Risk Management Strategies - Term Paper Example

Risk Management Strategies March 7, 2007 Contents Contents 2 Risk Management 3 Historic Role and Function 4 Current Strategic Decisions 5 Risk Management Future Trends 7 Conclusion 8 References 9 Risk Management Risk management behaviour is how the business perceives itself, as a small business; the behaviour may be that there is not a need for a risk management strategy, where a large multinational chain may have many risk management strategies in place through various departments. According to The Economist (2004) "managing risk is one of the things that bosses are paid for, "yet" most companies still don't have any idea what is required of risk management," stated The Economist (2004). The intensity and complexity of the current environment force small businesses to seek new ways of conducting business to generate more wealth than ever before (Stopford, 2001). As a result, more and more small companies are turning to a strategic approach as the way forward. Therefore, it is conclusive that risk planning has a very high significance in the risk management model, and, as secondary research shows, larger firms have more sustainability because they focus on risk planning and opportunity development. A firm's behavior in planning is also affected by the perception of its environment and size, as well as the nature of its activities, but not on the firm's performance. Although all small businesses have an amount of risk, being a new start-up restaurant and producing customer service goods adds further risk. This creates quite a bit more exposure to risks from mismanagement than in larger firms, where a major risk is that "some change will occur that will leave the enterprise beached high and dry," and "enterprises must expect to change drastically and repeatedly in response to changes in customers' wants and purchasing power, in competitors' products and prices, in available technologies, in law and in social expectations" (Goetz p 25 2001). The overall rationale to management is to answer the circumstances that develop risks. In business, the successful management strategy must be resilient in the face of failure, and develop sophisticated business plans because major chains have created competitor risk by raising the bar with strategic planning, which is a large part of their success according to Kep Sweeney (Garber p 88 2006). Sweeney further states that "The critical points in the deal making phase include identifying a new concept, forming a team, raising money and finding real estateYou can engineer out a tremendous amount of risk-and increase your chance of success-with proper planning." (Garber p 88 2006). Historic Role and Function Kerzner (p 876 1998) first identifies risk planning as "the process of developing and documenting an organized, comprehensive and interactive strategy and methods for identifying and analyzing risk issues, developing risk handling plans, and monitoring how risks have changed," to the small business owner, this means that a step by step analysis of proposed risks and their possible changes is an inherent part of risk management. Secondly, Kerzner (p 878 1998) describes risk assessment as "the process of identifying and analyzing program areas and critical technical process risks to increase the likelihood of meeting cost, performance and schedule objectives," this will assist the risk management model by answering to the critical processes that create risks and the businesses responses in those areas. The risk identification process is also shown by Kerzner (p 880 1998) as "process of examining the program areas and each critical technical process to identify and document the associated risk," in risk identification, the internal and external factors are described and levelled according to their significance to the program area. For example, while a flood may be a risk, that is minimal if the business currently has a leaking roof. Risk analysis "is the process of examining each identified risk issue to estimate the likelihood of a risk and predict the impact on the project," this is the point at which the restaurant defines the proposed impact of the risk, in the flood example, the possibility of flooding would be compared to the urgency of the leaking roof in an analysis to decide which has the greater and most imminent impact on the business (Kerzner p 880 1998). Finally, in the risk management strategy, Kerzner (p 889 1998) points out that continued monitoring, called risk monitoring, is "the process that systematically tracks and evaluates the performance of risk handling actions against established metrics throughout the acquisitions process and provides inputs to updating risk handling strategies, as appropriate." To the small business owner, this is the flexibility in strategy that allows it to be applied over the lifecycle of the business, with the future goal to continually minimize risks before they develop into crises. Current Strategic Decisions Webber (p 48 2006) identifies risk management as "the art of making decisions in the face of uncertainty," where an "analysis can help us understand the nature of that uncertainty and dimension of the risks we are taking, but they can also provide false comfort and engender undue confidence." Risk management strategies answer to the concerns of management by assessment and development of an applicable plan to overcome associated risks. This practice allows for proactive decision making to assess what can go wrong, their implications and impacts, and implement strategies to overcome risks. Systematic assessment and responses to risks is often used in management (Kerzner 2006). This allows for management and organizations to have a risk management process that encompasses the identification, mitigation, and continuous tracking procedures that prevail through the business life cycle. Furthermore, a risk management strategy "includes both the process and implementation approach for the project," which allows a step by step answer to the defined issue. This is "of primary importance for achieving effective risk management," yet it is "generally far easier to improve a deficient process than remedy a problematic project environment that is unsupportive or hostile towards risk management" (Kerzner p 720 2006). Therefore, risk management strategy must be developed and employed before the risk becomes a 'deficient process' or crisis in a 'problematic environment.' Risk management is important "when the overall stakes are high and/or a great deal of uncertainty existsIt forces us to focus on the future where uncertainty exists and develop suitable plans of action to prevent potential issues from becoming problems and adversely impacting the project. (Kerzner p 709 2006). It is important to validate the best practices in risk management in small business enterprise and how it impacts its success or failure. This currently assists business managers to know what the potential risks in the restaurant industry are, and to what degree the impact will be an opportunity or risk towards the business's needs. Risk management has many components, and even is risk management there are factors that should be avoided, as noted above. Overall, however, having a solid and comprehensive risk management strategy may not answer all of the concerns all of the time, but it certainly improves the businesses sustainability against negative forces. Risk Management Future Trends Enterprise risk management uses a comprehensive portfolio of risk management strategies in a holistic system. The main focus of ERM is to visualize risk as an opportunity to identify the characteristics of tolerance, mitigation and outcome tactics to take advantage of the risks that arise. In the study by Banham (2004), he identifies enterprise risk management (ERM) as being the future trend of risk management. Yet the specific definition of enterprise risk management remains elusive because each company, entity and business applies it in a different manner with variant results, where "Some organizations have turned to ERM to help control all corporate risks--hazard, operational, compliance, financial and strategic--on a consistent basis," to the manager, this overall process would be applicable to provide a full and comprehensive response to multiple risks, but other organizations count on ERM to " help better control a select number of risks," and still other organizations utilize ERM in a different manner, instead of mitigating risks, they "have turned to ERM to help pinpoint where they can afford to take on more risk that holds a reasonable promise of generating additional profit" (Lenckus p 15 2006). Furthermore, ERM is interpreted very differently amongst various business entities. The overall concept of ERM, however, is regardless of the manner in which ERM is actually deployed and integrated into the business cycle. ERM effectively takes all of the previous characteristics of risk management described by Dr. Kerzner as: risk planning; risk assessment; risk identification; risk analysis; risk handling; risk monitoring; and boldly creates one comprehensive system that entails all of these traits, but does not treat them as separate entities. Which is probably a large part of why there are disparate approaches to ERM, but the concept is built on a broader perspective and for many businesses, the proposal of knowledge management turning a risk into an opportunity is tempting. The question then becomes, exactly how doe ERM make a risk into an opportunity The answer is that while it encompasses the same characteristics of Kerzner's risk management, it does so with a focus on the relationships and qualities of the outcome-not simply the prevention of a crisis. Conclusion The analysis of risk management components suggests the need to prepare a plan and institute proactive measures to address potential risk throughout the life of the business. Understanding the core competencies of risk management strategies as continuous application throughout the business lifecycle to address problems as or, hopefully, before they occur. Enterprise risk management involves all of the characteristics Kerzner outlines in risk management strategy, but does so with the significance towards developing a risk into an opportunity instead of addressing it as a crisis. However, as provocative as ERM sounds, there is no definitive method, quality, or definition of the method. A firm's planning behavior is based on its characteristics, and firms that utilize risk planning are often more profitable than those that do not. References Banham, Russ (2004). Enterprising Views of Risk Management: Businesses Can Use ERM to Manage a Wide Variety of Risks. Journal of Accountancy. Volume 197 Issue 6 Garber, Amy (2006) Proper planning the main ingredient in creating a winning business. :Nation's Restaurant News; 6/13/2005, Vol. 39 Issue 24, p88-88, 1/2p, 1c Goetz, Billy E. (2001) Management of Risk in Small New Enterprises SAM Advanced Management Journal Vol. 38 Issue 1, p21, 7p Kerzner, H. (2006). Project management: A systems approach to planning, scheduling,and controlling (9th ed.). Hoboken, NJ: John Wiley & Sons, Inc Kerzner, Harold (1998). Project Management- A systems approach to planning, scheduling, and controlling. Sixth Edition, John Wiley & Sons, Inc. pp 876-890 Lenckus, Dave (2006) NO Two Approaches to ERM the Same. Business Insurance, 5/8/2006, Vol. 40 Issue 19 Stopford, J. (2001). Should strategy makers become dream weavers Harvard Business Review 79(1), 165-169 Webber, Susan (2006) Management's Great Addiction. Across the Board May/Jun2006, Vol. 43 Issue 3, p43-48, 6p Read More