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sesn bus risk Political Risk
Session Business Risk Session Outline Risk Types Risk Assessment Risk Process Strategic Risk Management Risk Context Management Methods This Session Weekly Activity:CRM Software Today many organisations use computers to help them better manage their client relationships. A basic CRM system consists of a database containing information about people with whom staff maintain relationships with. Download the Reflect free CRM software at www.nchsoftware.com/crm/index.html. Learn some of the fundamentals of CRM including customer information searching, time management, communication, sales forecasting, etc. Evaluate it’s usefulness as a CRM tool. Feasibility Study Structure 1. Business Overview 2. Country Analysis 3. Economic Analysis 4. Industry Analysis 5. Product/Service Offerings 6. Market Analysis 7. Competitor Analysis 8. Customer Analysis 9. Business Risk Analysis 10. Key Personnel requirements 11. Conclusions 12. Recommendations Feasibility Study - T.O.C. 1. Business Overview 1.1 Concept 1.2 Description 1.3 Motives 1.4 Goals & Objectives 1.5 Resources 2. Country Analysis 2.1 Overview 2.2 Social Institutions 2.3 Education System 2.4 Political Structure 2.5 Social Organisation 2.6 Legal System 2.7 Religion 2.8 Language 2.9 Other Factors Feasibility Study - T.O.C. 3. Economic Analysis 3.1 Demographics 3.2 Gross National Product 3.3 Transportation Network 3.4 Communication System 3.5 Balance of Payments 3.6 Trade Restrictions 4. Industry Analysis 4.1 Description 4.2 Conditions (current state) 4.3 Trends (growth areas) 4.4 Size 4.5 Dominant Operators 4.6 Future (opportunities/threats) Feasibility Study – T.O.C. 5. Product/Service Offerings 5.1 Description 5.2 Features 5.3 Main Applications 5.4 Life-cycle 5.5 Competitive Advantage 6. Market Analysis 6.1 Location 6.2 Demand Forecasts (size, customers, units) 6.3 Economic Considerations 6.4 Socio-cultural Considerations 6.5 Legal Considerations Feasibility Study – T.O.C. 7. Competitor Analysis 7.1 Direct Competitors 7.2 Market Share 7.3 Sales 7.4 Strengths/Weaknesses 8. Customer Analysis 8.1 Total Market Segments 8.2 Target Customer Groups 8.3 Group Profiles (characteristics) 8.4 Consumer Behaviour (needs & wants) Feasibility Study – T.O.C. 9. Business Risk Analysis 9.1 Risk Assessment 9.2 Risk Likelihood 10. Personnel Analysis 10.1 Key Positions 10.2 Roles & Responsibilities 10.3 Skill requirements 10.4 Skill Gaps 11. Conclusions 12. Recommendations Business Risk Analysis 9. Business Risk Analysis 9.1 Risk Assessment 9.2 Risk Likelihood Business Risk Analysis Business Risk Analysis Business risk is the threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully. This involves analysing the organisation and it’s various components as well the different environments including their specific elements to determine likely impacts to the organisation. Business Risk Analysis Risk Assessment List the possible losses you could experience in operating as an international business? Explain the basis for your reasoning and how it will affect your business Business Risk Analysis Risk Likelihood Rate the probability of each listed loss occurring. For example, rate something certain of occurring as 1, anything less than certain as between 0 and 1, and something that you consider as certainly not occurring as 0. Review the list you have made above and decide whether or not the risks are acceptable enough to allow you to proceed. Business Risk Analysis Components Elements Risk Management Risk management may be defined as a field of activity seeking to eliminate, reduce and generally control pure risks (such as from safety, fire, major hazards, security lapses, environmental hazards) and to enhance the benefits and avoid detriment from speculative risks (such as financial investment, marketing, human resources, IT strategy, commercial and business risks). Risk Types Pure Speculative Security/fraud Investment/finance Fire Product development Environment Business strategies Health & safety Marketing Quality assurance Political risk IT reliability Socio-cultural risk Business interruption Business process Earthquake Re-engineering Flood. IT strategy. Risk Management Scope The scope of risk management is extensive. One way of looking at risk management scope is to consider four key areas: 1. Risk types - hazards or threats i.e. the objects of risk management; 2. Risk contexts; 3. Risk management objectives; 4. Risk management process. Hazards and Threats Hazards or threats may be physical entities, conditions, substances, activities or behaviours which are capable of causing harm. Hazards and threats to an organization come in many forms. An organization may be damaged by cumulative effects of many small incidents or by a spectacular but rare major incident. Resulting damage could be to the health and safety of employees, to plant, equipment or an entire installation, to the environment, to products, or to financial assets. Damage to intangible factors such as credibility, status and bargaining power may also result. Risk Contexts The context(s) in which risks are perceived to exist in and to which risk management responds set the scene for identifying and understanding relevant hazards and threats and analysing the corresponding risks. The way to look at this is: at an organisational level (operational) and at an environmental level (strategic) considering the internal and external aspects that would be affected. Risk Contexts Business Risk Business risk is the threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully. Managers take business risks in their attempt to convert resources into goods and services their customers demand (i.e., integrating the value chain while attempting to control/mitigate the uncertainties created by a complex set of stakeholder relationships and process interactions). The Business Risk Model The Business Risk Model is a practical framework developed by the Economist Intelligence Unit to help organizations prioritize and collect the appropriate information needed to manage their own unique exposures to risk and uncertainty. Its three main risk categories are the following: Environmental risk Process risk Information for decision-making risk The Business Risk Model (Cont’d) Business Risk ModelTM Environmental Risk Competitor Sensitivity Shareholder relations Capital availability Catastrophic loss Sovereign/poli tical Legal Regulatory Industry Financial markets Process Risk Operations risk Empowerment risk Financial risk Customer satisfaction Leadership Interest rate Price Human resources Authority/limit Currency Product development Outsourcing Equity Efficiency Performance incentives Commodity Capacity Change readiness Financial instrument Performance gap Communications Cycle time Cash flow Liquidity Sourcing Information processing/Technology risk Opportunity cost Obscelescence/shrinkage Access Concentration Compliance Integrity Business interruption Relevance Default Credit Product/service failure Availability Concentration Environmental Infrastructure Settlement Health and safety Collateral Trademark/brand name erosion Integrity risk Management fraud Employee fraud Illegal acts Unauthorized use Reputation Information for Decision-making Risk Operational Financial Strategic Pricing Budget and planning Environmental scan Contract commitment Accounting information Business portfolio Performance measurement Financial reporting evaluation Valuation Alignment Taxation Performance measurement Regulatory reporting Pension fund Organization structure Investment evaluation Resource allocation Regulatory reporting Planning Life-cycle Source: The Economist Intelligence Unit Limited 1998 Environment Risk Environment risk is the risk of external forces affecting a company’s ability to achieve its objectives or threatening its existence. Examples include competition; catastrophic loss; legal, regulatory or shareholder relationships; capital availability, etc. Process Risk Process risk is the risk that the processes within a company do not perform efficiently or effectively in meeting business objectives or do not protect the physical, financial, intellectual, or information assets they use or consume. The five subsets of process risk are as follows: Operations Risk Empowerment Risk Information Processing/Technology Risk Integrity Risk Financial Risk Operating Risk Operating risk is an unexpected flaw in the value chain that prevents it from functioning as planned. Examples include customer satisfaction, human resources, product development, efficiency, etc. Empowerment Risk Empowerment risk is the risk that company personnel will have insufficient authority, responsibility, training, or incentive to execute the value chain process. This type of risk affects the value chain process by affecting human productivity. Examples include leadership, authority, outsourcing, performance incentives, etc. Information Technology Risk Information processing or technology risk is the risk that a company will not completely, accurately, and promptly capture, process, and record all the data needed to monitor its economic transactions and related performance. Examples include access, integrity, relevance, availability, and infrastructure. Integrity Risk Integrity risk is the risk that employee or manager fraud, illegal acts, or a breakdown of the value chain will negatively affect the company’s performance or its reputation. Examples include management fraud, employee fraud, illegal acts, unauthorized use, and reputation. Financial Risks Financial risks are the uncertainties businesses face in managing commodity price changes, cash flows, collection of receivables, and repayment of debts. Examples include price (interest rate, currency equity commodity, financial instrument), liquidity (cash flow, opportunity cost, concentration), and credit risk (default, settlement, collateral). Information Risk Information for decision-making risk is the risk that information used to support strategic, operational, and financial decisions is not relevant or reliable or could be misused. Specific examples in each category are as follows: Operational: Pricing, contract commitment, and alignment Financial: Budget and planning, accounting information, and taxation Strategic: Environmental scan, business portfolio, and valuation Assessing Business Risk Although techniques vary, most risk assessment programs accomplish three tasks: Identification of the risks that might affect the success of the firm’s business strategy Determination of why, how, and where the risks originate (outside the firm or within the business processes) Measurement of the severity, likelihood, and financial impact of the risk. Risk Contexts Inner context (specific Outer context internal environment – (general & industry system, inputs and environment) transformation) Economies and Organisational structures markets. Resources Public policy, regulation Culture and standards Power relations Social, historical and Risk perceptions political climate Strategy Physical conditions and climate. Motivations Technology. Activity: Risk Analysis Exporters need to consider: strategic risk (global environment) (www.ita.doc.gov) (www.eiu.com) (www.riskcenter.com) process risk (organisation) (www.efic.gov.au) (www.stopfakes.gov) tactical risk (management) (www.hg.org/guides.html) Given your selected export product, to be competitive, develop strategies to manage the identified risks. Risk Management Objectives Risk management helps to improve bottom line revenue by cost reduction (loss prevention, reducing insurance costs etc.) and improving the likelihood of overall business success. The objectives of risk management are to: eliminate, reduce and control pure risks; gain added value or benefit from speculative risks. Because pure and speculative risks often interact, they need to be considered together. For example, an organization's financial, investment and business risks are likely to be adversely affected by uncontrolled security risks or IT risks. Process Identification Unless a loss exposure is recognised it cannot be managed. Loss exposure is described as a possible future loss rather than a loss that has already happened. How to find them - to be able to identify possible future loss, the organisation needs to undertake a Situation Analysis: Strengths Weaknesses Opportunities Problems Threats Influences. Risk Management Process The risk management process begins by identifying hazards or threats and analysing them in terms of potential consequences, i.e. risk profiling. On the basis of the information and understanding gained, a risk assessment is then carried out with the following main steps: risk estimation (Measuring the risk); risk evaluation (How big in a scale of risks?); risk decisions (Is the risk acceptable against specified criteria?), risk action/strategy (What combination of strategies should be selected?). Risk strategy relates to a particular approach, or combination of approaches, to one or more risks. 3 Risk Management Rules Three rules of risk management (Mehr and Hedges) The first (and most important) of the three rules is "Don't risk more than you can afford to lose." Although it does not necessarily tell us what should be done about a given risk, it does tell us which risks about which something must be done; those with the potential for catastrophe losses. Since these losses should not be retained, the first rule suggests that such risks should be avoided, reduced, or transferred. 3 Risk Management Rules The second rule, consider the odds, suggests that risks characterized by a high frequency (high probability) should probably not be insured, mainly because of the high cost of transferring risks with a high loss frequency. Finally, the third rule, don't risk a lot for a little, dictates that there should be a reasonable relationship between the cost of transferring risk and the value that accrues to the transferor. It provides the guidance in two directions. 3 Risk Management Rules First, risks should not be retained when the possible loss is large (a lot) relative to the premiums saved through retention (a little). On the other hand, there are instances in which the premium that is required to insure a risk is so high relative to the risk transferred. In these cases, the premiums (inc. excesses represent "a lot" while the possible loss is "a little.” When the exposure represents “more than you can afford to lose”, a loss minimization strategy is appropriate. When the loss is not more than one can afford, maybe “consider the odds” and “don’t risk a lot for a little” strategies a better option. Risk Management Implications Cost Justification In treating the risk, the actions taken should aim to eliminate or minimise the identified risk exposure. The implication lies in the selection of the “preferred option” response measure or treatment action from a number of possible risk treatment options in order to maximise the reduction of risk likelihood (frequency) and impact to minimum acceptable levels. Is the cost of correcting or treating a potential risk justified when weighed against the various factors? Strategic Risk Management It is an overall approach to risks, both pure & speculative, which involve significant hazards or threats to an organisation and addresses the interactions between pure and speculative risks. Strategic risks, both pure as well as speculative may be seen as those which, if occurs, could seriously threaten an organisation’s business or its viability. It is important to recognise here that pure and speculative risks interact. For example, poor security may damage investments and assets; under-resourced projects may increase all the pure risks. A major fire or explosion at an industrial installation may interrupt business and deter investors as well as lose a major asset. Strategic Risk Management Strategic risk management includes at least three meanings of 'strategic': 1. strategic risks - i.e. those which endanger the organisation's corporate or business strategy, including survival; 2. a strategic (i.e. overview) approach to risk and its management; 3. risk management activity at a high or corporate level in an organisation. One approach to undertaking a strategic approach to risk management is to select the most appropriate combination of options. Risk Management Decisions There are several ways that risk management decisions should be made. The two major risk management techniques include, risk control which focuses on minimising the risk of loss to which an organisation is exposed and risk financing which concentrates on arranging the availability of funds to meet the losses that do occur. Risk Control Avoidance Reduction (Mitigation) Risk Financing Retention (Acceptance) Transfer. Managing Business Risk Risk management strategies generally fall into one of four broad categories: Avoidance: The conscious choice not to proceed with the activity that creates the risk. Transference: Reducing exposure to a risk by transferring it to third parties (e.g., insurance, hedging with financial instruments, outsourcing, etc.) Mitigation: Reducing the likelihood or economic consequence of risk by controlling the processes that cause it (i.e., geographic dispersion of assets reduces the impact of the occurrence of a single risk event on a company) Acceptance: Accepting a risk because the potential rewards exceed the consequences of the risks when they are properly controlled Risk Strategies Avoidance Withdraw; do not enter market; cease activity. Deferment Wait and see; defer decisions and actions. Reduction Improve prevention and control measures; target risks and apply remedial programs to reduce risks to as low as reasonably practicable. Risk Strategies Retention Captive (internal) insurance and/or bearing the risk (part of risk financing). External insurance via Transfer premiums (part of risk financing). Sharing Joint ventures with other organizations. Limitation Limit scale or scope of presence or activities. Mitigation Damage limitation. Risk Analysis The SIMULATE approach looks at the decision- making process within an organisation and focuses those areas requiring attention. The various environmental elements that interface with the different components of the organisation can only be analysed through the various structures and processes within the organisation. SIMULATE Approach S - Structure the problem or decision situation I - Identify and Investigate the key elements of the problem, the potential uncertainties and risks M - Measure and assess the risks and uncertainties U - Understand the mechanics and interrelationships within the problem, why the problem occurred, what causes it and the future implications if not corrected L - Learn from the processes employed in analysing the problem and developing alternative solutions A - Analyse and evaluate the problem, the potential solutions and their possible outcomes in terms of risk T - Take the decision E - Experience. Build and develop the experience and expertise of the organization and its decision-makers on the basis of the decision process and the decisions taken. KISSAF Model KISSAF model - Keep It Simple, Strategic And Focused. This model should follow the following guidelines: Simple A balanced view in terms of complexity, details and scope. Strategic Take a strategic perspective but also consider the tactical and operational factors within their own contextual environmental framework. Focused Keep the focused attention to the key issues. Organisational Risk The most risky aspects of an organisation often lie within its culture (behaviour, power, motivation, etc). Despite all the efforts to produce fully harmonized, culture-sensitive 'learning organizations' (e.g. through TQM, business process re-engineering and culture change programmes), there often remains a significant gap between recognising risk issues and implementing changes. Such a gap is maintained by power and cultural factors which usually go unnoticed within the organisation. Risk Assessment Risk assessment is the general term used to describe the process of gauging the most likely outcome(s) of a set of events, situations or options and the significant consequences of those outcomes. Risk assessment is inherent in our human existence. Learning, perception, motivation and attitude interplay with decision-making and prioritising actions across the spectrum of individual interests, needs and concerns. Risk Assessment At an individual level, informal risk assessments are a more-or-less continuous learning process, whether crossing the road, purchasing goods, engaging in social interaction, gauging job prospects or whatever. At a formal level, risk assessment adopts an analytical approach to uncertainty and uses a rational methodology process. Risk Assessment The aim of (formal) risk assessment is to provide information on which decisions may be made about proposed actions, the adequacy of risk controls and what improvements might be required. Typically, such risk assessments focus on so- called credible event or situation 'scenarios' - i.e. those deemed by risk 'experts' to be credible and significant. Risk Websites ARIAWeb http://www.risknet.com/aria.htm Federal Emergency Management Agency http://www/fema.gov/homepage.html Global Risk Management Network http://www.emap.coin/grmn/maini.htm Insurance and Risk Management Central http://www/irmcentral.com/risk.html Insurance Information Institute gopher ://infx.infor.com :4200/11/ Norma Nielson's Home Page http://www/bus.orst.edu/faculty/nielson/home.htm Occupational Safety and Health Administration http://www.osha.gov/] The Risk and Insurance Management Society http://www.gxnet.com/rims/ Next Session Weekly Activity: Financial Risks In assessing the financial risks including potential price changes, cash flow restrictions, receivables collections and debt repayments as well as unreliable or irrelevant financial information being used to make budgeting, planning, accounts and taxation decisions, determine what necessary insurances considered as appropriate risk management decisions should be taken out by the business to cover for these potential losses. How might www.efic.gov.au be useful to your business in covering potential export losses?
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