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Managing Risk and Uncertainty in Business.pptx

  1. 1. Managing Risk and Uncertainty in Business T. OSANYINTUYI
  2. 2. Learning Objectives At the end of the session, participants will be able to: define the concepts of risk and uncertainty; describe the risk management process; and analyse business risks to determine their importance
  3. 3. Introduction “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”  https://blog.kstart.in/how-smart-entrepreneurs-manage-risk-and- uncertainty-249aac6d5d01
  4. 4. Introduction  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?
  5. 5. Introduction  Every business faces some risks and uncertainties  It is good practice to take cognizance of and make plans to deal with risks, i.e. businesses should seek to formally manage risks.
  6. 6. 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 too  Positive and Negative – positive risks are known as opportunities  Cause and Consequence
  7. 7. Risk vs Uncertainty  Risk involves uncertainty  The distinction between risk and uncertainty derives from Frank Knight’s (1921) views, where he states thus:  “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)
  8. 8. 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 unknowns”)
  9. 9. Risk Management Risk management is concerned with identifying risks and drawing up plans to minimise their effect.
  10. 10.  The BusinessDictionary defines risk management as: the identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks.
  11. 11. Risk Management Process  Risk identification  Identify business, project and product risks  Risk analysis  Assess the likelihood and consequences of these risks  Risk response planning  Draw up plans to avoid or minimize the effects of the risk  Risk monitoring  Monitor the risks
  12. 12. Types of Business Risks – Group Activity  Identify a business  Identify 10 potential risk / uncertainty factors that can adversely affect the business’s profitability
  13. 13. 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 service process
  14. 14. 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 legal dispute.  Compliance Risk - the chance that you will break laws or regulations  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
  15. 15. 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 pay
  16. 16. Types of Business Risks…  Exchange Rate Risk - the risk that volatility in foreign exchange rates will impact the value of business transactions and assets.  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 process.
  17. 17. 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.
  18. 18. Risk Analysis  Assess probability, seriousness, and urgency of each risk.  Probability may be very low, low, moderate, high or very high.  Risk effects might be catastrophic, serious, tolerable or insignificant.  Urgency might be immediate, short term, or long term.  Risk analysis may be quantitative or qualitative
  19. 19. Analyzing Risk - Qualitative  Subjective  Educated Guess  High, Medium, Low  Red, Yellow, Green  1-10  Prioritized/Ranked list of ALL identified risks  First step in risk analysis!
  20. 20. Analysing Risk - Quantitative  Numerical/Statistical Analysis  Determines probability of occurrence and consequences of risks  Should be focused to highest risks as determined by Qualitative Risk Analysis and Risk Threshold
  21. 21. 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.
  22. 22. Risk analysis  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.
  23. 23. Risk Probability-Criticality Matrix Risk score High 5 10 15 20 25 4 8 12 16 20 3 6 9 12 15 Low 2 4 6 8 10 1 2 3 4 5 Low High Criticality score
  24. 24. Probability and Impact Analysis / Expected Value Analysis  The ‘biggest’ risk isn’t always the biggest risk  Risk analysis enables us to identify the important risks to plan for Risk Probability Impact Expected Value 1 25% $45,000 $11,250 2 50% $2,000 $1,000 3 30% $100,000 $30,000
  25. 25. Risk Response  “What are we going to do about it?”  Techniques/Strategies:  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
  26. 26. 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.  Examples:  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)
  27. 27. Risk Monitoring  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 changed.  Each key risk should be discussed at management progress meetings.  Continuous, Iterative Process
  28. 28. Conclusion  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.
  29. 29. Thank you for participating

Hinweis der Redaktion

  • (http://www.businessdictionary.com/definition/risk-management.html)
  • Knight, Frank H. 1921. Risk, Uncertainty, and Profit. New York: Hart, Schaffner, and Marx