends and Expectations
Better Focus on Diversity and Inclusion
Employees now expect companies to support diverse and inclusive workspaces that highlight their beliefs and values.
Ever-Increasing Employee Expectations
Today’s workforce craves more than just salary — employees seek a supportive culture, career development prospects, and meaningful work.
Shift to Remote Work
The COVID-19 pandemic increased the adoption of remote work. It improved mental health support, work-life balance, and flexibility, which is why several employees seek remote working opportunities today.
Impact of Labor Market Dynamics
Employee Engagement
Companies that invest in recognition, career development, and training make a loyal workforce that improves productivity.
Cultural Influence
If the workplace has a strong culture, it will attract talent. Companies that have positive environments are magnets for skilled employees.
Employee Retention
Employees will be retained if the work culture is positive. According to a study, engaged employees are five times less likely to leave than disengaged ones.
Recruitment Difficulties
To attract talent, businesses must adapt their recruitment strategies by emphasizing their commitment to inclusivity, flexibility, and well-being.
Political Instability
Impact of Political Changes
Businesses can be significantly affected by political instability. Some of the major threats to businesses are:
Economic Risks
As a result of political changes, businesses may experience sanctions, augmented tariffs, and currency fluctuations. This can affect operational viability and profitability in volatile markets.
Operational Disturbance
Due to political instability, there can be regulatory uncertainty, alterations in government policies, and civil unrest. This can impact access to market and supply chains as well.
Risk Management Strategies
If your business is operating in a volatile market, you must implement the following strategies based on the risk perspective:
Engaging Local Stakeholders
Maintaining relationships with local governments and communities can offer valuable insights.
Contingency Planning
Implementing robust contingency plans helps businesses continue even during times of crisis. This includes alternative sourcing strategies and emergency response protocols.
Diversification
Companies must minimize dependency on just one market and diversify their supply chains.
Political Risk Assessments
Ventures must conduct assessments related to political risk in areas where they function to comprehend the possible impacts on their operations.
Public Sentiment and Consumer Behavior
Impacts of Social Movements and Public Opinion
Public sentiment and consumer behavior can affect businesses and their reputations to a great extent. These impacts are discussed in brief below:
Social Movements
Public sentiment concerning social issues – such as workers’ rights, racial equality, and climate change – can have a significant impact on the brand’s reputation.
Public Opinion
When companies fail to align with social values, they experience backlash from customers who prioritize transparency and ethical practices.
Strategies for Customer Engagement and Trust Building
n order to avoid top business risks and further engage with consumers, companies should implement the following strategies:
Feedback Mechanisms
When businesses work on feedback channels for consumers, they can address individual concerns quickly and adopt practices according to public sentiment.
Community Outreach Programs
By engaging in community initiatives, brands can connect with customers on a personal level, improving positive sentiment and loyalty.
Social Issues Engagement
Companies must indulge in social movements that align with their values, showcasing commitment by actions instead of words.
Transparent Communication
Companies should actively communicate their CSR (Corporate Social Responsibility) initiatives and SDG (Sustainable Development Goals) plans. This helps in building trust with customers.
Health Risks
Pandemic Preparedness
COVID-19 Lessons
The COVID-19 pandemic affected businesses across the globe, and the risks of international business with regard to the pandemic are known to all. While it was a hard time recovering from the impacts, it certainly taught all businesses a few lessons. What are they?
Investing in Health Protocols
Companies started implementing health protocols, such as wearing masks, social distancing, and sanitation measures. These were crucial for maintaining operational continuity and ensuring employee safety.
Adaptation of Business Models
Businesses that switched to e-commerce or remote work to adapt their business models to COVID-19 were able to withstand the disruptions.
Health Crises Responses
The pandemic showed that businesses must have robust preparedness for crises like these.
Strategies for Businesses
Companies must have flexible business models and establish health protocols to avoid top operational risks associated with pandemics. This can be done in the following manner:
Flexible Business Models
When businesses are flexible in their function, they can pivot quickly to any change in circumstances. Flexible working hours and hybrid work arrangements can improve employee productivity and satisfaction while also ensuring the resilience of the business.
Health Protocols
Implementing robust health protocols protects employees and helps build trust with stakeholders and customers. Key components include mental health support, vaccination campaigns, and regular health checkups.
Mental Health and Employee Well-being
Mental Health Support in the Workplace
Several factors associated with the mental health of employees can imply key risks for businesses. These include:
Employee Expectations
Today’s employees expect companies to prioritize their mental health support by offering a supportive work environment and access to mental health resources.
Impact on Productivity
Mental health problems can substantially impact employee retention, engagement, and productivity. According to the American Psychiatric Association, the economic burden of depression among adults in the United States was approximately $236 billion in 2018.
Better Awareness
Recognizing the significance of mental health in the workplace is growing, particularly as employees experience increased stress levels due to personal challenges and economic uncertainty.
Strategies for Promoting Well-Being and Productivity
Promoting Work-Life Balance
Encouraging work to be flexible, like providing flexible work hours and remote opportunities, can aid employees in managing their professional responsibilities alongside personal duties.
Mental Health Programs
Implementing mental health programs for employees can offer employees the necessary mental health resources, support, and counseling services.
Training for Managers
Managers must be trained to identify signs of anxiety or emotional distress and respond appropriately.
Fostering a Supportive Environment
Wellness programs, regular check-ins, and mindfulness training can encourage mental well-being. Additionally, businesses can also create spaces for meditation or relaxation.
Strategic Risks
Last but not least, strategic risks are among the top risks in 2024 that businesses must be cautious of. Businesses must strictly implement strategies that help them avoid these risks.
Competitive Landscape
Threats associated with the Competitive Landscape
Factors like new entrants and disruptive business models can be huge threats to companies. When new startups emerge, especially those that leverage technology, the business models of conventional markets are disrupted. Hence, they are a threat to established companies.
In addition to this, market barriers contribute to the increased risk of business failure. Even though barriers to entry can keep established ventures safe, changing consumer demands and technological developments are lowering the barriers, enabling novel rivals to easily enter markets.
As a result, businesses must track the competitive landscape regularly and adapt their strategies to challenge new entrants. They must also keep up with the risk management trends to develop the right strategies. Finally, they should consider investing in innovation and exploring acquisitions or partnerships to improve capabilities.
Importance of Agility and Awareness
Strategic Agility
Businesses must form strategic agility to be able to respond quickly to competitive pressures and market changes. This requires flexibility in decision-making and a willingness to pivot when needed.
Market Awareness
Continuous market analysis is critical to comprehending potential disruptions, competitor actions, and customer trends. Ventures that stay up-to-date with these can quickly adjust their strategies to remain competitive.
Innovation Culture
Besides being aware of the market and developing strategic agility, businesses must foster a culture of innovation to motivate employees to share ideas that can result in new services and products. This further helps companies to stay ahead of the curve.
Mergers and Acquisitions
Risks Associated with M&A Activities
Regulatory Issues
Merger and acquisition (M & A) transactions can be blocked or delayed by regulators if they are done to minimize competition in the marketplace.
Operational Disruptions
Activities of M&A can lead to operational inefficiencies when companies merge teams, processes, and systems. This phase of transition can impact the delivery of goods and services as well as customer satisfaction.
Cultural Integration Problems
One of the most important factors that lead to risk of failure in M&A is the integration of different workplace cultures. Not aligning with one another can result in high turnover rates, decreased productivity, and employee dissatisfaction.
Best Practices for Successful Integration
When it comes to mergers and acquisitions, it is important to follow the practices shared below to ensure a smooth transition and successful integration and avoid any threats to businesses.
Post-Merger Integration Proposal
Form a post-merger integration plan outlining necessary timelines, responsibilities, and objectives. This will help M&A align with the strategic goals.
Effective Communication
Always ensure clear communication throughout the entire process. This will help in handling employee expectations and concerns, further minimizing any uncertainties.
Cultural Assessment
Conduct an assessment of the cultural compatibility of the organizations being merged. The parties must devise a plan for cultural integration as well.
Due Diligence
Performing extensive due diligence is crucial to identify possible risks related to the acquisition, such as operational issues, cultural fit, and financial liabilities.
Reputation Management
Growing Significance of CSR
Brand reputation is one factor that matters the most. If there is any reputational damage, there is a high magnitude of risk for business failure. This is where CSR or corporate social responsibility steps in. CSR is among the top strategies that businesses adopt for reputation management. Below are some of the reasons why they do so.
Regulatory Compliance
From the regulatory perspective, adhering to CSR principles is crucial for businesses to promote ethical business practices.
Impact on Brand Reputation
Companies that do not consider CSR experience backlash from stakeholders and consumers, resulting in reputational damage, which can negatively impact market position and sales.
Consumer Expectations
Consumers increasingly expect ventures to showcase CSR by indulging themselves in ethical practices and playing a positive role in society. Brands seen as socially responsible usually enjoy customer trust and better loyalty compared to the ones that don’t follow CSR.
Strategies to Build and Maintain Brand Reputation
Continuous Improvement
Companies must assess their CSR efforts regularly. Additionally, they must always be on the lookout for areas of improvement. By putting up a strong front for social responsibility, businesses can improve their reputation and build consumers’ trust in the long run.
Plans for Crisis Management
When ventures develop executive risk management plans, they can respond promptly to events that could lead to reputational harm. Being prepared in advance means they can mitigate any damage using effective strategies.
Engaging with Stakeholders
Organizations must engage with stakeholders actively to comprehend public sentiment and accordingly address their concerns. This includes interactions with communities, suppliers, employees, and customers.
Transparency in Communication
Most importantly, organizations must be transparent in their communication regarding CSR initiatives.
Wrapping Up
In today’s complex business environment, companies face a number of risks that can significantly affect their business operations. In fact, to some extent, they may even lead to failures. Thus, organizations must implement comprehensive risk management strategies to mitigate top business risks, including economic, technological, environmental, social/political, health, and strategic risks.
If you are not sure how to mitigate these risks, you can seek help. Companies like LITSLINK offer customized services to help businesses attain their goals. Try our services today to devise a robust risk management plan.
When businesses invest in these strategies, they not only get protection from immediate threats but also get safeguarded in the long run. By continuously monitoring and addressing risks, organizations can increase profitability, improve customer trust, and boost resilience.
