RISK MANAGEMENT

PROCESS LECTURE 4
BBA 3
•1.Risk Identification: The first step in risk management is to identify
potential risks that could affect the project. This involves brainstorming
with project stakeholders, reviewing project documentation, conducting
interviews, and using various techniques such as checklists, flowcharts,
and SWOT analysis. Risks can be categorized into different types such
as technical risks, organizational risks, external risks, and so on.
•2. Risk Assessment: Once risks are identified, they need to be
assessed in terms of their likelihood of occurring and their potential
impact on the project objectives. This can be done using qualitative
assessment techniques (e.g., probability-impact matrix, risk scoring)
and/or quantitative assessment techniques (e.g., Monte Carlo
simulation, decision trees). The goal is to prioritize risks based on their
significance to the project.
•3. Risk Analysis: Risk analysis involves further examining identified
risks to understand their root causes, potential consequences, and
potential responses. This may involve performing root cause analysis,
scenario analysis, sensitivity analysis, or other techniques to gain a
deeper understanding of the risks and their implications for the project.
•4. Risk Response Planning: Based on the assessment and analysis
of risks, appropriate risk response strategies are developed. These
strategies can include: Avoidance: Taking actions to eliminate the risk
or avoid its occurrence altogether. Mitigation: Implementing measures
to reduce the likelihood or impact of the risk. Transfer: Shifting the risk
to another party, such as through insurance or outsourcing.
Acceptance: Acknowledging the risk and deciding to live with its
potential consequences without taking any specific action.
•5.Risk Monitoring and Control: Throughout the project lifecycle,
risks need to be continuously monitored and managed. This involves
tracking the status of identified risks, assessing the effectiveness of
risk responses, and implementing any necessary adjustments to the
risk management plan. New risks may emerge, existing risks may
evolve, and the project context may change, requiring ongoing
vigilance and adaptation.
•6.Documentation and Communication: It's important to
document all aspects of risk management, including identified risks,
assessment results, response plans, and monitoring activities.
Regular communication with stakeholders about project risks is also
essential to ensure transparency, alignment, and informed decision-
making.
OBJECTIVES OF RISK
MANAGEMENT
 Prepare for potential losses in the most economical way
 Reduce anxiety
 Meet any legal obligations
 Survival of the firm
 Continue operating
 Stability of earnings
 Continued growth of the firm
PRINCIPLES OF RISK
MANAGEMENT
Proportionate /Aligned/ Complete/ Embedded / Dynamic ( PACED )

Proportionate Risk management activities must be proportionate

to the level of risk faced by the organization.
Aligned Risk management activities need to be aligned with the
other activities in the organization.
Comprehensive In order to be fully effective, the risk
management approach must be comprehensive.
Embedded Risk management activities need to be embedded
within the organization.
Dynamic Risk management activities must be dynamic and
responsive to emerging and changing risks.
METHODS OF RISK
IDENTIFICATION
1.Brainstorming: A technique used to generate ideas and identify
potential risks by encouraging open discussion and creative thinking.
Brainstorming is a technique developed by Alex Osborn.
2. The Delphi Technique: was developed by the RAND Corporation (an
acronym for Research And Development) in the 1960s and was created
as an interactive forecasting method that relies on a panel of
independent experts. Usually, all participants maintain anonymity. Their
identity is not revealed even after the completion of the final report.
3. Root Cause Analysis (RCA): A root cause analysis is an
investigation of previous project risks and how they relate to one
another and the current project. RCA is a reactive method of problem
detection and solving, initially. The analysis is performed after an event
has occurred. This allows practitioners to identify process ‘triggers’, so
that RCA becomes a pro-active method.
4.SWOT analysis: came from the research conducted by Albert S.
Humphrey at the Stanford Research Institute from 1960-1970. A
framework for assessing a project's strengths, weaknesses,
opportunities, and threats to identify potential risks and opportunities.
Strengths: Areas where the team excels and how they relate to
projects.
Weaknesses: Areas where the team can improve to increase
productivity and efficiency.
Opportunities: Areas where the team or business can improve or
expand.
Threats: Areas of risk for the project or business and how the team
can minimize those risks.
5. Requirements review: A requirements review is a review of a
project's labor, material or financial requirements, and allows the team to
analyze requirements often and identify potential risks quickly. The team
can complete a requirements review throughout the project timeline to
understand risks and requirements at each stage of production.
6. Stakeholder interviews: Stakeholders are the people who have an
interest in your project or business, and interviewing them may help you
better understand what they believe are the biggest risks. Stakeholders
often have invested significant resources, whether it be time, money,
labor or all three, into your business. They understand risk from an
outsider's perspective as an investor, not a laborer or leader. This
viewpoint can help you learn what concerns your investors and how to
address it.
IMPORTANCE OF RISK
TRANSFERENCE, AVOIDANCE,
REDUCTION AND
ACCEPTANCE
1.Risk Transference:
Transferring risk involves shifting the financial burden of potential
losses to another party, such as an insurance company or a
contractual partner. This can be crucial for protecting the
organization's financial health and mitigating the impact of adverse
events.
Benefits: By transferring risk, organizations can limit their
exposure to certain types of risks, especially those that are beyond
their control or expertise. Insurance policies, warranties,
indemnification clauses, and outsourcing agreements are common
mechanisms for transferring risk.
Considerations: While risk transfer can provide financial
protection, it's essential to carefully evaluate the terms, coverage
limits, exclusions, and costs associated with the transfer
mechanism. Additionally, some risks may be difficult or costly to
transfer, and organizations should have contingency plans in place
for risks that cannot be fully transferred.
2.Risk Avoidance:
Avoiding risk entails eliminating activities, decisions, or exposures
that could potentially lead to adverse outcomes. This approach is
essential for preventing catastrophic losses or reputational damage
that could jeopardize the organization's viability.
Benefits: By avoiding certain risks altogether, organizations can
preemptively mitigate the need for costly risk management efforts
and potential negative consequences. For example, avoiding high-
risk investment ventures or discontinuing products with significant
liability risks can protect the organization from future harm.
.
Considerations: While risk avoidance can be effective for
mitigating certain types of risks, it may also entail missed
opportunities for growth, innovation, or competitive advantage.
Organizations must carefully weigh the potential benefits and
drawbacks of risk avoidance and ensure it aligns with their
strategic objectives and risk appetite
3. Risk Reduction:
Risk reduction involves implementing measures to decrease the
likelihood or impact of identified risks to acceptable levels. This
proactive approach helps organizations manage risks more
effectively while still pursuing their strategic goals.
Benefits: By reducing risks, organizations can enhance operational
resilience, minimize potential losses, and improve their ability to
achieve desired outcomes. Risk reduction strategies may include
implementing internal controls, improving safety protocols,
diversifying investments, or enhancing cybersecurity measures.
Considerations: While risk reduction can strengthen the
organization's risk management capabilities, it may require upfront
investments of time, resources, and expertise. Organizations
should conduct cost-benefit analyses to evaluate the effectiveness
and efficiency of risk reduction measures and ensure they align
with the organization's risk tolerance and priorities
4. Risk Acceptance:
Risk acceptance involves acknowledging certain risks as
unavoidable or tolerable within the organization's risk appetite. This
pragmatic approach allows organizations to focus their resources
and attention on managing higher-priority risks while accepting
those with lower potential impact.
Benefits: By accepting certain risks, organizations can avoid
unnecessary expenditures on risk mitigation efforts that may not
provide commensurate benefits. Risk acceptance also fosters a
realistic understanding of the organization's risk exposure and
encourages disciplined decision-making.
Considerations: While risk acceptance can be a sensible strategy
for managing low-impact risks, organizations must ensure they
have appropriate risk monitoring and contingency plans in place.
Continuous monitoring and reassessment of accepted risks are
essential to identify emerging threats or changes in risk profiles
that may warrant reconsideration.
OUTLINE DIFFERENT
ATTITUDES TOWARDS RISK
Attitudes toward risk can vary significantly among individuals and
organizations, influencing how they perceive, approach, and manage
risks. Here's an outline of different attitudes toward risk:
1.Risk Aversion:
Description: Risk-averse individuals or organizations tend to prioritize
safety, security, and stability over potential gains. They have a low
tolerance for uncertainty and are inclined to avoid or minimize risks
whenever possible.
Characteristics: Risk-averse individuals may exhibit cautious decision-
making, reluctance to take on financial or personal risks, and a preference
for conservative investment strategies. They prioritize protecting assets
and avoiding losses rather than pursuing aggressive growth opportunities.
2. Risk Neutrality:
Description: Risk-neutral individuals or organizations are
indifferent to risk and make decisions solely based on expected
outcomes and probabilities. They neither seek nor avoid risk but
instead focus on maximizing expected utility or profitability.
Characteristics: Risk-neutral individuals may exhibit rational
decision-making behavior, weighing the potential benefits and
drawbacks of different options objectively. They are not swayed by
emotional reactions to risk and focus on optimizing outcomes
based on available information and analysis.
3. Risk Seeking:
Description: Risk-seeking individuals or organizations are inclined
to pursue opportunities with higher potential returns, even if they
involve greater uncertainty or volatility. They are motivated by the
prospect of rewards and are willing to accept higher levels of risk to
achieve their objectives.
Characteristics: Risk-seeking individuals may exhibit adventurous
or entrepreneurial behavior, seeking out novel experiences,
investments, or challenges. They are comfortable with uncertainty
and view risk as an opportunity for growth, innovation, or
excitement.
4. Risk Tolerance:
Description: Risk tolerance refers to an individual's or
organization's willingness and capacity to endure uncertainty and
potential losses in pursuit of their goals. It represents a balanced
approach to risk management that considers both risk appetite and
risk capacity.
Characteristics: Individuals or organizations with moderate risk
tolerance are neither overly conservative nor excessively
aggressive in their risk-taking behavior. They assess risks carefully,
considering the potential rewards and consequences, and strike a
balance between safeguarding assets and pursuing growth
opportunities.
5. Risk Awareness:
Description: Risk awareness refers to an individual's or
organization's ability to recognize, understand, and manage risks
effectively. It involves acknowledging the presence of risks,
assessing their potential impact, and implementing appropriate risk
management strategies.
Characteristics: Risk-aware individuals or organizations prioritize
proactive risk management, conducting thorough risk assessments,
developing mitigation plans, and maintaining vigilance against
emerging threats. They recognize that risk is inherent in all
endeavors and take steps to mitigate its impact while pursuing
their objectives.
NECESSITY OF INCURRING RISK
AS PART OF COMPETITIVELY
MANAGING A BUSINESS
ORGANIZATION
Incurring risk is often an inherent aspect of competitively managing a
business organization for several reasons:
1.Innovation and Growth: Taking risks can lead to innovation and
growth. Whether it's developing new products, entering new markets,
or adopting new technologies, calculated risks can open up
opportunities for expansion and differentiation from competitors.
2.Adaptation to Change: Markets are constantly evolving due to
technological advancements, shifts in consumer preferences, and
changes in regulations. Embracing risk allows businesses to adapt to
these changes more effectively, staying ahead of the competition.
3.Market Leadership: To establish or maintain a position of leadership in
the market, businesses often need to take risks that others are not willing
to. This could involve aggressive marketing strategies, investment in
research and development, or strategic mergers and acquisitions.
4.Competitive Advantage: Risk-taking can provide a competitive edge
by allowing a business to capitalize on opportunities that others may
overlook or avoid. This could include being the first mover in a new market
or industry, or being willing to invest heavily in disruptive technologies.
5.Financial Returns: Risk and return are typically correlated in business.
Higher-risk ventures often offer the potential for higher returns. By
strategically managing risks, businesses can optimize their risk-return
profile to maximize profitability and shareholder value.
6.Resilience: Paradoxically, taking calculated risks can enhance a
business's resilience. By diversifying operations, investing in
contingency plans, and embracing flexibility, businesses can better
weather unexpected challenges and disruptions.
7.Attracting Talent and Investment: Businesses that
demonstrate a willingness to take risks and pursue ambitious goals
are often more attractive to top talent and investors seeking high-
growth opportunities. This can help in recruiting skilled employees
and securing necessary funding for expansion.
HOW RISK VARIES IN RELATION
TO THE SIZE, STRUCTURE AND
DEVELOPMENT OF AN
ORGANIZATION
1. Size of the Organization:
Scale of Operations: Larger organizations typically have more
resources at their disposal, allowing them to spread risks across a wider
range of activities. However, their size can also make them slower to
adapt to changes or take advantage of opportunities.
Complexity: With size often comes complexity. Large organizations may
have diverse business units, geographic locations, and stakeholders,
leading to more intricate risk landscapes. Managing these complexities
requires robust risk management frameworks and systems.
Market Power: Larger organizations may have greater market power,
enabling them to influence market dynamics and mitigate certain types of
risks, such as supplier or customer-related risks, through negotiation or
vertical integration.
2. Structure of the Organization:
Centralization vs. Decentralization: The degree of centralization
or decentralization in decision-making can affect risk management.
Centralized decision-making may lead to more uniform risk
management practices but could result in slower responses to
localized risks. Decentralized decision-making may facilitate quicker
responses but could result in inconsistent risk management
approaches across different units.
Organizational Culture: The culture of an organization, including its
attitude toward risk-taking, transparency, and accountability,
influences how risks are perceived, managed, and communicated. A
risk-aware culture encourages proactive risk management behaviors
throughout the organization.
3. Development Stage of the Organization:
Startups and Early-stage Companies: These organizations often
operate in highly uncertain environments and face existential risks
related to market acceptance, funding availability, and scalability.
Risk management for startups involves prioritizing risks that could
jeopardize their survival and focusing on innovation and rapid
iteration to address market uncertainties.
Mature Companies: Established organizations have typically
developed more structured risk management processes and systems.
Their focus may shift toward managing operational risks, regulatory
compliance, and reputation risks. However, they still face risks
associated with technological disruptions, changing consumer
preferences, and competitive pressures.
Globalization and Expansion: As organizations expand globally,
they encounter a broader spectrum of risks, including currency
fluctuations, political instability, cultural differences, and regulatory
compliance in multiple jurisdictions. Managing these risks requires
a comprehensive understanding of local contexts and tailored risk
mitigation strategies.