Lecture 2

Defining and Assessing Risk

 “Revenue Drivers” & “Key Success Factors”
 Four Areas of Risk
 Strategic & Operational Risk
 Operational Risk Classified by Time & Cause
 Four Steps in Assessing & Managing Risk
 Probability & Severity
 Doing the Assessment
 Assessing Vulnerability
Revenue Drivers & Key Success
Factors
 What Contributed most to Corporate Earnings?
 What Must We do Well to Succeed?
The Revenue Drivers
Manufacturing Plant,
Equipment & Process
Delivery, Logistics
IT/Telecoms Systems
Personnel & Customer
Support
Raw Materials / Inventory
Intellectual Property
Survey on senior managers
The Key Success Factors
No Downtime
Effective Website Design
Fast Fulfillment
Effective / Distinctive
Product Range
Profitable Customer
Acquisition
Effective Customer Support
Example : KSF’s for an online business
Adequate Profit Margin
Four Areas of Risk Operational
-Distribution, Logistics
Strategic -Suppliers

-Markets -Product/ServiceQuality
-Competitors -Employee Issues

-Technology -Fraud

-The Economy -Projects

-Consumer Needs -Natural Events

-Legal -IT

-Merger and Acquisition -Fire

Business Risk Management

Compliance Financial
-Stock Exchange Rules -Exchange Rates
-Tax Requirements -Interest Rates

-Environmental Legislation -Liquidity

-Accounting Standards -Profitability

-Internal Controls -Credit

-Ethics -Costs
Strategic Risk
 Big Issues Require Companies to Think on a Grand
Scale
Factors
• Government
• Customers
• Competition
• New Technology

Impact Solutions
• Costs • Strategic Planning
• Prices • Quality Management
• Products • Investment
• Sales • Innovations
Operational Risk
 Risks relating to the organization’s production / operations

Time
Process &
Suppliers Internal Risks Distribution Customers
Risk

E - Supplies -Fire -Counterfeiting - Payment

X Interruption -Pollution -Tampering Problems

- Poor Quality - Competitor
A -Fraud

M -IT
Activity
P -Accidents

L -Labor Dispute
E -Terrorism

Example : Operational Hazard Classified by Time

 Classifying Risk By Cause (example)
 The Widening Effects of Risk
Four Stages of Risk Management

Risk Awareness

Assess Monitor
• Audit
• Audit • Continuous
• Measure Improvement

Treat
• Minimize
• Transfer
• Spread
• Accept
Risk Assessment & Treatment

Risk
assessed

Yes
Acceptable? Monitor
No

Treat
-Minimize
-Spread

No Yes
Avoid Acceptable?
Probability & Severity
Probability & Severity (2)
 3 x 3 matrix for risk assessment

High
Severity

Medium
Severity

Low
Severity

Low Medium High

Probability Probability Probability
Doing The Assessment
 Common headings ; kind of questions need to be
asked
◦ The purpose of the assessment
◦ The nature of the risk, description of the project,
product, process
◦ Resources involved / affected
◦ The scale of the impact
◦ Benefits from the hazard
◦ The mitigating factors
◦ The contingency plans
◦ The limitations of the assessment
◦ The conclusions and recommendations
◦ Action has been taken
Doing The Assessment (2)
 Simpler Assessment
Doing The Assessment (3)
 The “Heat Maps”

Issue Description Likelihood Impact Risk

Fleet Driver death Unlikely Severe Moderate

Vehicle theft Possible Moderate Moderate
Theft from lorries Almost certain Minor Low
Tools for Analysis

Qualitative
Focus Groups
Brainstorming
Advice from experts
Quantitative
Historical data analysis
Influence diagrams
Fault tree / event tree analysis
Life cycle analysis
Test marketing / market research
Monte Carlo analysis
Vulnerability Assessment