Risk Management Tutot Marked Assignment Tasks.

RISK MANAGEMENT TUTOT MARKED ASSIGNMENT TASKS

Task 1

Impact of different types of risks on organizations

The increasingly complex and interdependent nature of twenty first century business have increased the risk exposure of firms. According to Bac (2010), ‘all modern organizations operate in the conditions of risk’- this statement sums up the nature of risk as arising from the interactions an organisation have with the business environment. An organisation, especially a profit- seeking one, is subjected to different category of risks. As Jeffrey (2010) noted, the different types of risks faced by firms can be categorized into financial, economic, strategic, organisational, operational and legal dimensions. Each of the categories have specific risks contained in its set. Economic and financial risks are among the most visible and comprehensible risks faced by business organisations. The dimensions of capital rates’ fluctuations, inflation, timely accessibility of loans, natural disaster related losses and fluctuating foreign exchange rates affect business activities (Alderfer and Bierman, 1970; Bernstein, 2005). These identified dimensions introduce varying levels of risk into business planning, execution and outcomes. The internal processes of an organisation have their functioning imbued with a risk factor. When such internal processes fail or are not adequately monitored, crises ensue, some of which have led to the collapse of such firms as Enron and Lehmann Brothers in the USA and Northern Rock Bank in the UK. Risks resulting from flawed internal processes have a blow- out effect that affect other aspects of the company.

The level of demand for an organisation’s products or services is a risk that is considered in the processes of product development, production and in the design and implementation of marketing plans. According to Doff (2008), ‘there is always the possibility that the client’s demand for a product or service will abruptly change’. This have the effect of affecting sales, profitability and consequently a firm’s return on investments. Another category of risk that significantly impact organisations relates to a firm’s organisational and operational position. A firm’s organisational risk is further splintered into those arising from the organisational culture, organisational changes and also the composition and decisions of the management board and the various contracting parties that the organisation deals with. A bad organisational culture initiate event chains that culminate in woeful marketplace performance thus risking the equity that the company have built up over the years (Jeffrey, 2010). Also, when a contracting party or vendor that a firm deals with initiate changes in its own cost, quality or output levels, there is a risk involved. This is especially important for firms that are involved in the production and marketing of food, pharmaceutical products and consumables.

An evaluation of high risk activities in the different sectors of the economy

An economy is an entity made up of smaller entities each of whom conduct activities to which different degrees of risk might be attributed. Activities in such an economy can be categorized into low- and high risk. Bernstein (2005) speculated that high risk activities are laden with higher economic returns than low risk activities. This is based on the assumption that individuals and firms must be given an incentive to pursue high risk activities. High risk activities include stock and derivatives trading in the finance sector, exploration in the minerals developing sector, expansion and new product development in the manufacturing sector, venture capital investment in the technology sector and surgery and advanced medical research in medicine.

In the financial markets, financial instruments are ranked in order of volatility. On one end of the spectrum are safe instruments such as bonds, treasury bills and annuities which typically yield low single- digit rates but are safe. On the other end are such instruments as stocks and derivatives such as options, futures and credit swaps- these instruments are high yielding and come with a higher degree of risk (Bernstein, 2005). Oil exploration is also a high risk activity which is essential for human survival. This particular activity is engaged in by different companies with the hope of striking oil- one of the most consumed resources in the world. Oil exploration is high risk and development is high risk especially in the developing countries because even when a strike is made, the turbulent political system in these countries make the long- term investments which oil refining requires risky. The expansion and product development process is also a high risk activity especially in the manufacturing sector. While the introduction of market research have served to mitigate this risk, evidence still suggest that more than 80% of new products introduced into the market fail. The risk of a product failing is increased because of changes in consumer tastes, existing competitors and poor awareness among other factors.

Task 2

The concept of business risk

In the financial sector, business risk has been defined considering the modes of operation in the sector. Two leading banks have provided definitions of business risk. ABN Amro Bank defined business risk as the ‘risk that operating income will be lower than expected because of lower than expected revenues or higher than expected costs not being caused by one of the other risk types’ (Doff, 2008). Business risk have also being conceptualized by Credit Suisse as a ‘risk associated with adverse business outcomes which result from a weak competitive position or from poor choice of strategy, markets, products, structures and activities’ (Conine, 1982).  Business risk often result from an interplay of the forces of revenue and cost in a business. The adoption of an inflexible cost structure coupled with structural inefficiencies and an inefficient pricing mechanism portend a high risk exposure. From the revenue perspective, unstable and unfavourable macroeconomic conditions can result in revenue volatility which makes long term planning and decision- making futile and also increase a firm’s exposure of risk. Business risk also result from fluctuations in the general business conditions as expressed in the dimensions of consumer behavior, competition, government regulation, market environment and technology. When a firm does not change in response to changes in the preceding variables, such firm have a potential high risk exposure.

The role of the risk management function in organizations

The function of risk management in the modern corporation is derived from the fact that continuing survival and success of a firm depends on how risk is managed in such firm. Ensuring that a firm does not have deleterious risk exposures, the cycle of risk definition, analysis, assessment, manipulation, observation and control must be the basis for ensuring organizational survival. The role of the risk management function is encapsulated in ensuring that the cycle is continued. According to Doff (2008), ‘the essence of the risk management function is to ensure that the process by which risk is managed is guaranteed continuity’.  Another role of the risk management lie in the area of decision- making. Any organization, whether profit oriented or not, rely on the decision- making process to determine the allocation of inputs in order to generate projected levels of outputs.  Committing resources to a specified output carries an element of risk and opportunity cost. Business activities are conducted within a milieu of uncertainty and as such have varying levels of risk. There is noted tendency among corporate decision makers to introduce subjectivity in making decisions without considering associated risks. Risk management provides an objective framework for decision- making.