Risk management is a topic that Slovenian marketing community rarely addresses. But a period is coming in which risk management will become an increasingly important business area and in which marketing can also find its place and role. How can marketing improve the impact it has on a company through risk management? Lovro Gruden (Indigo Consulting) talked about this with Igor Zgonc (Silver Bullet Risk).

Before we start thinking about how marketing can assist with risk management, we first have to understand the field of risk management thoroughly. “Risks arise when there is a possibility of a negative deviation from the planned goals, or if there is a probability of damage that prevents the achievement of organizational goals. In short, risk means uncertainty. If we know something is going to happen, then this is not a risk. If a certain outcome of the situation doesn’t mean a financial loss for us, then this is not a risk either. Risk management is a process of assessing and mitigating the consequences of the risks facing an organization. The goal is to reduce risks, which is why we need as much information as possible. Company decisions are based on knowledge, experience and information, meaning we cannot make good decisions without incorporating risks into the equation. Management is always interested in raising the value of the company, or in other words, the higher the cost of capital, the lower the value of the company. Risk management is therefore needed for every company existence,” says Igor Zgonc

Example: If we expect a decline in product sales, then this is not yet a risk. However, if there is a possibility that sale declines unexpectedly, this is a risk of not achieving sales goals and similarly, every challenge or trouble the company goes through, as well as the demanding market conditions, are not a risk. On the other hand, the possibility of failing to enter a new market is.
 

Risks can occur everywhere in the company and can vary tremendously. “We can divide them into four quadrants according to the impact of the risk on the company and the probability that a particular risk will occur. One could easily say that we need to focus solely on those who have a big impact on the business and are very likely to happen. In reality, this is not entirely the cases, as there are not many of these risks in general. Even more, a company could not even , and the situation would be difficult to solve. Also, we can ignore those risks that have low impact and low probability. Therefore, the key to risk management is the risk field, where the effects can be catastrophic, but there is little chance that this scenario will materialize. This is why we refer to them as “black swans”. The field, where the effects can be catastrophic, but there is little chance this scenario will materialize, is key to risk management,” points out Igor Zgonc.

In the business community, risk management is not yet a fully established area. “According to our international survey, one one-fifth of companies evaluate risks and use risk modelling. As the most common risk, companies see a drop in their economic activity or a crisis; whereas political risk is among the less common risks, but it should also be noted that these results vary from country to country. What is very interesting for marketing is that the decline in a brand’s reputation is recognized as a grave risk. Unfortunately, in Slovenia, conducting research in a business environment and get real answers from organizations regarding their approach to risk management is not an easy task,” continues Igor Zgonc.

Internationally, the decline in the brand's reputation is recognized i as a grave risk.

-Igor Zgonc

For risk management, marketing is a vital function: “Marketing is the face of the company, as the business community, future customers and partners look at the company through these eyes. It is exactly this perception or reputation than can open new doors or destroy the company. Brand reputation and perception is the most obvious risk in the field of marketing, and then there is the illicit use of intellectual property, business ethics, internal communication with employees etc. To sum up, the key task of marketing is to strengthen trust among users and employees, because the growing trust reduces risk.

Marketing is the face of the company, as the business community, future customers and partners look at the company through these eyes.

-Igor Zgonc

Through the perception of risk management, marketing can gain importance from the company’s management and decision-makers. “Marketing has to understand the language of management, and the coming crisis will be an ideal opportunity for marketing to prove its value. Therefore, when management shrinks marketing budgets, prepare risk calculations. What will occur if marketing is unable to carry out its activities and tasks? What is the danger of the brand reputation falling, how will partnerships loosen, what are the challenges of unethical and false advertising? All this can lead to unpredictable costs for the company, which will be significantly higher than the savings due to reduced marketing investments. Marketing creates trust, which is a value that is very difficult to regain. The task of marketing is also to collect data, as making decisions on deficient or incorrect information can lead to huge costs,” advises Igor Zgonc.

When management shrinks marketing budgets, prepare risk calculations. What will occur if marketing is unable to carry out its activities and tasks?

-Igor Zgonc

Generally, risk management in Europe is not sufficiently valued; however, this is entirely different across the Atlantic. “A good risk manager is a central figure of the company in the US and the most likely next director. Why? Because a good risk manager communicates with everyone, from management to the production worker, he knows the processes and people well, and he knows what can go wrong. In Europe, and especially in Slovenia, this is rarely the case. Risk management is still perceived as a department that deals with bureaucracy and the preparation of risk tables, and that is also where it ends. But, risk identification is only the first step, whereas, in the next steps, these risks need to be managed and reduced. Similar can be said for risk management in marketing. First, we identify what could go wrong, but we then close these findings in a drawer and deal with ongoing tasks. Until a few months ago, we were in a period when everything was going well, and in times like these, it is tough to convince people that we need to prepare for different times as well. Now that they are coming, it is too late for preventive measures. Everything we can do is to curate them and prepare for what comes next.

As a company that is well prepared for the onset of potential risk, Zgonc points out the company ELES. They have prepared various risk scenarios of how to react in certain situations, meaning they will respond faster if these events occur. Lovro Gruden (Indigo Consulting) complements his thinking: “The companies in the energy sector and producers of energy-intensive products are well prepared for the current situation. These companies mostly have well-defined risks, especially concerning changes in the price of raw materials and changes in the behaviour of suppliers. On the contrary, those who are not ready at the moment are also thinking only about how to carry out key activities and sell off stocks. However, this way of thinking rarely leads to the right products that users need in this situation and are willing to pay more for them.

Example: Marketing and its inseparable dependence on numbers – One of the tasks of strategic marketing is to monitor developments in various markets. Suppose a company generates two million annual sales in market A and a million euros in market B. Without a broader context and a view through the eyes of risk management, we would be much more satisfied with Market A and plan further activities there. But what if market A is, for example, a Russian market where we sell to low-income companies, and market B is a fast-growing German market. Meaning, we can only raise the price in the Russian market to cover the potential risk of the failure of our customers, and market B is the one to which we must focus all our activities, including marketing.
 

A particularly big problem for companies is that risk assessments usually end up as printed Excel spreadsheets enclosed in a drawer. “Risk management is too often left to external auditors, who prepare the visualization in a way that marks the probability of the risk with a certain colour. That way, the company’s management has difficulties in understanding what it means if, for example, one risk is red, and the other is pink. We will catch their attention much faster if we present the fact that a certain risk will cost 10,000 euros and another one million euros. A comprehensive review helps the company implement processes to reduce risks. Proper visualization makes it easier to make decisions. We can write anything in Excel spreadsheets or paper, but the question is how useful they are. When we notice that something is wrong in the company, we first need to write it down and then find out why it happened. Only in this way can we manage the risks systemically.” points out Igor Zgonc.

The future is always tricky to predict. “We are all aware we don’t know what’s in store for us, so this is not a risk. Something new is definitely coming, be it a different way of doing business and living. So even this is not a risk. Risk is a complete unknown, which you can prepare for by planning all processes in the company in the direction of robustness and resilience. The robust operation of the company means that we can operate relatively smoothly even if we all have to move to home offices, and if fires, diseases or protests are raging around us. Key processes must run, no matter what. However, for risk management, the current period is certainly a time when the company’s management is more obedient to our advice. If we compare the current situation with the past crisis, the companies have become much more robust and resilient in the past ten years. During the previous crisis, companies prepared scenarios, adjusted processes and structure. However, there is still a lot of room for manoeuvre,” Igor Zgonc thinks at the end of the conversation.

Risk is a complete unknown, which you can prepare for by planning all processes in the company in the direction of robustness and resilience.

-Igor Zgonc

Lovro Gruden concludes: “The lack of cooperation between individual departments of the company in these times is a huge challenge. It can lead to deteriorating results or even the collapse of those companies that will not be able to effectively adjust their activities or decisions to the impact of risks. It is not enough to have established departments of marketing, sales, development or risk management if they are not connected and if they do not work effectively. With its activities, marketing can certainly help a company to identify and reduce risks, but only if it has a large enough influence in the company. However, it is a fact that it is through risk management that it can build and increase its influence in the company.

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The conversation was published on the DMS page. To DMS members, a full recording of the conversation is available in their digital library