This chapter discusses three levels of risk in operations strategy: 1) aligning resources with requirements to avoid external and internal operational risk, 2) developing sustainable competitive advantages to manage speculative operations-related risk over time, and 3) accounting for uncertainty and increasing complexity. It examines how context influences the causes and consequences of operational incidents at different levels from specific processes to generic stakeholders. Risk management strategies include mitigation, recovery, and prevention to control coupling and potential crises depending on the degree of tight or loose operations. Uncertainty is represented through models of risk-return, uncertainty cones, and how assets/capabilities modify exposure.

1. Level 1 - Fit This chapter examines the third level of the operations strategy process – risk Level 2 - Sustainability Level 3 - Risk Align resources with requirements Develop sustainable competitive advantage Include impact of uncertainty Increasing complexity

2. Level of market requirements Level of operations resource capability Real fit over time (‘requirements evolve and capabilities evolve’) Line of fit A B External operational risk (Market needs exceeding current level of capability means risk of failing to satisfy the market) Internal operational risk (excess capability for current market needs means risk of unexploited capabilities)

3. Level of market requirements Level of operations resource capability Pure operations risk Line of fit A y1 x1 B y2 x2

4. Level of market requirements Level of operations resource capability Speculative operations-related risk Line of fit D y4 x3 C y5 y3 x5 x4 E F

5. CAUSATIVE EVENT(S) NEGATIVE CONSEQUENCE Risk and the operations transformation model

6. Level of market requirements Level of operations resource capability Speculative operations-related risk at Monsanto (1985-1998) Line of fit H y8 I G y7 y6 x6 x7 1985 1998

7. 20 25 30 35 40 45 50 55 60 0 Line A Line B Age and risk-taking profile 5.00 4.00 3.00 Increasingly risk averse Age

8. Level of market requirements Level of operations resource capability Subjective operations failure Line of fit L K y10 x8 J y9 x9 x10

9. CAUSATIVE EVENT(S) (corroded storage tank leaks) NEGATIVE CONSEQUENCE The influence of context on causative events and negative consequences (?) OPERATING CONTEXT

10. Specific operations process concerns Specific event Specific stakeholder concerns Generic stakeholder concerns 1. The direct (physical and temporal proximity etc.) negative consequences of an operational incident. The negative consequences for the entire operations process. Might be separated from specific incident by space and time. 2. 3. The negative consequences for immediate stakeholders (i.e. staff, managers, customers, neighbours). Prone to greater subjective interpretation. The negative consequences for all possible stakeholders. This might include generic groups such as ‘concerned citizens’, politicians and media. 4. Layers on context for understanding negative consequences

11. Causative event(s) Negative consequences Three risk control strategies Mitigation Recovery Prevention

12. [4] [2] [5] [3] [6] Minor Major Loose Tight Degree of coupling in the operation Causal event (failure) Potential crisis Probable control through mitigation Coupling, mitigation and recovery [1]

13. A X B Y Very undesirable: low pay-off and high risk Very desirable: high pay-off and low risk Spread of pay-offs for decision The risk-return diagram

14. HIGH LOW 2 years Today Time Value of firm Probability High Low mean Uncertainty cone and outcome distribution Based on Amram and Kulatilaka, 1999)

15. Operational assets and capabilities Cone of external uncertainty Cone of uncertainty for investment Assets and capabilities modifying exposure to uncertainty