Managing Risk Lecture

Managing Strategic Risk : A Holistic View

Risk

Book: Introducing riskman, Ned Robins

Risk software

Risk perspectives

• Organization

• Markets risks and mediation

Email Howard Thomas – risk slides

Risk and uncertainty perception and bias in assessment.

Types of bias

Addressing how to manage the perceptions and bias of risk and uncertainty.

Scenario modelling for options to handle changes

Impact on cashflow and business preservation.

How to take positive actions?

Huge inertia, how to move organizations to deal with risk,

Linked to strategic role of the board

What is the organizations attitude to risk? and what is the organizations business model ?

Organizations are made up of individuals and groups

What are the levers?

Total risk management

• Strategic risk

• Operational risk

• Hazards, economic, social risk

What about personal risk?

Analysis are a means to an end , not the end in them selves

Unconscious incompetence

Concept of knowledge management in organizations is important.

Make it a imperative to change (“facing the lion”)

Be aware of what you need to do to take the right imperative action

Risk is the human condition – we are good at it.

There is no unmanageable risk.

Lack of clarity is a risk in itself. The world is very complex, you need to identify complexity ?

But inspite the models the decisions are based on assumptions and perception.

May not be able to manage the cause of the risk; but you can manage the causal relationship of that risk.

It is possible to predict risk ?

The reason risk is not managed is because we don’t understand it.

Does regulation help manage risk ?- protection points of a system.

Risk A future uncertain event that may cause harm or damage.

Project risk management objective = minimize risk and uncertainty at a reasonable cost (profit)

People are genetically conditioned to be risk takers

People expect risk to be defined for them, a dependency to identify risk as we are conditioned to assume the world is safe or dangerous and someone will sort it out?

Need to take risks to address another risk ?

Hero = a risk taker

Risk may result in outcomes that could result in severe destruction of the existing business model. To unlearn the current behaviours to address risk.

The cult of hero

Start comparing opportunity risk with threat risk

Activities, events,

Need to identify types of risk

Risk is about uncertainty

Identify risk variables – these variables can be a measure of the system entropy and boundary

• Variability risks

• Impact risks -- most books focus just on this

Uncertainty and future are the two key aspects of risk

Risk and be an opportunity and a threat – it can switch

Need to identify impact owners and causes

Identifying and defining risk – you can manage the risk

Avoid checklists – they close down thinking

A risk is a risk whether it is perceived or not

Reward systems - Bankers don’t take risks ; they risk other peoples money not theres’.

Selling risks versus managing risks

Companies can perceive they manage the risk by passing risk on. E.g. ppp projects

You have to understand risk , you can not pass risk on.

Government – orange book on risk

The risk can evolve up or down; over time trade-off of risk can change as situation evolves

Relative risk - has to be a trade-off between risks

Betting does not change the probably the horse will win the race.

Risk management is changing the probably the horse will win the race

Bankers are just gamblers; Business Managers are fundamentally different in they are managing risk.

Risk management is about focus on the overall outcomes of the activity ; not just the specific tasks and styles of the activity. Focus on future.

Need to buy what they need

Prelonging the current model while have disruptive technologies

Working in a distributed interconnected world.

Need to examine what is the future manifestations and the impacts of these things.

Book: Animal Spirit Its not just about economics

Circe Solie took a bet on the structure of the industry and environment. Need to focus on first principles.

Don’t abandon the old model – there are aspects.

Need to connect to the right groups and competencies through networks, physical and virtual.

The types of risk and sources of risk is a key issue.

Risk appetite – how do you express risk appetite

Risk tacking is subjective view – depends on your point of view

Expectation of returns versus appetite to address the risk to achieve the expectations.

Need to get right mix of people and org structure in organization to address risks.

It depends on context of the industry for the propensity for risk appetite

Its about the conversations that happen

Maximizing risk and opportunity and the position in cycle you are in - balanced versus maximization risks.

Need to define the objective function

Utility function = e,g, maximize share holder value. Or Objective function.

Defining utility functions to describe the appetite.

Organizations have different long term and short term objective functions.

Corporate responsibility - a changing view onshore holder value.

Risk catalogs, risk registers, risk logs are dangerous

Many risks are buried in the project plan.

Experience based risk analysis - things may not be written in the risk register or the plan.

Mitigration planning

Contingency planning

Quantum Strategies and Organizational Resilience

• Conventional strategies

• Dual strategies

• Quantum strategies

• Achieving organizational strategies

Conventional strategies

Is about choosing a generic strategy focusing on competitiveness and operating advantage: cost leadership and differentiation. E.g. Michael Porter The idea is to describe alignment between environment, strategies, capabilities and skills to get sustainable competitive advantage.

What is Sustainable competitive advantage ?- options and spread risks

Something that can eviolve and renew it self; ability to respond to external threats, adaptability to respond to external threats and competitors

Competitive advantage derives from the Company culture , people, processes and competencies

The “red queen” effect – need to continuously improve and respond. Therefore need ability to continuously review and improve.

Very few companies have the ability to do this.

Superior performance by revenue growth and profitability – difficult to do both.

Company liquidity Sample could be companies that are acquired could be winners too if absorbed and create higher value. McKInsey study sample may not be perfect for adjusting the sample types choosen.

Micheal Porter said you could not do both: low cost and differentiated but made sense with clear direction and alignment. Environment ß à Strategy ß à Core Competencies ß à Organization.

Rynair is a good example of a pure cost leadership strategy.

Relative payment per hour is lower but gtet paid a higher absolute salary.

Core competencies: Efficiency and Execution. Define the organizational recipe.

Porter is right most of the time ; Rynair is a example.

Offer acceptable service quality and lowest cost. Also offer ancillary services to increase revenues.Buy it if you want it.

Challenges to this view

Things have changes

Technologies can enable quality – high quality at low cost.

Technology can transcend low scale and high costs wiuth mass customization.

Economic logic of scale, scope (sharing resources ; learning, experience curves

There are rare examples of lowest cost in their sector and offer highest quality.

e.g. Singapore Airlines; First Direct

Time based competitive advantage relative to competition.

Need to develop quality strategies to support movement from premium to mass market competitiveness.

Mixed strategy is possible temporarily, but will have to choose

Dual strategies – different , potentially conflicting strategies by different subsidiaries.

Competing for today and investing for tomorrow (exploit and explore)

Trans-national strategies – customize to local markets versus standardization

Quantum strategies

Involve integration of strategy elements

Exquisite but frugal (cost leadership / differentiation)

Huge but agile e.g. Niki

Exclusive but available (Premium positioning / extensive distribution) e.g. Niki

The same but different (standardization / personalization ) e.g. google, AWS

Test of differentiation is if your customer is choosing you even through you are more expensive.

Apple 3% , Microsoft 12-15% spend on R&D. Yet Apple is voted as more innovative.

How much do they spend on marketing and brand as a % of Revenue.

Make technologies work seamlessly together

It is about making synergies work together.

Being superior in both dimensions

See how the elements can work synergistically.

Focus on the high cost elements e.g. distribution and reduce costs for this by synergistic selling

Formulas for strategic dilemmas.

Prepackaed software – profitability

Underlying industry structure is key in the value chain ownership – key issue in creating highly leverage one to many usage of assets.

Buyer power, lots of choice

Suppliers getting more powerful?

Intensity increasing the difficulty and attractiveness of an industry.

Key Metrics

How do services improve revnue growth and profitability ?

Being very good at market segmentation - understand the target service markets

Integration of differentiation and cost leadership

Operationalized through a complex activity system, how to configure functions to deliver strategy

Differentiation

• Position service excellence

• Developing HR policies image – human resource strategies, extensive training

A test if empowerment to do something about it

Don’t display awards as don’t want to think they have arrived

Culture is an important part: National and corporate culture is more important.

Attention to detail.

Relativist ethics

User experience

Innovation

Cultural values of organization

Premium pricing

Lower cost by:

Low cost assets use

Leverage buyer positioning power to get bet price

Lower labour costs

Highly efficient human operations and delivery costs – taken out all costs of failure.

Exploit and build related subsidiaries to create ancillary value services to increase revenues

Obsession with reducing wastage

Cost conscious and adaptability

High efficiency

Innovations in quality and cost

Costs per ASKs?

Singapore business system is difficult to copy because of interconnected and focus

Signalling effects - competitors

De-commoditization – buyer power

Higher relative attractiveness – substitutes

Higher bargaining power – supplier power

Staying power – to handle rivalry

Barriers to imitation – because of complemenary

Causal ambiguity – hiding how you do it – it’s the culture and people

Develop staying power for resilience in tough times - how to add toughness ?

Rigorous service design

• Extensive feedback mechanisms

• Competitive intelligence

• Benchmarking

• Demanding customers (focus on good customers to work with)

Understand things that compromise quality

Using Markets to Manage Risk

Buying and selling risk in financial markets

Financial markets have got less liquid but still reasonable liquid.

Financial markets are particularly effective as bringing together buyers and sellers of risk from across the world.

Financial markets are very good at finding out risk and who is able to take these. Passing on risk.

Financial markets in themselves don’t have a morality.

Marketplaces are very efficient ways of bringing buyers and sellers together.

The information about markets is very useful in seeing the risk level.

The market enables a place to trade things that enable exchange.

But it needs knowledge. It is difficult to understand the language of the Finance market so the risk is not apparent. You have to be an expert person to understand the risk in the market.

Market places does provide market pricing information that can be valuable. It tells you what others are doing in a market context.

Markets offer alternatives for trading choices

Need to define boundary of what is the market and what is its characteristics of the market behaviour.

The behavior of the market can be affected by the behavior of the companies in that market and the employee behaviours. Market manipulation.

Some markets the market price may not be much value if the market is very thin (small number, small size of deals). In large markets you may get different dynamics ? Market price can bee affected by its liquidity, behaviours.

Mental framework for looking at the market; the models for looking at the market

There is now much more interconnection of markets which makes it more difficult to predict.

People and companies are good at getting round regulation e.g. shadow banking system.

The regulation was to avoid the collapse but may have helped stimulate ways to get round it and cause the collapse.

Strong markets enable financing of new market sources - i.e. focus on healthy markets that give room for development. This enables enrichment of choices.

But, it does not shield the industry from economic changes and it does not make the market/financial accounts easier to understand.

Markets can change the financial decisions and to off-set these to future times potentially.

Many corporate failures can be related to corporate control.

Markets are very good at seeking out people and companies who want to buy and sell. Sometimes these people and organizations may not understand or be suitable.

How can companies manage again these risks?

• Buying services that may not be used and benefits materialize

• Over compensating to avoid confronting inefficiencies and risks

• The level of perfect information may be imperfect – level of unawareness of personal ignorance can make you vulnerable.

A herd instinct effective

“Buy every way”.,, its ok to screw people ?

Markets are prone to information asymmetry and moral hazard.

Governance and regulation help mitigate problems.

Markets are a way of transferring risk and taking risk.

Board structure liability and responsibility ownership

Challenge of getting better decision making.

Changing the mix; not promote all the same image.

Markets can badly underprice the risk

Bad architecture of banks / markets

Lessons:

Difficult to know how and when to intervene to correct markets

Markets can help develop industry and services

#Risk