# Risk Control: What It Is, How It Works, and Examples

![Risk Control: The set of methods by which firms evaluate potential losses and take action to reduce or eliminate such threats.](https://www.investopedia.com/thmb/6QgQUg1khEIKnzb5hJNbLLOmPqs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/risk-control.asp-Final-d0dc2b8f24dd401c8cdc8cbd5ee12b33.jpg)

*Financial institutions, healthcare providers, and businesses with complex supply chains utilize risk control. — Sabrina Jiang / Investopedia*

> **Definition**
>
> Risk control is a critical component of business management that strives to minimize and manage the risks a company faces in the course of doing business.

## What Is Risk Control?

Risk control is a set of methods by which firms evaluate potential losses and take action to reduce or eliminate such threats. The technique uses findings from [risk assessments](https://www.investopedia.com/terms/r/risk-assessment.asp) that involve identifying potential risk factors in a company’s operations. These can include technical and nontechnical aspects of the business, financial policies, and other issues that may affect the well-being of the firm.

Risk control also implements proactive changes to reduce risk in these areas. It helps companies limit loss and is a key component of a company’s [enterprise risk management (ERM)](https://www.investopedia.com/terms/e/enterprise-risk-management.asp) protocol.

### Key Takeaways

*   Risk control is a systematic process used to identify, evaluate, and manage risks to minimize potential losses and negative outcomes.
*   The technique utilizes findings from risk assessments.
*   The goal is to identify and reduce potential risk factors in a company’s operations, such as technical and nontechnical aspects of the business, financial policies, and other issues that may affect the well-being of the firm.
*   Risk control methods include avoidance, loss prevention, loss reduction, separation, duplication, and diversification.

## How Risk Control Works

Modern businesses face a diverse collection of obstacles, competitors, and potential dangers. Risk control is a plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster that may interfere with an organization’s operations and objectives, both physical and figurative.

The core concepts of risk control include several key components.

### Avoidance

Avoidance is the best method of loss control. A factory owner may find a safe substitute chemical to protect the workers’ health after discovering that a chemical used in manufacturing a company’s goods is dangerous for the workers. Avoidance is not always possible, however.

### Loss Prevention

Loss prevention [accepts a risk](https://www.investopedia.com/terms/a/accepting-risk.asp) but attempts to minimize the loss rather than eliminate it. Inventory stored in a warehouse is susceptible to theft. There’s no way to avoid it, so a loss prevention program is put into place. The program includes patrolling security guards, video cameras, and secured storage facilities.

[Insurance](https://www.investopedia.com/terms/i/insurance-coverage.asp) is another example of risk prevention that’s outsourced to a third party by contract.

### Loss Reduction

Loss reduction accepts the risk and seeks to limit losses when a threat occurs. A company storing flammable material in a warehouse may install state-of-the-art water sprinklers to minimize damage in case of fire.

### Separation

Separation involves dispersing key assets so catastrophic events at one location affect the business only at that location. The business would face more serious issues if all assets were in the same place. A company might utilize a geographically diverse workforce so production can continue when issues arise at one warehouse.

### Duplication

Duplication involves creating a backup plan, often by using technology. A backup server is readily available in case the primary server fails because an information system server failure would stop a company’s operations.

### Diversification

[Diversification](https://www.investopedia.com/terms/d/diversification.asp) allocates business resources for creating multiple lines of business offering a variety of products or services in different industries. A significant revenue loss from one line won’t result in irreparable harm to the company’s bottom line. A restaurant might have grocery stores carry its line of salad dressings, marinades, and sauces in addition to serving food.

> **Important**
>
> No single risk control technique will be a golden bullet to keep a company free from potential harm. These techniques are used in tandem with others to varying degrees and will change as the corporation grows, the economy changes, and the competitive landscape shifts.

## Using a Risk and Control Matrix (RACM) for Effective Risk Management

A risk and control matrix (RACM) is a valuable tool used by organizations to better understand and optimize their risk profiles. It’s a structured approach that helps companies identify, assess, and manage risks by mapping the relationships between potential risks and the corresponding control measures implemented to mitigate them.

The RACM allows organizations to visualize and evaluate the effectiveness of their risk control strategies and make data-driven decisions to enhance their risk management practices. The RACM typically includes the following components:

*   **Risk identification**: The matrix lists all the potential risks an organization may face, often categorized by business areas, processes, or functions.
*   **Risk assessment**: Each identified risk is assessed based on its likelihood of occurrence and potential impact on the organization. This assessment helps prioritize risks and focus resources on the most critical areas.
*   **Control measures**: The matrix outlines the specific control measures implemented to mitigate or reduce the likelihood and impact of each risk. These measures can include policies, procedures, systems, or other mechanisms.
*   **Control effectiveness**: The RACM evaluates the effectiveness of each control measure, taking into account factors such as the level of compliance, the adequacy of the control design, and the control’s ability to detect or prevent the risk from materializing.
*   **Action plans**: The matrix is based on the assessment of control effectiveness and may include action plans for improving risk control measures or addressing identified gaps in the organization’s risk management practices.

Organizations can gain a comprehensive understanding of their risk landscape and the effectiveness of their risk control measures by creating and maintaining an up-to-date RACM. This information can inform strategic decision making, guide resource allocation, and support continuous improvement in risk management practices.

### RCAM Example

This RCAM example outlines different risk categories such as Finance, HR, Operations, and IT. It includes specific risks within each category. The likelihood and impact of each risk are assessed, leading to an overall risk rating. Control measures are then listed along with an evaluation of their effectiveness. Action plans are proposed to enhance risk control measures or address identified gaps in risk management.

This is just a simplified example. An actual RACM for an organization would likely be more detailed and cover a broader range of risks and controls.

## Examples of Risk Control

### Sumitomo Electric and Disaster Resilience

Sumitomo Electric ([SMTOY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMTOY)) developed [business continuity plans (BCPs)](https://www.investopedia.com/terms/b/business-continuity-planning.asp) in fiscal year 2008 as a means of ensuring that core business activities could continue in the event of a disaster. The BCPs played a role in responding to issues caused by the Great East Japan earthquake that occurred in March 2011. The quake caused massive damage on an unprecedented scale, far surpassing the damage assumed in the BCPs, so some areas of the plans didn’t reach their goals.

Executives continue promoting practical drills and training programs based on lessons learned from the company’s response to the earthquake, confirming the effectiveness of the plans and improving them as needed.

### British Petroleum Oil Spill

[British Petroleum](https://www.investopedia.com/articles/personal-finance/010715/worlds-top-10-oil-companies.asp#toc-8-bp-plc-bp) ([BP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BP)) implemented several risk control measures following the Deepwater Horizon oil spill in 2010, one of the largest environmental disasters in history. BP was subject to a $20.8 billion settlement with the U.S. government and five Gulf states in 2015 as a result of the spill. The company has since strengthened its risk management approach to prevent similar incidents in the future.

BP has focused on improving its safety culture, including conducting regular safety training and drills for employees, investing in advanced technology for better monitoring and control of drilling operations, and implementing rigorous safety standards across its global operations. The company has also adopted a systematic approach to risk assessment and management, which involves identifying, evaluating, and prioritizing risks and developing tailored control strategies to mitigate potential impacts.

BP has also increased its efforts to promote transparency and [stakeholder](https://www.investopedia.com/terms/s/stakeholder.asp) engagement. The company now publishes an annual [sustainability](https://www.investopedia.com/terms/s/sustainability.asp) report that provides detailed information on its safety, environmental, and social performance as well as its progress in implementing risk control measures. This openness allows stakeholders to hold the company accountable for its actions and fosters a culture of continuous improvement in risk management.

### Starbucks’ Supply Chain

[Starbucks](https://www.investopedia.com/articles/markets/021316/how-starbucks-makes-money-sbux.asp) ([SBUX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SBUX)), a leading global coffee retailer, has implemented various risk control measures to manage its [supply chain](https://www.investopedia.com/terms/s/supplychain.asp) risks. The company sources coffee beans from multiple regions worldwide, making it vulnerable to fluctuations in supply and potential disruptions due to weather, political instability, or other unforeseen events.

Starbucks has adopted a diversified sourcing strategy to address these risks. It involves procuring coffee beans from a wide range of suppliers across different regions. This approach helps the company reduce its reliance on any single supplier or region, ensuring a steady supply of [raw materials](https://www.investopedia.com/terms/r/rawmaterials.asp) and minimizing the impact of potential disruptions.

Starbucks has also established a comprehensive set of supply chain standards known as the Coffee and Farmer Equity (CAFE) Practices. These standards cover various aspects of coffee production, including quality, environmental sustainability, and social responsibility. Starbucks can ensure compliance with these standards by working closely with its suppliers and conducting regular audits, minimizing the risk of reputational damage and potential supply chain disruptions.

Starbucks also uses advanced management software to monitor its global supply chain in real time, enabling the company to identify potential risks early and take appropriate action to mitigate them. This proactive approach has helped Starbucks maintain its reputation for high-quality coffee and build a resilient, sustainable supply chain that supports its continued growth.

## Ways to Identify Emerging Risks

Emerging risks can be challenging to identify because they often involve novel or rapidly changing situations. Companies can employ various strategies to detect and monitor these risks, such as:

*   Keeping up to date on industry trends, news, and research to identify potential risks on the horizon
*   Engaging in scenario planning to consider possible future developments and their implications for the organization
*   Utilizing [big data](https://www.investopedia.com/terms/b/big-data.asp) analytics and [artificial intelligence](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) tools to analyze large datasets and identify patterns or trends that may signal emerging risks
*   Encouraging a culture of open communication and collaboration that enables employees to share insights and concerns about potential risks
*   Establishing a dedicated risk management team responsible for monitoring and responding to emerging risks

## How Does Risk Control Differ From Risk Management?

Risk management is the overarching process of identifying, assessing, and prioritizing risks to an organization. Risk control focuses specifically on implementing strategies to mitigate or eliminate the identified risks. Risk management typically involves the development of an overall risk management plan, whereas risk control addresses the techniques and tactics employed to minimize potential losses and protect the organization.

## Can a Company Eliminate All Its Risks Through Risk Control?

Risk control aims to minimize and manage risks, but it can’t remove them entirely. Some risks are inherent in the business environment or the nature of the industry, while others may arise from unforeseen circumstances. The goal of risk control is to reduce the likelihood and potential impact of risks on the organization, helping to build resilience and maintain stability in the face of uncertainty.

## How Does Risk Control Relate to Corporate Social Responsibility?

Risk control and [corporate social responsibility (CSR)](https://www.investopedia.com/terms/c/corp-social-responsibility.asp) are interconnected in several ways.

Companies can minimize potential harm to stakeholders, employees, customers, and the environment by implementing risk control measures. This proactive approach aligns with the principles of CSR, which emphasize the importance of ethical and sustainable business practices.

Effective risk control can also help protect a company’s reputation and maintain public trust, which are crucial aspects of CSR. It’s an essential component of a comprehensive CSR strategy because it helps companies meet their social, environmental, and ethical obligations while ensuring long-term success and sustainability.

## The Bottom Line

Risk control is a critical component of modern business management, enabling companies to identify, assess, and mitigate potential hazards and threats to their operations and objectives. Businesses can minimize their exposure to risks and enhance their resilience by implementing a combination of risk control techniques such as avoidance, loss prevention, loss reduction, separation, duplication, and diversification.

Real-world examples such as British Petroleum’s post-Deepwater Horizon safety measures and Starbucks’ supply chain management strategies demonstrate the importance and effectiveness of robust risk control measures. Companies must remain vigilant and adaptive in their risk control efforts to ensure long-term success and sustainability as the business environment continues to evolve.

> **Article Sources**
>
> 1.  National Oceanic and Atmospheric Administration. “[Deepwater Horizon Oil Spill Settlements: Where the Money Went](https://www.noaa.gov/explainers/deepwater-horizon-oil-spill-settlements-where-money-went).”
>     
> 2.  North Carolina State University, Enterprise Risk Management Initiative. “[How Did BP’s Risk Management Lead to Failure?](https://erm.ncsu.edu/library/article/bp-risk-management/)”
>     
> 3.  Reuters. “[Slack Management Exposed BP to High Safety Risk—Leaked Report](https://www.reuters.com/article/bp-safety-idUSL5N1E84OX).”
>     
> 4.  British Petroleum. “[Safety and Operational Risk Update](https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/investors/bp-safety-operational-risk-update-oct-2011.pdf).”
>     
> 5.  SKF Corp. “[Starbucks: An Analysis of Supply Chain Risk and Mitigation Strategies (2025)](https://sfkcorp.com/2015/04/28/starbucks-an-analysis-of-supply-chain-risk-and-mitigation-strategies/).”
>     
> 6.  The New York Times. “[Starbucks, Flush with Customers, Is Running Low on Ingredients](https://www.nytimes.com/2021/06/10/business/starbucks-shortages.html).”
>     
> 7.  Solatech. “[Starbucks: An Analysis of Supply Chain Risk and Mitigation Strategies (2025)](https://solatatech-com.ngontinh24.com/article/starbucks-an-analysis-of-supply-chain-risk-and-mitigation-strategies).”
>     
> 8.  Harvard University. “[Starbucks Global Supply Chain and Climate Change](https://d3.harvard.edu/platform-rctom/submission/starbucks-global-supply-chain-and-climate-change/).”
>     
> 9.  Supply Chain Drive. “[Starbucks’ Real-Time Alerts Allow for Disruption Response in Days, Not Weeks](https://www.supplychaindive.com/news/starbucks-real-time-alerts-allow-for-disruption-response-in-days-not-week/596334/).”