Managing Risk and
At the end of the session, participants will be
define the concepts of risk and uncertainty;
describe the risk management process; and
analyse business risks to determine their
“Data from the U.S. Census Bureau reveal
that, aggregated across all sectors, 55%
of new ventures die within the first five
years. Of the remaining, 35% fail during
the next five”
Imagine for a minute this scenario. You have spent your entire
savings, gone into debt with some friends to open your dream
business – a small restaurant in a lucrative part of your city
when you notice the lease sign from another building close by
has been removed from the window. Hmmm.
It turns out that the building has been leased by KFC!
Do you cry or have you taken this kind of thing in mind when
you were planning your business?
Every business faces some risks and
It is good practice to take cognizance of and
make plans to deal with risks, i.e. businesses
should seek to formally manage risks.
Concept of Risk
An event that, if it occurs, causes either a
positive or negative impact on a business
A business risk is a future possibility that may
prevent you from achieving a business goal.
Keys attributes of Risk
Uncertainty – it could happen, or it might well not
Positive and Negative – positive risks are known as
Cause and Consequence
Risk vs Uncertainty
Risk involves uncertainty
The distinction between risk and uncertainty derives
from Frank Knight’s (1921) views, where he states
“To preserve the distinction . . . between the
measurable uncertainty and an unmeasurable one we
may use the term “risk” to designate the former and
the term “uncertainty” for the latter.” (p. 233)
Risk vs. Uncertainty
Risk can be regarded as randomness described by a
probability distribution and Uncertainty as
randomness that does not follow such a distribution.
Uncertainty may thus reflect difficulties of assessing
the probability of different events as well as difficulty
in describing the possible states of the world (as in
Donald Rumsfeld’s memorable phrase “unknown
Risk management is concerned with
identifying risks and drawing up plans to
minimise their effect.
The BusinessDictionary defines risk management as:
the identification, analysis, assessment, control, and
avoidance, minimization, or elimination of
Risk Management Process
Identify business, project and product risks
Assess the likelihood and consequences of these risks
Risk response planning
Draw up plans to avoid or minimize the effects of the risk
Monitor the risks
Types of Business Risks – Group
Identify a business
Identify 10 potential risk / uncertainty factors
that can adversely affect the business’s
Types of Business Risks
The risks facing a typical business are broad and include
things that you can control such as your strategy and things
beyond your control such as the global economy.
Competitive Risk - The risk that your competition will gain
advantages over you
Economic Risk - The possibility that conditions in the
economy will increase your costs or reduce your sales
Operational Risk - the potential of failures related to the day-
to-day operations of an organization such as a customer
Types of Business Risks…
Legal Risk - the chance that new regulations will disrupt your
business or that you will incur expenses and losses due to a
Compliance Risk - the chance that you will break laws or
Strategy Risk - risks associated with a particular strategy
Reputational Risk - the chance of losses due to a declining
reputation as a result of practices or incidents that are
perceived as dishonest, disrespectful or incompetent
Types of Business Risks…
Program / Project Risk – risks associated with a business
program or project
Innovation / Technology Risk - risk that applies to
innovative areas of your business such as product research
Country Risk - exposure to the conditions in the countries in
which you operate such as political events and the economy
Credit Risk - the risk that those who owe you money fail to
Types of Business Risks…
Exchange Rate Risk - the risk that volatility in foreign
exchange rates will impact the value of business transactions
Interest Rate Risk- the risk that changes to interest rates will
disrupt your business.
Taxation Risk - the potential for new tax laws or
interpretations to result in higher than expected taxation
Process Risk - the business risks associated with a particular
Types of Business Risks…
Resource Risk - the chance that you will fail to meet
business goals due to a lack of resources such as
financing or the labor of skilled workers
Political Risk - the potential for political events and
outcomes to impede your business.
Seasonal Risk - a business with revenue that's
concentrated in a single season such as a ski resort.
Assess probability, seriousness, and urgency of each
Probability may be very low, low, moderate, high or
Risk effects might be catastrophic, serious, tolerable
Urgency might be immediate, short term, or long
Risk analysis may be quantitative or qualitative
Analyzing Risk - Qualitative
High, Medium, Low
Red, Yellow, Green
Prioritized/Ranked list of ALL identified risks
First step in risk analysis!
Analysing Risk - Quantitative
Determines probability of occurrence and
consequences of risks
Should be focused to highest risks as determined by
Qualitative Risk Analysis and Risk Threshold
Risk analysis: criticality
In addition to assessing the probability of the risk
event, risk analysis also assesses the criticality or
impact of the risk on the business
Criticality can be categorized (e.g. insignificant,
tolerable, serious) and / or a score attached to it.
It may also be possible to estimate and compute
impact on the business in monetary terms e.g. in
terms of revenue or profit loss.
The probability score / value of each risk and the
criticality / impact score / value can be arranged in a
probability-criticality matrix and the scores / values
multiplied to determine the importance of each risk
on the business.
Probability and Impact Analysis /
Expected Value Analysis
The ‘biggest’ risk
isn’t always the
enables us to
important risks to
Risk Probability Impact Expected
1 25% $45,000 $11,250
2 50% $2,000 $1,000
3 30% $100,000 $30,000
“What are we going to do about it?”
Avoidance – Eliminate it
Transference – Pawn it off
Mitigation – Reduce probability or impact of it
Acceptance – Do nothing
Strategy should be commensurate with risk
Hint: Don’t spend more money preventing the risk than the impact of
the risk would be if it occurs
The Risk Response Plan/Risk Response Register
Risk Response Strategies
Avoidance – can we change something to avoid the risk.
Transference – Transfer the risk or responsibility of the risk to a third
party. Insurance, performance bonds, warranties, guarantees.
Mitigation – Usually involves increased costs/budget, but overall the
goal is to try and lessen the risk to an acceptable level.
Choosing a more established vendor (reduces the problem)
• Diversifying into other products (reduces impact)
Acceptance – Active – Good (contingency Planning…IF, THEN),
Passive – Bad (PUT OUT THE FIRES)
Assess each identified risk regularly to decide
whether or not it is becoming less or more probable.
Also assess whether the effects of the risk have
Each key risk should be discussed at management
Continuous, Iterative Process
Businesses, particularly new ventures and even
existing ones, all face risks and uncertainties
that may lead to failure
Risk management provides a framework for
businesses to constantly think about these
risks and uncertainties, with a view to
minimizing their impact on the business.
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