Strategic Risk Management Practice Chapter 7

Question 1

Describe the four modes of scanning.

Answer 1

1. Formal search - obtain information on the relevance of specific issues and input this information into the planning and decision-making processes
2. Conditional viewing - track pre-selected information from particular sources
3. Informal search - actively look for information through unfocused and unstructured efforts
4. Undirected viewing - scan many diverse sources of information with no specific informational needs in mind

Question 2

What are the components of a PESTEL analysis?

Answer 2

• Political events
• Economic developments
• Social trends
• Technological innovations
• Environmental issues
• Legal issues

Question 3

State the components of Porter’s five-forces model.

Answer 3

1. The threat of new entrants
2. The bargaining power of buyers
3. The bargaining power of suppliers
4. The threat of substitute products or services
5. The intensity of competition in the industry

Question 4

What are the four components of a SWOT analysis?

Answer 4

1. Strengths (Positive + Internal)
2. Weaknesses (Negative + Internal)
3. Opportunities (Positive + External)
4. Threats (Negative + External)

Question 5

Describe the importance of the row total and column total for influence matrix
analysis

Answer 5

The row total indicates:

• How the risk factors affect all of the other risk factors
• Captures the importance of the specific risk factor and its relative ranking

The column total indicates:

• How much each risk factor is influenced by all of the other risk factors
• Called the passive score

Question 6

Describe the five major steps to arrange scenario planning.

Answer 6

1. Identify the key environmental risk factors
2. Elaborate some of the major themes since they may characterize alternative developments in future competitive market conditions
3. Elaborate on the major themes outlined previously and describe a few environmental scenarios that arise as the consequence of different
   assumptions about the risk factors and the underpinning themes that are relevant for the corporate strategy
4. Evaluate the consequences of the key strategic risk factors within the themes that shape the alternative scenarios in view of essential strategic concerns
5. Formulate new strategic alternatives, if required, and evaluate them given the different scenarios

Question 7

State the benefits of scenario analysis

Answer 7

• • Encourages managers and other employees to think through the diverse pieces of the puzzle. Allows managers to organize these fragments into a cohesive pattern in the future business environment
• Allows managers to discuss the implications on the effectiveness of current strategies while evaluating alternative strategic options
• Can help make blind spots visible and uncover areas where further knowledge and insight are needed
• Helps managers evaluate the robustness of strategic alternatives when operating in an uncertain future business context
• Provides executive decision-makers a way to think about the need for corporate response capabilities if they face unexpected events
• Company strategists get to focus on how central external environmental factors can frame competitive conditions
• Can apply structured thinking around possible future business scenarios

Question 8

Describe the shortcomings of scenario analysis

Answer 8

• Difficult to estimate many of the strategic risks due to insufficient data
• The models backing the quantification of scenarios are built on rather restrictive assumptions
• Fat-tails or regime shifts may not be adequately modeled (or may not be modeled at all)
• There is a strong tendency for people to focus on numbers at the expense of more important qualitative aspects
• Can lull corporate executives and regulators alike into a false sense of security

Question 9

Describe the difficulties in designing foolproof contingency plans.

Answer 9

• The environment is outside the view of corporate management and therefore cannot be planned for
• Management can be lulled by the illusion of having robust contingency plans in place
• Contingency planning can make things worse if it leads to tunnel vision and ignorance

Plans should not restrict responses only to actions built into an existing repertoire

Question 10

Describe selection and learning.

Answer 10

Selection

• Selection relies on conducting multiple parallel trails, understanding that many
• Speed and low cost are emphasized at the expense of learning

Learning

• Relies on a cyclical, experiential, and sequential learning process
• Trial and error learning

Question 11

Describe when selection may be preferred over learning.

Answer 11

• The degree of complexity and unknowability of the terrain is high
• The cost of learning is relatively high
• Time is of paramount importance to ensure at least one early success

Question 12

Describe when learning may be preferred over selection.

Answer 12

• Low complexity projects with a low cost of learning
• Long-time horizon projects with larger budgets

Question 13

Describe high reliability organizations (HROs).

Answer 13

• HROs comprise a particular group of organizations that have the common characteristic that even minor mistakes might result in a fatal outcome
• These organizations have specific practices in place to prevent these problems, while retaining sufficient flexibility to deal with unexpected situations

Question 14

What is the main advantage of establishing a common risk vocabulary?

Answer 14

The main advantage of establishing a common language is that it ensures a more consistent way of looking upon and analyzing risks across the organization