Management Strategies - Essay Example

Businesses are becoming Increasingly Risk Averse and more Creative in their Risk Management Strategies By Devangini Mahapatra Chauhan Risk - A wordthat no business or entrepreneur can seem to do away with. Risk is a term of dichotomous nature in its implications for the business entrepreneur. Undertaking risks in the course of business can either bring a windfall in the form of profits or shattering losses. On a less dramatic note, risk is that element of entrepreneurship that is inevitable for the conduct of successful business activities. The role of risk in organisations has gained increased prominence in recent times as the consequences of risky decisions have become more visible. This can, in part, be contributed to past analysis which has effected in a study of decision making behaviour. This analysis by various scholars has depicted the fact that decisions regarding risky organisational decisions brings out contradictory reactions. Here, we can find the essence of the dichotomy that risk taking strikes as a major aspect of business activities. Risk, in case of such decisions, is seen as a focus of single determinants of behaviour arising from risk theories. Although this approach does not conform to real life situations in an obvious fashion, it has led to potentially inaccurate conclusions about risk behaviour. Such unresolved contradictions can be reconciled by examining the usefulness of placing risk propensity and risk proportion in a more central role than has been previously recognised. Based on such analysis, it is believed that the propensity of risk dominates both the actual and perceived characteristics of the situation as a determinant of risk behaviour. Marina 2 Such an observation can safely justify the finding that suggests that apart from being central to any and every business or organisation, risk is something that entrepreneurs in general, are averse to. This brings us to a discussion on business and kinds of risks. Business can be conducted in any sphere of the earth - literally. Today we have a plethora of businesses on land apart from the ones on water and in air. Apart from the normal business activities, one can find airlines and maritime organisations emerging as major sectors. If we are to take the example of maritime, it is the oldest sector in terms of innovation and discoveries. There have been perils to overcome, risks to undertake, more powerful vessels to make each time, and even more powerful contracts to insure and protect the maritime entrepreneurs, as we are going to refer to these 'shipmen' in the course of this paper. Marina organisations today have spread their wings beyond mere cargo vessels and are now running good profits in the sphere of luxury liners, etc. With risks and businesses come allied industries. Insurance and financial risk management are major industries that thrive side by side with any sector in the world, for there is no area that has been spared the occurrence of risks and accidents as well as catastrophes. Maritime activities hold the promise of enormous risks, which can be analysed in its various aspects as follows, from the insurance point of view: Type and size of boats using the marina New industries established in adjacent areas Changes in the international and national regulatory environment Marina 3 Aging of the marina infrastructure Recent waterfront development Changes in response to equipment, technology and availability Logistics Identification of human and natural resources Trends in political climate and global economy These points besides being self explanatory are relevant in context of the current state of affairs. They have every potentiality of developing from minor to major crises, which explains the development and growth of the field of financial risk management. This can be attributed to the fact that at the end of the day, any loss has financial implications of its own and is deeply rooted in the genesis of risk taking and management. The above mentioned points, with a strong background of financial risk management, bring us directly to maritime law. It is a strongly held belief that a business that is considering shipping goods must ensure that they have adequate insurance apart from being aware of the obligations and duties that will form the main points of the insurance documents in the case of damage or loss. Section 17 of the Marine Insurance Act 1906 has been hailed as the central basis for businesses in consideration of the risk of transporting goods and creating shipping contracts from the UK. The notion of good faith is very important in determining the validity of an insurance contract. The key factors that section 17 focuses on are the notion of a valid contract made in utmost good faith. Therefore this exploration will begin by considering the notion of a valid contract. Here there exists a link to section 17 in order to answer the question of whether section 17 is essentially focusing on a contract of utmost good faith. Marina 4 From here, the discussion shifts to the 18th and 19th sections in due course of time, with the aim of providing further insight in the duty contained within the Marine Insurance Act 1906. Finally, in accordance with section 17, the basic principle of the maritime law is that in order to determine if there is a valid contract there has to be three elements which are; agreement; consideration; and intention. Coming back to the issue of the risk averse nature of businesses in context of the section of the maritime law as discussed above, the one question we need to ask before proceeding any further is whether a law is enough to act as a strong foundation for resolving all those difficulties arising out of risk management in case of maritime activities. The answer is, no. And more and more organisations are beginning to recognise this basic premise, which has led to creativity in the sphere of risk management strategies. The marina is a sphere where nothing is impossible - a sudden whirlpool in seemingly calm waters, the appearance of a storm from the clearest of skies, an iceberg in the middle of nowhere, a laid back crew with a minute of distraction that will take the business from incurring particular to total loss; all in that one minute. Apart from that are more deliberate, yet unpredictable, factors like theft, hijacking, political interventions, and unstable economic climate, amongst others. When one is dealing with oceans and the countries separated by them, one must also be prepared to acknowledge the fact that disparities in climate, economies, government policies, sudden occurrences of acts of terrorism, etc., will occur from shore to shore. In fact, such factors are central to maritime studies and the subsequent structuring of risk management, especially in financial terms. Marina 5 Innovation and creativity in insurance covers are designed to handle such risks. According to this, to begin with, one will require regular assessments of the ability of the marina to respond to the following type of emergencies: Fire Natural disasters Chemical and oil spills Collision Capsize or sinking Loss of man Technological disasters Increasing acquacultural activities Terrorism Management inadequacies Infectious diseases When we say regular assessment, it is for the simple purpose of keeping up with the dynamics of our fast changing times. This fact has been a major essentiality in the minds of maritime entrepreneurs who know for sure that the waters today change in size, structure and even basic ingredients, a lot faster than they did a century ago, owing to the environmental changes and greenhouse effects among other such phenomena. It has become necessary therefore, to keep reinventing the methods and strategies to be used in order to overcome the perils enumerated above, in a timely and cost effective manner. Marina 6 Another creative aspect attributed to the entire gamut of activities concerning risk management in this sphere adheres to the notion of utmost good faith that has been lately used to expand the protection for the insurer from pre-contractual fraud to include post-contractual fraud as well. This works in the benefit of the insured, who is saved from the abyss of financial loss, as well as the insurer, who is saved from parting with the sum assured upon occurrence of such a loss, therefore subjugating both parties to complete protection in an aspect that was earlier a matter of great confusion as well as debate. The mechanism of creative risk management extends to preliminary planning as well. To be prepared and organised for the contingencies in advance will help the managers cope with them more easily. This can be further propagated by the use of timeliness and efficiency in the response stage with a reliable communication system, logistics and flawless coordination to boot. For this purpose, damage assessment and reporting will constitute of the preliminaries of restoration and restructuring apart from playing an important role in the formulation of a crisis management plan. Since crises threaten the strategic objectives of the marina organisation, crisis management has been structured so as to work under the foresight of strategic management. This is one of the major trends that are seen to be emerging in the field of prioritising control of crisis to facilitate eventual risk management. Further, staff training and scenario testing have been made to sound more specific with special emphasis on real life situations and an assessment of the responses that are gathered thereon. This results in proper task description and designation of responsible staff. Also, outsourcing has become a major trend in providing of equipment and facilities so as to lighten the load on the risk bearer's mind. Marina 7 During strategic planning of risk management, a major point to be made and clarified is the estimated value of percentages for the probability of the risks that should be included in the picture. To give a fairer idea, the records of insurance companies are now taken as a database for the purpose of analysis. Before concluding, let us take a brief look at a minor case study from a developing country in order to more effectively depict the level of creativity that is being employed in the sphere of insurance and risk management. Reliance Industries is a major player in India's insurance industry. India has a vast insurable population of which only 20% is insured. To gain a foothold in the case of the remaining 80%, the newly launched Reliance Insurance Pvt Ltd, has come up with an innovative scheme wherein the 'connect to life' proposal offers a 'no questions asked, no tests conducted' insurance policy to the insuring entrepreneurs. This not only enhances the client base of Reliance, but also reduces the sum assured payable by the insuring party upon buying such a policy, which becomes more like a retail product. A move of such nature definitely qualifies as creativity. In conclusion it can be said that a risk averse entrepreneur has a variety of innovative options before him today, for the purpose of risk management and insurance in terms of financial loss. In keeping with this viewpoint, the theories studied above have been based on the models that have a great deal of influence on the risk management strategies in the maritime industry. Sources Cited Page: 1. Hakki Kisi. Head of Department of Deck Officer Training. Contingency Planning in Marina Management. 2. Google Inc. URL: www.google.com Accessed on: 29th and 30th of August 2006. 3. Debasish Panda. Reliance Industries Pvt Ltd, India. 4. Marine Insurance Act, 1960; S20 Read More