Achieving Risk Management and Change in Hospitality Industry - Essay Example

A Critical Evaluation of Methodologies for Achieving Risk Management and Change in Hospitality Industry The business environment of today ismore volatile and risk prone as a result of globalisation then it was ever before. Investments in the hospitality industry in general and hotels in particular are also subject to a variety of risks which can be both strategic as well as operational in nature. Revenues generated from tourism are important contributors to local or national economies and events which can turn away the tourist or the clients of the hospitality industry have to be planned for and guarded against. Whilst, it is important to identify risks, it is equally important to manage risks when they have been identified. The methodologies for the management of risk in the hospitality industry may be broadly classified as being organisational and financial in nature. The strategies for the management of risks in the hospitality industry may be classified as being defensive, cautious or offensive in nature and these may be dictated by the broad business environment of the day. Risk avoidance, risk reduction or risk transfer are the organisational methodologies for managing risks and their financial counterparts for the management of risks include risk retention, transfer of risk related financial liability and risk repartition in which risks are spread amongst a number of businesses or groups. Whereas a practical organisational strategy is likely to combine a number of techniques to handle risks associated with a hospitality operation, attempts towards the repartition of risks present the best way to deal with situations in a global economy in which the clients of the hospitality industry or the tourists have a number of alternatives that are available to them. This brief essay attempts to take a look at the methodologies for managing risk in the hospitality industry. Introduction Any economic activity is characterised by an associated exposure to risk as a result of the conduct of the activity. Large projects may be exposed to risks associated with delays, cost escalations and exchange rate fluctuations etc. In the hospitality industry, risks may arise as a result of investment risks in ventures, risks arising out of the globalisation of tourism, risks associated with requirements to comply with legal and licensing requirements and health as well as safety risks in establishments. Investment risks and the risks arising out of the globalisation of the tourism industry have to be considered at the time of investing in a new venture and these risks are more of long term or strategic risks in nature. Risks that are associated more with the day – to – day operations of a hospitality establishment include risks associated with personal accidents, theft or damage to property, valet parking, food management, passive smoking, noise and the responsible service of alcohol. An investor needs to be sure that the hotel that is being funded will be able to attract clients and compete favourably with other tourist destinations. Hotel policies associated with the serving of alcohol or the care that is taken in serving fresh and hygienically prepared food for its clients can have an impact on the reputation of the establishment and hence its ability to generate returns (Nykiel). In order to be able to make managerial decisions about risks, organisations have to identify all possible sources of risks to their operations. The identification of the sources of risks is followed by an assessment of the possible impact of risks on the performance of the company. This results in the selection and implementation of control methods and the implementation of the monitoring of such risks. Risk control is applied at the strategic planning level of an organisation and the strategy to handle risks may be classified as being a defensive, cautious or offensive strategy (Bednarska). Defensive strategies for handling risk place an importance on survival and there is an unwillingness to take any risks by implementing failure prevention mechanisms. A defensive approach to the management of risk is likely to cause an organisation to waste resources and miss opportunities. A Cautious strategy for handling risk is characterised by the prudent undertaking of activities, implementation of risk mitigation measures such as insurance and a careful expansion of activities after a study of the business environment. Offensive strategies for handling risk mean that an organisation is willing to take risks, identifies and takes advantage of opportunities and makes an effort to implement solutions that are suited to the likely business conditions (Bednarska) and (Lawrie). In this brief essay, an attempt has been made to take a look at the methodologies for achieving risk management in the hospitality industry, evaluate these methodologies with regard to their merit and to consider some of their limitations. The Methodologies for Achieving Risk Management and their Evaluation Risk identification techniques include risk evaluation techniques for identifying the priority as well as the severity of an identified risk that threatens the safety, quality, reliability or the durability of a process or program. Risk evaluation makes it possible for a risk to be assessed and a subsequent action taken. Impact criteria technique helps to identify an area that may be affected by risk and to allocate a level of severity or impact from that risk. Thus, the most critical risks are highlighted by the impact criteria technique. Risk response planning permits the organisational or project management team to determine how it will react to a risk. Some managerial responses to risk can include accepting the risk altogether, avoiding the risk, changing a process or the nature of a product and implementing measures to reduce the likely impact or threat of the risk (Nykiel). Risk control methodologies may be broadly classified as being financial or organisational in nature. The organisational methodology for minimising risk consists of risk avoidance, risk reduction or operations transfer. Risk avoidance means that an organisation will not undertake certain activities for the fear of being adversely impacted from the associated risks. Risk reduction consists of physical safety precautions such as the installation of burglar or fire alarms and ensuring the hygienic supply of food for consumption. Staff training in customer care and the implementation of safety or indemnity procedures such as security searching for detecting possible terrorist threats, requiring of guarantees for payments and the inclusion of indemnity clauses in contracts are examples of risk reduction techniques. In operation transfer, the risk burdened activities are undertaken by other businesses which assume the risk. The financial aspect of risk control consists of risk retention in which the hospitality organisation continues to assumes responsibility for the consequences of a risk, the transferring of financial liability in which a hospitality organisation continues to bear the likely consequences of risk materialisation, but another corporate entity, usually an insurance company, bears the financial consequences of risk materialisation for a fee. Repartition refers to attempts to spread the consequences of risk by spreading the financial consequences over a group of entities, such as the structure of a corporation consisting of parent and subsidiary companies or other businesses (Bednarska), (Nykiel) and (Head). Risk prevention is the best possible method of dealing with risk because the effects of the risk never materialise. However, this can also mean that no activity is undertaken. Risks, such as demand risks related to there being no demand for hospitality services due to bad weather are better handled by attempting to distribute risks by joining up with a reputed chain of hotels by a franchising or management agreement in which a proven and successful business formula can be expected to counter demand problems. Operations transfer techniques such as renting out the premises to other operators for operating services such as hair dressing or parking services are useful but these can mean that valuable income is lost. Investing in insurance and derivative instruments for hedging against losses due to poor turnout of tourists as a result of weather and contracts with tour operators attempt to spread the consequences of what can be rather expensive risks. The best way of managing risks in the hospitality industry is to try and estimate the expenses associated with the risk and then to distribute the risk on businesses so that all can attempt to make profits but stand together in the likely event of a loss. It also pays for the hospitality and allied industries to invest in making tourist locations more attractive so that better returns can be generated from events (Bednarska) and (Lawrie). Any practical methodologies for the management of risks in the hospitality industry must combine a number of organisational and financial methodologies in order to be successful. However, the globalisation of tourism requires that there should be attempts towards a repartition of financial risks amongst a number of businesses associated with hospitality and tourism. Conclusion Risks are inherent in every facet of hospitality operations and can range from a poor turnout of clients to the risks associated with litigation as a result of personal loss, injury or property damage. Risks need to be carefully considered with regard to the likely loss and the probability of their having an impact on an organisation. However, it is probably best to spread the financial risk amongst businesses and to present a united effort in an attempt to attract the tourists and clients of the hospitality industries. References / Bibliography 1. Barth, Stephen. “Hospitality Law: Managing Legal Issues in the Hospitality Industry”. Wiley. January 12, 2001. September 3, 2005. http://www.amazon.com/exec/obidos/tg/detail/-/047134849X/002-3884690-5141630?v=glance 2. BEDNARSKA, Marlena. “Risk control methods in a hotel operation”. The Poznań University of Economics. 2004. September 3, 2005. http://www.puereview.ae.poznan.pl/2004v4n1/4-bednarska.pdf 3. Clarke C.J. & Varma S. “Strategic Risk Management: the New Competitive Edge”. Long Range Planning, Vol.32, No.4, p414. 1999. September 3, 2005. http://www.lrp.ac/pastissues/32_4_august_1999.html 4. Head, George L and Stephen Horn. “Essentials of the Risk Management Process”. Insurance Institute of America Incorporated. January, 1985. 5. Lawrie, G.J.G, D.C. Kalfe and H.V.Anderson. “Integrating Risk Management with Existing Methods of Strategic Control: Avoiding Duplication within the Corporate Governance Agenda “.2GC Working Paper. 2003. September 3, 2005. http://www.2gc.co.uk/pdf/2GC-CP0803.pdf 6. Lawrie, G.J.G, D.C. Kalfe and H.V.Anderson. “Risk Management and Performance Management: A Way to Avoid Duplication of Effort by Combining Both Tools”. 2GC Working Paper. 2003. September 3, 2005. http://www.2gc.co.uk/pdf/2GC-MB0831.pdf 7. Nykiel. “Hospitality Management Strategies”. Prentice Hall. May, 2004. September 3, 2005. http://www.bookfellas.co.uk/scripts/browse.asp?ref=0130618764&source=J69 8. Yang H. Huo Francis Kwansa. “Effect of Operating and Financing Leverage on Firms Risk”. Journal of International Academy of Hospitality Research. June 1994. September 3, 2005. http://scholar.lib.vt.edu/ejournals/JIAHR/issue8/ Read More