Strategic Risk Decision-Making - Literature review Example

Strategic Risk Decision-making [Name] [Professor Name] [Course] [Date] Introduction Mason (2007) defines an external environment as the pertinent physical and social aspects that are outside an organisation’s typical boundaries, which however affect the management’s decision-making. According to Mason (2007) an external environment is divisible into two key categories. These include the domain and the task environment that directly impact an organisation’s operations and outcomes, as well as the outside environment that has indirect yet long-term impacts. In particular, the task environment comprises the competitors, suppliers, and the industry regulators, while the domain environment consists of technological, social-cultural, political and legal sectors. The task environment tends to be organisation-specific, where each organisation has to operate within its specific task environment (Fatemi & Luft 2002). Researchers such as Zhang et al (2011) have defined modern-day external environment as too complex and chaotic, and the behaviour of individuals as too unpredictable. However, it is not true that strategic managers have little claim to the outcome of a crisis. This is since the environmental issues are usually ambiguous and therefore call for diagnosis, perception and critically guided by strategy and sound decision-making. However, these perceived environmental uncertainly happen when strategic managers view unpredictability of the organisation’s external environment. It is this difference between derived information and available information on external environment that makes the difference between management of external risks (Mason 2007). Based on this background, it is critical to argue that strategic managers have significant claim to the outcome of a crisis when they use strategies such as corporate risk assessment, horizon scanning, business continuity programs, and effective communication. Indeed, strategic managers can deal with any crisis to successfully claim organisational success amide the external risks. Corporate risk assessment Management of external risks is a primary task for strategic managers. The business environment consists of a combination of relationships between the stakeholders or agents in the environment-relationships affected by organisational decisions (Culp 2002). Strategic managers are trained for environmental certainty and hence are able to handle intense uncertainty, complexity, and turbulence through effective communication. They create the set of condition through which the systems, teams, and individuals are able to communicate and respond effectively to the changing external environment (Institute of Management Accountants 2006). Strategic managers who effectively use corporate risk assessment to identify and monitor the risks and to recommend appropriate mitigation strategies have a greater potential of management external risks. This perspective is supported by Nocco (2006). Environmental risks, as Nocco (2006) stated, are always likely. Risks, according to Epstein and Buhovac (2006), refer to the volatility of unforeseen outcomes that influence an organisation’s assets and liabilities. While the aspects of volatility have to be management, the perspective of risk manager has to be considered once the risk management process is perceived. The process of corporate risk assessment enables strategic manager to assess the external environment of your organization or company against things can go wrong. The process identifies the risks that can disable an organisation from meeting its objectives and strategies (Culp 2002). The strategy is effective for modern organisations that consistently face competitions and events that are likely to give rise to significant risk. Under such circumstances, corporate risk management can enable the strategic managers to continuously seek ways to reinvent their business models so as to maintain competitive growth as well as to create value to the stakeholders. Corporate risk assessment is therefore vital for modern-day organisations, where business profit and shareholder value is prioritised. As Fatemi and Luft (2002) argued, the modern day organisations are anchored in three key aspects: no-arbitrage principle, risk/return trade-off and wealth maximisation. Fatemi and Luft (2002) further argued that risk management is perceivable through these three aspects as well as their extensions to investment, corporate finance and financial intermediation. The shareholder maximisation value theorises that an organisation will manage external risks in order to increase its value as well as that of the organisation. Value enhancement on the other hand theorises that costs of financial distress have to be minimised, the taxes also have to be minimised while the likelihood of lacking the capacity to generate funds internally have also to be minimised ((IMA 2006). As an alternative, the managerial risk aversion argument is supported by the agency argument, which posits that managers have to maximise their personal wealth rather than that of the shareholders. Hence, despite of whether the managerial risk aversion or shareholder value maximisation is used, corporate risk assessment strategies are critical. Towards this end, theories that govern the risk-return relationship foretell whether a reward would be limited to certain types of risks rather than others (Fatemi and Luft 2002). As Culp (2002) stated, while an organisation has to constantly make profits and to increase stakeholder value by engaging in activities that expose the businesses to risks, failure to identify and manage the major risks that face the business model of the organisation, which may however result to stakeholder values, may led to failure to overcome external risks. The process provides an opportunity for management of the external risks. A critical process in corporate risk management is risk identification strategies. The focus is on identifying the events that may produce risks that may prevent the accomplishment of certain objectives of strategies. In risk identification process, the strategic managers should understand that it is identifying the external risks that face an organisation can lead to risk mitigation (Culp 2002). Among the techniques for risk identification include PESTEL analysis, brainstorming, facilitated workshops, risk questionnaires ad event inventories. After the risks are identified, they are assessed relative to their probability of affecting organisational operation, or likelihood of occurrence. The risks should then be ranked in terms of low, moderate, and high risks. Horizon scanning The modern-day organisations today face unparalleled challenges when it comes to maintaining their success and survival. Because of the dynamic changes that happen in today's emergent business practice and marketplace. The managers can actively detect the environmental signals and which spontaneously grasp opportunities or mitigate strengths, which lead to organizational success (Bengston 2013). The managers can ensure this through horizontal scanning, which links the actions and perceptions that allow an organisation to adapt to the external environment. Indeed, environmental scanning is a vital strategic management tool for enabling organisations to adapt to environmental uncertainties. Horizon scanning, also known as environmental scanning, entails investigating and interpreting early signs of change within the external environment of an organisation. The process can serve as an early warning instrument for identifying the likely threats and opportunities that enable the strategic managers to make effective plans, make timely decisions and promote a culture of foresight across the organisation. According to Zhang et al (2011), horizon scanning can meet the high-level strategic foresight needed within the modern-day era of increased dynamic and complex changes to enable the strategic managers or decision-makers to create and maintain wide and external-environment focused foresight needed. According to Bengston (2013), environmental scanning is the process of obtaining information regarding the events and relationships within an organisation's outside environment, the information of which would help the management of an organisation in its effort of finding an organisation's future course of action. Hence, the strategic managers can perform environmental scanning of the organisation to acquire a strategic understanding of the external influences to enable them to develop effective responses that can secure them in case of future external risks. Studies have indeed established that environmental scanning lead directly to more efficient organisational performance, since the performance is dependent on external environment factors. According to Zhang et al (2011), efficient tailoring of the scanning to the purposes of strategy offers information critical for incremental environment-strategy fit. Zhang et al (2011) defines horizon scanning as the process of acquiring and using information regarding trends, events and relationships within the external environment of an organisation as well as the knowledge that would assist the management to plan the future courses of action for the organisation. In using this technique, the goal of the strategic managers is to establish the nascent signs of significant future development to allow them to plan for that reason. Example of horizon scanning system that the strategic managers can use includes three basic elements: scanning, analysis and interaction, which was proposed by Gordon and Glenn (2009). The components consists of the team’s effort that investigates the diverse sources of information to make out the potential signs of change and the emergent trends referred as the scanning hits. The analysis component and the synthesis components then follow for determining the likely consequences of each scanning hits and determining the implications of the big picture. The information on raw scanning hits is afterwards entered into an interactive database for managers and other decision-makers in the organisation to access. Lastly, the organisation’s management interacts with the information and offers feedback to use the relevant information that can curtail external risks (Bengston 2013). Business continuity programme Due to the dynamic changes that happen in today's emergent business practice and marketplace, strategic managers can use business continuity programmes to effectively manage the external risks. Business continuity programme, also known as business continuity, is the process of identifying an organisation's external or internal risks and synthesising the organisational resources to provide efficient mitigation and recovery process for the organisation while sustaining the organisation's competitive advantage and value. The strategy can enable the strategic management to continue operating once several levels of disaster affect an organization (Nocco 2002). The program can show how the organisational could recover after the external risks such as natural disasters occur. For instance, once a typhoon destroys an organisation's premises, the business operations would be relocated to a new site. At this rate, the events that can negatively affect an organisation's business operations are integrated in the plan. In the end, it enables an organisation to reduce disruptions when complex risks happen that may bring business operations to a standstill. After identification of the threats, the impact scenarios are targeted to support the recovery programme of the business. Communication Through effective communication, strategic managers are able to manage the external risks. Communication is also essential for preventing and mitigating crisis (Epstein & Buhovac 2006). It is concerned with how members of an organisation communicate internally as well as how they communicate with external environment. The strategic managers need to communicate to the decision-makers the various organisational risks to establish and review corporate processes needed for managing the risks. Effective internal and external communication enables the management and the shareholders to effectively value a company's value or shares and to reduce the average costs of capital. According to Epstein and Buhovac (2006), effective communication is critical for an effective risk management strategy. Management of these risks entails each member of the organisation, including the employees, staff, the board, visitors, or clients. Hence, the strategic managements can enable each one to understand the risk management and its significance as well as how to develop and implement risk management strategy. Conclusion Modern-day external environment are too complex and chaotic, and the behaviour of individuals as too unpredictable. However, it is not true that strategic managers have little claim to the outcome of a crisis since strategic managers can actively detect the environmental signals and which spontaneously grasp opportunities or mitigate strengths, which lead organisational success. The managers can ensure this through corporate risk assessment to identify and monitor the risks and to recommend appropriate mitigation strategies have a greater potential of management external risks. The strategy is effective for modern organisations that consistently face competitions and events that are likely to give rise to significant risk. They can also use horizontal scanning, which links the actions and perceptions that allow an organisation to adapt to the external environment. Business continuity programme can also enable strategic managers to harness organisational resources in order to provide efficient mitigation and recovery process for the organisation while sustaining the organisation's competitive advantage and value. Additionally, the strategic managers need to communicate to the decision-makers the various organisational risks to establish and review corporate processes needed for managing the risks. References Bengston, D 2013, Horizon Scanning for Environmental Foresight: A Review of Issues and Approaches, U.S. Forest Service, Delaware Culp, C 2002, “The Revolution in Corporate Risk Management: A Decade of Innovations in Process And Products,” Journal Of Applied Corporate Finance vol 14 no 4, 8-17 Epstein, M & Buhovac, A 2006, The Reporting of Organizational Risks for Internal and External Decision-Making, Society of Management Accountants of Canada, Toronto Fatemi. A & Luft, C 2002, "Corporate risk management Costs and benefits," Global Finance Journal vol 13, pp.29-38 Gordon, T & Glenn, J 2009, Environmental scanning, In: Glenn, J.C.; Gordon, T.J., eds. Futures research methodology, The Millennium Project, Washington, DC: Institute of Management Accountants (IMA) 2006, Enterprise Risk Management: Tools and Techniques for Effective Implementation, Institute of Management Accountants, New Jersey Mason, R 2007, "The external environment’s effect on management and strategy: A complexity theory approach," Management Decision vol. 45 no. 1, pp. 10-28 Nocco, B 2002, "Enterprise Risk Management: Theory and Practice," Journal of Applied Corporate Finance vol 18 no 4, pp.8-15 Zhang, X, Majid, S & Foo, S 2011, "The Contribution of Environmental Scanning to Organizational Performance," Singapore Journal of Library & Information Management vol 40, pp.65-80 Read More