Introduction to Management

Fourth edition

by Richard Pettinger

Risk: a Short Summary

The purpose of identifying and studying the components and elements of risk and uncertainty from a strategic point of view is to ensure that anyone in a managerial or executive position understands the full range of issues that must be considered for any situation, in the devising and implementation of strategy, and in the management of operations if they are to stand the best possible chance of success, and minimise the chances of failure.

In practical terms associated with the expertise of management, risk is a major current concern, and likely to assume an ever greater importance. This subject is covered in full detail in the main text of the book. A short summary is nevertheless useful and valuable here.

Risk Management

In straightforward and familiar situations risk management is likely to be a simple process and easily carried out. Otherwise, it requires a full recognition and assessment of a variety of factors.

  • Sectoral trends: whether growing or declining, either in size or prosperity; whether this is likely to continue. Factors that are affecting this at present; are likely to affect it in the future; and could possible or remotely affect it.
  • Substitutes: what else people could buy or do as an alternative to their current set of activities; what else they might buy or sell or make; where else they might locate.
  • Social, political and economic issues: major drives and restraints; also including ethical and environmental considerations and attention to fundamental values and standards.
  • Strategic aspects: relative to the organisation's position in its sector; its preferred direction; its size; its ability to dominate or take control of its niches; the balance of its proactive, steady state, responsive, and crisis activities.
  • Operational aspects: in relation to precise goals and objectives especially over the short and medium-term, and balancing proactive, steady state, responsive, and crisis activities.
  • The constitution of the organisation: its directorate, executive and management. The style and attitude and capability of these, and the extent to which they are stable or changing, or open to reform or take-over, must also be taken into account. This is especially true at present of civil, health and public utilities and services in the UK, which are increasingly subject to privatisation and a profit motive, as well as service delivery.
  • Identification of the critical requirements of success of the operation: this is truly dependent upon the executive capabilities of the managers and directors involved in projects. Above all, this part of the process requires a full consideration of the questions: 'What can possibly go wrong?' and 'What is the single most important factor for success?'

The Generally Favourable Response

The generally favourable response is based on an assumption that because people have a general understanding or liking for something, they will therefore buy and use it. A useful illustration of the ways in which this is arrived at is as follows.

  • When potential customers, clients and end-users say that they do like a particular product or service, and that they would use it, but are then not asked how often they will use it, nor how much they would be willing to pay for it and under what set of circumstances.
  • When business projections and forecasts are accepted as a statement of truth rather than possibility by directors, divisional chiefs, and other senior managers.
  • When general interest is assumed to translate into specific customer and client activity.

This last is another key contributor to the failure of many consumer-based internet companies. The internet has generated a vast amount of general interest. Internet companies measure the effectiveness of their website in terms of the number of hits or visits. However, this is the virtual equivalent of window-shopping only, yet it was mistaken for genuine commercial interest and potential during the start-up boom of 1998-2000; and this attitude still remains to some extent.

  • A monitoring and evaluating and projection process that covers the following:
  • identification of the best, medium and worst outcomes;
  • analysis of any critical path or critical incident;
  • ability to extricate oneself from the situation (or not) and the conse­quences of this;
  • assessment of the full range of cost and benefits.
  • Factors outside the control of the organisation and its managers. These factors especially include criminal and fraudulent activity, financial irregularities, breaches of information technology security; and they include also sudden changes in the operating environment and market and trading conditions.
  • Behavioural and perceptual issues: the extent of these in the organisa­tion; their nature; and their influence on strategy and operations.
  • Early warning systems: based on collective, individual, management and staff awareness of changes in the environment, markets, customer and consumer behaviour, and the lifecycle of products and services.

Within this broad and managerial frame, quantitative, statistical and math­ematical approaches may be used to project likely results and possible outcomes. These approaches include:

  • Accounts, profit and loss modelling to assess commercial and cost liabilities; cost apportionment; minimum income levels.
  • Statistical modelling, to assess probability and likelihood; averages, frequency and mid-point; standard distribution; the critical path of a given project; time factors; and space usage.
  • The inclusion of given variables to project changes in circumstances; changes in possible outcomes; and to address the effects of these variables on other components.
  • Market size and product/service usage projections to infer initial and long-term demand and income.

This is then considered by managers, executives and experts in the light of the real situation in which they must operate. All of this will therefore, in turn, be limited or influenced by the following, with especial reference to conditions that may cause any or all of them to change.

  • Workforce capacity and potential.
  • Technological capacity and potential.
  • Market capacity and potential.
  • Deadlines.
  • Particular ways of working.
  • Where executive power, authority and influence lie.
  • Key characters and their personal as well as professional preferences.
  • Market conditions and customer behaviour.
  • Local factors and political and institutional aspects.
  • Particular strengths, weaknesses, opportunities and threats.
  • Aspects of difficulty, value, frequency, importance and presentation.
  • The decision-making process.
  • Culture, values and ethics.
  • The balancing and accommodation of all these.

The end result is thus that an accurate or informed assessment of the risks involved in any activity or proposal is produced in advance. It does not mean that risks are not taken, but rather that an informed judgement has been made before going ahead. If this is done, a truer range of outcomes can be assessed; more accurate contingency plans can be drawn up; and any future matters arising from the issues in hand can be proposed from a position of relative strength and certainty.