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 Risk
Management
Chapter 11
 Risk
Management
 What is Risk?

Risk:
 An uncertain future event or Oppotunity:
condition which if happens • Positive risks is
affect the mission obejectives. called opportunities
It could have a positive or
negative effect.
 What is Risk
Management ?
is the process of measuring or
assessing risk and developing
strategies to manage it.
a systematic approach in
identifying, analyzing and
controlling areas and events
with a potential for causing
unwanted change.
 What is Risk
Management ?
ISO 31000:
 Basic Principles of Risk
Management

1 Create
Value 5 be capable of continual
improvement and
enhancement

2 address
uncertainty 6 be systematic and
structured

3 be an integral part of
organizational processes and
decision-making

4 be dynamic, iterative,
transparent, tailorable, and
responsive to change
 PROCESS OF RISK
MANAGEMENT

.
01 02 03
ESTABLISH IDENTIFICATION RISK
THE OF POTENTIAL ASSESSMENT
CONTEXT RISK
 ELEMENTS OF RISK
MANAGEMENT

1 identification, characterization, and

assessment of threats 5 prioritization of risk reduction
measures based on a strategy

2 assessment of the vulnerability of

critical assests to specific threats

3 detemination of the risk ( i.e. the expected

likelihood and consequences of specific types
of attacks on specific assets

4 identification of ways to
reduce those risks
 RELEVANT RISK TERMINOLOGIES

I. Risks Associated With

Investments
BUSINESS DEFAULT RISK FINANCIAL INTEREST LIQUIDITY
RISK RISK RATE RISK RISK

- is related to the
- refers to the probability that - The firm’s - because - is associated
uncertainty about some, or all of the capital structure money has time with the
the rate of return initial investment or sources of value, fluctuations uncertainty
caused by the will not be financing in interest rates created by the
nature of business returned. determine finacial will cause the inability to sell
risk. value investment investment quickly
to fluctuate. for cash.
RELEVANT RISK TERMINOLOGIES

I. Risks Associated With

Investments
MANAGEMEN PURCHSING
T RISK POWER RISK

-It is easy to
obeserve the
-Decisions made decline in the
by a firm’s price of a stock or
management and bond, but it is
board of directors often more difficult
materially affect to recognize that
the risk faced by the purchasing
power (risen) as a
investors.
result of inflation
( deflation).
RELEVANT RISK TERMINOLOGIES

II. Risks Associated with Manufacturing, Trading and Services

concerns
A. Market Risk B. Operations Risk
• Process Stoppage
• Product Risk • Health and Safety
 Complexity • After sales service failure
 Obsolescence • Environmental
 Research and Development • Technological obsolescene
 Packaging • Integrity
 Delivery of Warranties  Management fraud
• Competitor Risk  Employee fraud
 Pricing strategy  Illegal Acts
 Market share
 Market strategy
RELEVANT RISK TERMINOLOGIES

II. Risks Associated with Manufacturing, Trading and Services

concerns
C. Financial Risk D. Business Risk
• Regulatory change
• Interest rates votality • Reputation
• Foreign currency • Political
• Liquidity • Regulatory and Legal
• Derivative • Shareholder relation
• Viability • Credit rating
• Capital Availability
• Business Interruptions
RELEVANT RISK TERMINOLOGIES

III. Risks Associated with Financial Institutions

 POTENTIAL RISK TREATMENTS

Risk Risk Risk Sharing Risk

Avoidance Reduction
means sharing with
Retention
This includes involves reducing another party the
. incolves accepting
performing an the severity of the burden of loss or the
benefit of gain, from a the loss or benefit
activity that loss or likelihood
risk, and the measures of gain from a risk
could carry risk of the loss from
to reduce a risk when it occurs
occuring
 Areas of Risk
Management
The most commonly encpuntered areas of risk
management include :
1. Enterprise risk management
2. Risk management activities as applied to project management
3. Risk management for megaprojects
4. Risk management of information technology
5. Risk management technique in petroleum and natural gas.
A simplified framework for an Enterprise-wide Risk Management
Process follows:
1 STEPS IN THE RISK
MANAGEMENT
Set up a
separate risk
PROCESS
4
Evaluate the effectiveness of
management
the various steps in the
committee
assessment of the
chaired by a
3
comprehensive risks faced
board member . Assess whether by the business firm.
the formal

5
system

2
Ensure that a formal
possesses the
necessary
elements
Assess if management has
developed and implemented
comprehensive risk the suitable risk
management management strategies and
system is in place. evaluate their effectiveness
6 STEPS IN THE RISK
Evaluate if
MANAGEMENT
management has
designed and
PROCESS
9
Assess regularly the level of
implemented risk
management sophistication of the firm’s
capabilities. management

8 See to it that
best practices as

7
Assess management’s
well as mistakes
are shared by
all.
10
efforts to monitor overall Hire experts when needed.
company risk
management
performance and to
improve continuously
the firm’s capabilities
 Practical Guidelines in
Reducing and Managing
Business Risks

Chapter 12
 Understand the nature of
risk
Accepting that risks exist is a
starting point for other actions
needed, but the most important is
to create the right climate for risk
management.
 Identify and Prioritize Risks

Identification of significant risks Risk surrounds and continues to

both within and outside the be with us. A former British prime
organization is crucial and allows minister once said: “To be alive at
to make informed decisions. all involves some risk”.
 Identify and Prioritize Risks

This allows for a more structured analysis and reduces the chances of
risk being overlooked. Some of the most common areas of risk
affecting business are shown in Table 12.1
Identify and Prioritize Risks
 Consider the Acceptable
level of risk
This involves assessing the
likelihood of risks becoming reality
and the effect they would have if
they did. Only when this is
understood can measures be taken
to minimize the incidence and
impact of such risks.
 Understand why Risks
become Reality
The five most significant types of risk catalyst are as
follows:

• Technology
• Organizational change
• Processes
• People
• External factors
 Apply a simple Risk
Management
A. Risk Assesment and Analysis
B. Risk Management and Control
-Avoidng and Mitigating Risks
-Create Positive Climate for Managing Risk
- Overcoming the Fear of Risk
C. Controlling and Monitoring Enterprise-Wide
Risk
 PRACTICAL CONSIDERATIONS IN MANAGING
AND REDUCING FINACIAL RISK
• Improving Profitability
 Variance Analysis
 Assessment of Market Entry and Exit Barriers
 Break-even Analysis
 Controlling costs
• Practical Techniques to improve
profitability
 Improving Profitability

Variance Analysis

Variance analysis is used to monitor and manage

the results of past decisions, asssess the current
situation and highlight solutions.
 Improving Profitability

Assessment of Market Entry and Exit Barriers

Entry barriersinclude the need to compete with

business that enjoy economies of scale, or established
differentiated products
 Improving Profitability

Break-even Analysis

The break-even point is when sales cover costs,

neither a profit nor a loss is made.
 Improving Profitability

Controlling costs
To control costs:
• Focus on the big items of expenditure
• Be cost aware
• Maintain a balance between costs and quality
• Use budgets for dynamic financial management
• Develop a positive attitude to budgeting
• Eliminate waste
 Practical Techniques to
improve profitability
Some pratical techniques to improve profitability:
• Focus decision-making on the most profitable areas.
• Decide how to treat the least profitable products.
• Make sure new products enhance overall profitability
• Manage development and production decisions
• Set the buying policy
• Consider how to create greater value from existing
customers and products to enhance rofitability
• Consider how to increase profitability by managing people
 Avoiding Pitfalls

• Financial expertise must be widely available

• Consider the impact of finacial decsions
• Avoid weak budgetary control
• Understand the impact of cash flow
• Know where the risk lies