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sesn bus risk Political Risk by MikeJenny


sesn bus risk Political Risk

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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
   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
   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
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
             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
                  Sourcing                                Information processing/Technology risk                                           Opportunity cost
          Obscelescence/shrinkage                                          Access                                                           Concentration
                Compliance                                                Integrity
            Business interruption                                        Relevance                                                            Default
           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

                                                         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

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
       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
       Specific examples in each category are as follows:
            Operational: Pricing, contract commitment, and
            Financial: Budget and planning, accounting information,
             and taxation
            Strategic: Environmental scan, business portfolio, and
     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
   Motivations
                                   Technology.
             Activity: Risk Analysis
   Exporters need to consider:
       strategic risk (global environment)
            (
            (
            (
       process risk (organisation)
            (
            (
       tactical risk (management)
            (
   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
   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
       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
   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
      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
   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
   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

      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
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
Risk Strategies
   Retention        Captive (internal)
                      insurance and/or
                      bearing the risk (part of
                      risk financing).
                     External insurance via
   Transfer          premiums (part of risk
   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
   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
    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
   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
   Federal Emergency Management Agency
   http://www/
   Global Risk Management Network
   http://www.emap.coin/grmn/maini.htm
   Insurance and Risk Management Central
   http://www/
   Insurance Information Institute
   gopher :// :4200/11/
   Norma Nielson's Home Page
   http://www/
   Occupational Safety and Health Administration
   The Risk and Insurance Management Society
     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 be useful to your
    business in covering potential export losses?

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