Lektion 13 - Risk management Flashcards
(!) Describe risk management in general
- Take behavioral & emotional tendencies into account & replace them with fact-driven prepared responses
- Explicitness & standardization generalize handling
- Increase visibility, awareness & attention to risk
- Help company achieve missions, goals & strategies
- Include all processes to identify risks & their effects
- Increasingly seen as ultimate way to stay in control
- In an uncertain world, changing equals taking risk
- Modern MCS needs design & attention to risk
- Traditionally risk is seen as out of control
- Independent activity within firm/integral part of MCP
- Can easily be integrated across organization
- Process part of the MCS that for some firms explicitly focus on the occurrence of negative events
- Different from crisis management: E.i. COVID-19
- Should be beneficial in terms of cost & benefits
- Structured instead of incident-driven exercise
- Should be compatible with other MC practices
- Ensure negative events have limited effect
- Reference to threats & opportunities in the SWOT
Describe what is meant by risk
- Neutral in statistics & economics
- Often negative connotations
- Associated with unexpected, negative by-products of choices & decisions, loss of value or money, fear
- The chance of certain outcome of importance
- Minority of people likes taking risk
(!) Describe the statistical notion of risk
- Neutral & symmetric
- Probability that certain positive or negative event or outcome happen
- Alternative terms like change & odd often used
- Underlies pure mathematical exercise to calculate risks in choices & decisions
- Typically normally distributed: Tails of distribution point to deviation from being in control
(!) Describe the economic and behavioral economic notion of risk
Economic:
- Statistical notion of expected value as guideline
- Expected value = Multiplying the probability of various outcomes with economic value of outcomes
- Aims to take option with highest expected value
- Does not account for tail risks
- Neglect small probabilities despite huge impact:Covid
- Often hard to follow
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Behavioral economic:
- Human being irrational: Invoked by framing decision
- By default, humans are not good statisticians
- Poor change in estimating chances
- Bigger felling after losses versus gains
- Bias depends on positive or negative risk
- Unexpected events makes bias even worse
- Decision-making either loss-avoiding or gain-seeking
(!) Describe the managerial notion of risk
The managerial notion of risk:
General:
- Formal description often far away from experience
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Managers three position towards risk:
Managers use different definition of risk:
- Managers forget positive outcomes as aspect of risk
- Risk seen as event concept instead of probability
- No overall quantitative risk figure
Managers have various attitudes to risk:
- More than just risk averse & risk seeking
- Risk taking seen as job expectation, not personality
- Motivating effect from risks emotional pleasure & pain
Managers often deal with risk reactively:
- More inclined to react than prevent negative events
- Overestimate ability to react & prevent bad events
- Feeling of control often inappropriately leads to rejecting unfavorable risk estimates
(!) Describe step 1 in risk management processes
Step 1: Assess the organizations risk appetite
General:
- Stimulates thinking about risk in neutral terms
- Types & sources of risk and how much risk the organization believes it can carry
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Risk appetite scale:
General:
- Foster dialog about typical kind of risk-related behaviors that are or should be for organization or parts of it
- Often create deeper understanding of feeling in control or out of control
_____________
Scale:
Open:
- Rating: 5
- Philosophy: Will take justified risk
- Tolerance for uncertainty: Fully anticipated
- Choice: Choose highest return. Accept risk of failure
- Trade-off: Willing to trade off against achievement of other objectives
Flexible:
- Rating: 4
- Philosophy: Will take strongly justified risks
- Tolerance for uncertainty: Expect some
- Choice: Choose risk, but manage impact
- Trade-off: Willing to trade off against achievement of other objectives under right conditions
Cautious:
- Rating: 3
- Philosophy: Preference for safe delivery
- Tolerance for uncertainty: Limited
- Choice: Accept risk if limited & out weight by benefits
- Trade-off: Prefer to avoid trade off against achievement of other objectives
Minimalist:
- Rating: 2
- Philosophy: Extremely conservative
- Tolerance for uncertainty: Low
- Choice: Only accept risk if essential or little failure-risk
- Trade-off: Extreme reluctance to trade off against achievement of other objectives
Averse:
- Rating: 1
- Philosophy: Sacred avoid risk as core objective
- Tolerance for uncertainty: Extremely low
- Choice: Always select lowest risk option
- Trade-off: Never willing to trade off against achievement of other objectives
(!) Describe step 2 in risk management processes
Step 2: Define risk management responsibilities:
General:
- Risk is an aspect in all managers job in organization
- Often department to risk management processes
- Responsibility decision depend on throughput control
- Some choose to bundle risk management in portfolio of the CFO or COO as function of most dominant category of risks
- Not independent from or equal to hierarchical structure
(!) Describe step 3 in risk management processes
Step 3: Analyze the types and sources of risk:
General:
- Vary with type of organization, major activities, processes, markets and strategies
- Sequence for describing risks
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Specify type and source of risk:
- Strategic risk
- Risk of operations
- Risk of financial reporting
- Risk of legal compliance
- Market risk: E.g. Banks under Financial crisis
- Political risk
- Financial risk
- Technological risk
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Metrics for market risk:
Value at risk / VaR:
- Measure worst expected loss on portfolio of instruments resulting from market movement over given time period and pre-defined confidence level
Expected shortfall / ES:
- Measure average of all potential losses exceeding VaR at given confidence level, which makes up VaRs shortcomings in capturing the risk of extreme losses
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Specify potential events in which risk may manifest:
_____________
Specify the qualitative & quantitative consequences:
- Often quantitative means monetary
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Specify likelihood:
- Preferably in quantitative terms
(!) Describe step 4 in risk management processes
Step 4: Communicate and report on risk:
General:
- Typically free-format
- Range of statistical, mathematical tools & concepts to describe potential impact on identified risk
- Risk analyst typical perform analysis & communication
- Ultimately responsibility of top management, but communicated to levels & managers accountable
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Risk event card:
General:
- Never a goal in itself or end station
- Ways of communicating & creating dialog
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Strategic objective:
- E.i. Ensure reliable & competitive processes
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Risk event:
- E.i. Interruption of deliveries
______________
Outcomes:
- Overtime
- Emergency freight
- Quality problems
- Production losses
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Risk indicators:
- Critical items report
- Late deliveries
- Incoming defects
- Incorrect component shipments
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Likelihood/consequences:
Risk assessment matrices:
General:
- Risk factor as function of potential impact & probability
- Impact often financial
- Risk score = Impact · Probability
- Priorities: Low, medium, high
Impact:
- 1: Not critical
- 2: Significant
- 3: Fundamental to continuing operations
Probability:
- 1: Extremely unlikely
- 2: Likely
- 3: Extremely likely
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Management controls:
- E.i. Daily meeting with logistics, purchasing & QA
- E.i. Monitor suppliers tooling to detect deterioration
- E.i. Risk mitigation initiative: Upgrade suppliers tooling
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Accountable manager:
- E.i. Mr. O. Manuel director of manufacturing logistics
(!) Describe the enterprise risk management framework
Enterprise risk management frameworks:
- Risk management important part of overall MCS
- Needed due to the globalization, more competition & interconnections between trade & politics
- Felt mostly by large, international organizations
- Report to shareholders & stakeholders about systems
- Differs from other management control practices since focus on limiting negative effects, opportunities & challenges instead of making good things happen
- Related to threats and opportunities in SWOT model
Define risk management
'’Risk management involves the continuous and constant awareness and attention of managers at all levels of the firm to the potential occurrence of developments that have a negative impact on the organization, and its
chances to achieve its mission, goals and strategies’’
Also include all the processes organizations implement to identify risks and mitigate their potential negative effects.
(!) Describe the psychological notion of risks
The psychological notion of risk:
- Focus on available, not complete or relevant info
- Focus on recognizable, not new or relevant event
- Focus on confirming not challenging beliefs
- Focus on first instead of relevant information
- Subjection to positive or negative moods which stands in the way for a neutral analysis
Describe the different risk preferences
General:
- Important factor for individuals
- Important for organizational or national culture
Risk averse:
- Settle for less risky option + lower expected value
Risk seeking:
- Settle for more risky option + higher expected value
Relate the topic to the case Toshiba
General:
- Hidden data & fraud with numbers since 2008
- Masking prices
- Padding books
Major problems:
- Top down approach: Fraud to meet high expectations
- Corporate culture: performance
Risk assessment matrix:
Impact: High
Probability: High
Change in MC:
- New way of selecting employees
- Decentralization against japanese culture
- Need of diverse people against japanese culture
