Oregon Wine Research Institute — In recent weeks, many have read business and industry-oriented news articles about the “important lessons learned” for business managers as we look back at the past 14 months and how the COVID-19 pandemic upended so much of our lives. One of the recurring topics in these articles has revolved around the idea of “risk management.” Of course, risk is nothing new to anyone involved in the wine industry, now or well before the pandemic. Yet, the idea that we can use this moment in time to hit a pause and reset button to assess actions to take us forward seems to have some validity. One area that might be worth considering is how we think about risks in our industry and how to be proactive in managing those risks.
Researchers at both the USDA and the nation’s Land Grant universities have developed an extensive body of knowledge and a set of publications about risk management. For example, the USDA Economic Research Service (ERS) has a dedicated website for understanding how to identify and manage risks in production agriculture. Primary types of risks detailed on this website include production, price, financial, policy/institutional, and personal/human resource risks. Each type offers its own set of challenges and options for mitigating costs and potential losses. Faculty members at Purdue University provide an alternative framework for understanding risk types by classifying into three broad types: business, financial, and strategic.
These various categorizations of risk are excellent starting points for individual decision makers in Oregon’s wine industry to help define each of his/her own “universe of risk.” As detailed on the Purdue website, there are five general approaches for managing your risks: avoidance, reduction, reposition, transfer, and retain. Some of these approaches are well suited for managing operational risks in vineyards and wineries. For example, crop insurance is a way to transfer risk, while ongoing safety training for all employees is a way to reduce risk. Though managing operational risks is always important, the lessons learned from the pandemic are more closely aligned with managing strategic risks. These risks deal with the dynamic changes affecting the match between a firm’s internal resources and capabilities, and outside forces such as competitors’ actions, buyers’ preferences, and changes in government policies.
As we process and learn from our pandemic experiences, there is great potential for long-term benefits from assessing strategic risk. Understanding and quantifying strategic risk, however, can be challenging. Asking the following questions can help decision makers assess their strategic risk:
How can our company create and sustain competitive advantage, recognizing that the advantages we had in the market before the pandemic may or may not be advantages in a post- pandemic market?
Having lived through the past 14 months, how can we better answer the question, “What can upend our business model?”
As we look to the future, how vulnerable is our value proposition to outside forces?
• Knowing that we have overlooked some risks in the past, what can we do now to create resiliency in order to minimize the effects of unexpected adverse events that await us in the future?
Risks in the wine industry will always be present, and in some ways, that is expected, perhaps even welcomed. Profits, after all, can be thought of as the rewards for taking risks. The goal for decision makers looking to a post-pandemic world should not be an attempt to eliminate all risks, but rather an attempt to answer the question, “What risks are worth taking?” — By Dr. James A. Sterns, Associate Professor, Dept. of Applied Economics, Oregon State University