CHAPTER 12

Basic approach in reducing enterprise-wide risks

Understanding the nature of risk, Identifying and prioritizing risks, Considering the acceptable level of risk, Understanding why risks become reality, Applying a simple risk management process.

Difference in attitude to risk (European vs. Anglo-American)

While in continental Europe strategies focus on avoiding and hedging risk, Anglo-American companies view risk as an opportunity and accept risk management as necessary to achieving their goals.

Acceptable Level of Risk

This involves assessing the likelihood of risks becoming reality and the effect they would have if they did. Only when this is understood can measures be taken to minimize the incidence and impact of such risks.

Opportunity cost associated with risk

Avoiding a risk may mean avoiding a potentially big opportunity.

Five most significant types of risk catalyst

Technology, Organizational change, Processes, People, External factors.

Technology (Risk Catalyst)

New hardware, software or system configurations can trigger risks, as can new demands on existing information systems and technology.

Organizational change (Risk Catalyst)

Risks are triggered by, for example, new management structures or reporting lines, new strategies and commercial agreements (including mergers, agency or distribution agreements).

Processes (Risk Catalyst)

New products, markets and acquisitions all cause change and can trigger risks.

People (Risk Catalyst)

Hiring new employees, losing key people, poor succession planning, or weak people management can all create dislocation, but the main danger is behavior everything from laziness to fraud, exhaustion and simple human error can trigger this risk.

External factors (Risk Catalyst)

Changes to regulation and political, economic or social developments can all affect strategic decisions by bringing to the surface disruption.

Stages of managing the enterprise-wide risk

First, assess and analyze the risks resulting from a decision by systematically identifying and quantifying them. Second, consider how best to avoid or mitigate them. Third, in parallel with the second stage, take action to manage control and monitor the risks.

Non-trading risks

These can be thought of as the fixed costs of risk and might include property damage risks, legal and contractual liabilities and business interruption risks.

Financial Risk (Typical Areas of Organizational Risk)

Accounting decisions and practices, Treasury risks, Fraud, Robustness of information management systems, Inefficient cash management, Inadequate insurance.

Commercial Risk (Typical Areas of Organizational Risk)

Loss of key personnel and tacit knowledge, Failure to comply with legal regulations or codes of practice, Contract conditions, Poor brand management or handling of a crisis, Market changes.

Strategic Risk (Typical Areas of Organizational Risk)

Marketing, pricing and market entry decisions, Market changes affecting commercial decisions (due to customers and/or competitors), Political or regulatory developments, Resource-building and resource allocation decisions.

Technical Risk (Typical Areas of Organizational Risk)

Failure of plant or equipment, Accidental or negligent actions (such as fire, pollution, floods).

Operational Risk (Typical Areas of Organizational Risk)

Product or design failure, including failure to maintain supply, Client failure, Breakdown in labour relations, Corporate malpractice (such as sex discrimination), Political change.

Factors to consider when setting and reviewing strategy

Profitability, cash flow, long-term shareholder value and risk all need to be considered when setting and reviewing strategy.

Variance Analysis

Interpreting the differences between actual and planned performance is crucial. Variance analysis is used to monitor and manage the results of past decisions, assess the current situation and highlight solutions.

Entry barriers

Include the need to compete with businesses that enjoy economies of scale, or established differentiated products. Other barriers include capital requirements, access to distribution channels, factors independent of scale (such as technology or location) and regulatory requirements.

Break-even Analysis (cost-volume-profit or CVP analysis)

The break-even point is when sales cover costs, where neither a profit nor a loss is made. It is calculated by dividing the costs of the project by the gross profit at specific dates, making sure to allow for overhead costs.

Techniques for Controlling Costs

Focus on the big items of expenditure, Be cost aware, Maintain a balance between costs and quality, Use budgets for dynamic financial management, Develop a positive attitude to budgeting, Eliminate waste.

Practical Techniques to Improve Profitability

Focus decision-making on the most profitable areas, Decide how to treat the least profitable products, Make sure new products enhance overall profitability, Manage development and production decisions, Set the buying policy, Consider how to create greater value from existing customers and products, Consider how to increase profitability by managing people.

Principles to avoid flawed financial decision-making

Financial expertise must be widely available, Consider the impact of financial decisions, Avoid weak budgetary control, Understand the impact of cash flow, Know where the risk lies.