So, what can bedone to preparefor, and manage risk?
Three key concepts• Risk management – The identification and acceptance or offsetting of the risks threatening a business• Contingency planning – A plan for unforeseen events, including back up procedures, emergency response and post- event recovery• Crisis management – The process of responding to and minimising the damage from an adverse event
What is risk in business?• The possibility of loss• A threat that may prevent or hinder the ability to achieve business objectives• The chance that a hoped-for outcome will not occur
Different ways to deal with risk• Ignore it (wait and see)• Reduce probability of risk• Reduce or limit the consequences• Share or deflect the risk (e.g. by insurance)• Make contingency plans - prepare for it• Adapt in order to maintain performance• Treat it as an opportunity- particularly if it affects other competitors
What is risk management?• Identifying what and how things can and might go wrong• Understanding the potential effects if things go wrong• Devising plans to cope with the threats• Putting in place strategies to deal with the risks either before or after their occurrence
Examples of risk managementArea Risk Management ActionMarketing Avoid over-reliance on customers or products Develop multiple distribution networks Test marketing for new productsOperations Hold spare capacity Quality assurance & controlFinance Credit insurance to protect against bad debts Investment appraisal techniquesPeople Key man insurance – protects against loss of key staff Rigorous recruitment & selection procedures
What are contingencies? Uncontrollable events that are notanticipated for in the business plan
Contingency planning• Businesses prepare contingency plans because things do go wrong from time to time• Contingency planning involves: – Preparing for predictable and quantifiable crises – Preparing for unexpected and unwelcome events• The aim is to minimise the impact of a foreseeable event and to plan for how the business will resume normal operations after the crisis
Drawing up a contingency plan• Recognise the need for contingency planning• Identify possible contingencies – All the possible adverse and crisis scenarios• Specify the likely consequences• Assess of the degree of risk to each eventuality• Determine risk strategy: – To prevent a crisis – To deal with a crisis should one occur• Prepare plan and identify responsibilities• Test the plan (crisis simulation)
The “what if” question• Scenario analysis – This involves constructing multiple but equally plausible views of the future – The scenario consists of a “story” from which managers can plan• Sensitivity analysis – Involves testing the effect of a plan on alternative values of key variables – e.g. the effect of a 25% loss of capacity
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