Bloomsburg University of Pennsylvania FIRM and PESTLE models of Risk Classification Systems

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Q:The importance of classifying risk relates to the duration of its impact on business continuity: short, medium, or long. Review the FIRM and PESTLE models of Risk Classification Systems in Chapter 11. How do you see them contributing to organizational Risk Management? Would either be appropriate for any type of organization (hospital, bank, nuclear power plant, Disneyworld, etc?)

1)PESTLE and FIRM refer to two different systems of risk identification. They are both used to assess risk so that they can be prepared for and the variables for which they are influenced can be acted upon or reacted to. They are similar in this general way though they have very different specific meanings and functions.

FIRM is an acronym for Financial, Infrastructure, Reputation, and Marketplace (Hopkin, 2017). FIRM is concerned with the analysis of how the company behaves and how that becomes an interaction with the outside world that can create risk. The acronym spells out the four aspects of risk regarding the internal behavior of a company.

• Financial risks.
• Infrastructure risks.
• Reputational risks.
• Marketplace risks. (Hopkin, 2017).

Financial risk can be explained as any financial decision that can create a problem within the company. For instance, a company that is designed to manage large numbers of credit accounts for home loans will often purchase these as packages of possible hundreds or more accounts. The accounts the chose and the quality and standing of that account will present a certain amount of risks. Has the debtor paid on time every payment? How is the job market in their area? Is the company they work for growing or shrinking? These are all examples of how a companies choices can create or reduce risks. After the financial crash of 2008, we saw how taking risks with large amounts of home loan accounts ended up in a critical failure at many financial companies who then needed a bailout.

This then led to reputation risks. Some of these companies knowingly engaged in dishonest practices, making packages of loans look better than they were, shifting percentages on the finiancing and allowing certain people to take out loans who couldn’t. This led to a large public criticism of their behavoir.

The poor financial choices led to infrastructural risks within the company. With all those bad mortages the company was like a house built on the beach with no foundation. Large portions of their company money was put into bad products which made the infrastructure of the companies poor.

This also had impacts on the marketplace as massive shifts in how the consumer behaved, new government regulations and other factors changed the landscape of the marketplace.

PESTLE has a reverse meaning to FIRM. It is concerned with how external variables can create risk for a company. PESTLE stands for Political, Economic, Sociological, Technological, Legal, and Ethical/Environmental (Hopkin, 2017). These risks are assest based on the behavoir of the global system. Many of these risks need to be preemptively understood as businesses often need to plan ahead maybe years in advanced. Those strategies, tactics, company goals, investments, company culture and more are all very vulnerable to how the rest of the world is working (Hopkin, 2017). Changes in policy at the political level with regulations, laws, presidential mandates, supreme court decisions and even precedents set by politicians on the campaign trail can all effect a business. An example of this can be found with Donald Trump. After becoming president, his company came under criticism as well as his personal dealings with business. His businesses also suffered losses by many of his critics.

Sociological changes such as a health food revivial and holistic mindset of a country or world can effect the companies in entertainment food and other. McDonalds and Walmart made several changes to their menus and products in order to meet the needs of a sociological change in mindset about the importance of healthy and local food. This was a direct response to a sociological change that then led to a strategy change for both companies.

I believe that both of these systems can be used for any company in any industry at every level. From an single entreprenuer to a large company such as Amazon. The specific variables may be very different but the foundation of the system remains the same.

Hopkin, P. (2017) Fundamentals of risk management: Understanding, evaluating and implementing effective risk management (4th Ed.). Kogan Page Limited: London, England.

2) FIRM is a risk rating and identification system that acts as a FIRM risk scorecard and also reinforces the idea that each institution must be concerned with its finances, infrastructure and business success, the headings of the FIRM risk scorecard as the following:

• Financial

• Infrastructure

• Reputational

• Marketplace

Financial risk and infrastructure are internal risks, while reputation and marketplace external risk. In addition, it is easy to identify financial and marketplace risks while it is difficult to identify infrastructure and reputational risks, considering that the reputation should not be separate in the FIRM classification result card in the global system because reputation can be affected by other risks, it doesn’t eliminate its importance in the case of the desire to obtain a brand stretch (Hopkin, 2018).

PESTLE is another risk classification system, but this system is easier to identify financial risk, infrastructure, and reputation risk. PESTLE is more appropriate to locate external risks, and this system focuses on the external context that is uncontrollable, but this action is taken to mitigate the potential risks. Also, PESTLE is a system that provides a comprehensive analysis of problems that are resolved in the external context, and it is considered more feasible in the public sector (Hopkin, 2018).

Finally, I believe that both the FIRM and PESTLE are two different systems of risk identification, and each one of them has its way to classify the risks. And yes, I think both can contribute to organizational risk management in the hospital, bank, nuclear power plant, Disneyworld, etc.

References:

Hopkin, P. (2018). Fundamentals of risk management: Understanding, evaluating and implementing effective risk management. London: Kogan Page.

 

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