LEVEL 5 DIPLOMA IN BUSINESS
LO 1
Review organisations risk tolerance in different environments
1.1 Identify and evaluate different business environments and the likely risks of those environments
• Different business environments: Micro, Macro and Market Environment.
• Micro(internal): include factors controlled by the company
• Macro (external): Indirectly affect company's working condition; the company is incapable of control over these.
• The market environment is in which the company operates and the industry's market
• Business risk is the possibility of a company to have lower anticipated profits or to face a loss rather than a profit.
• The risk factors developing direct impact on the business are sales volume, industrial competition, impute cost, government regulation, per unit price and economic climate.
•External risks faced by the different business environments may be either political, economic, sociological, technological or legal.
•Internal risks are financial, strategic,innovation, organisational or employee risks
•Tool for auditing an organisationand its environment: SWOT (Strength,weaknesses, opportunities, and threats)
•SWOTanalysis the risk and list these factorsaccordingto its relevance.
• •Strength & Weakness: internal
• •Opportunities & threats: External
•Purpose of SWOT:Add value and extend products and services, increase ROI (Return On Investment)
•The company can purchase political risk insurance in order to mitigate losses
1.2 Provide examples of organisation's tolerance to risk-taking and evaluate how organisations can measure tolerance.
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• Risk tolerance: Amount of risk that an organisation can take comfortably, or the degree of uncertainty that an organisation can handle.
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• Case study of Global profession service firm and Global investment bank shows that risk culture is healthy if the organisation understands they could improve by analysing the risk by tenure and threat of similar status.
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• Senior leadership, internal structures and clarity on risk decisions should always be cross-checked for a successful outcome
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• The risk is no longer considered as a threat; it can be diagnosed using a combination of survey tools.
One way to approximate the risk tolerance is to have senior decision-makers answer the following hypothetical question.
• If an organisation have a chance of potentially profitable investment, but risky, i.e. a probability of 50-50. If the required investment is R., the risk tolerance is the amount R for which decision-makers would just be indifferent between making and not making the investment. Or else the value of R for which the specific equivalent of the investment is zero.
References
• Kaplan, R.S. and Mikes, A. (2012) Managing risks: a new framework.
• Teece, D.J. (2010) Business models, business strategy and innovation. Long range planning, 43(2), pp.172-194.
• Hopkin, P . (2017) Fundamentals of risk management: understanding, evaluating and implementing effective risk management. UK: Kogan Page Publishers.
LO 2 Develop skills to identify and assess the risk profiles of organisations
2.1 Produce a risk profile for an organisation
• Risk profile: an evaluation of an organisation'swillingness to take risks, and the types of threatsto which an organisationis exposed.
• Risk profile is a useful tool for evaluating a potential investment's ability to maximise return on investment (ROI) by minimising risk.
A risk profile identifies
• level of the threats faced by an organisation
• The possible adverse effects that may occur
• the level of loss and depth of each kind of risk
• The possible tacticsto minimise those risks
The result of a successful risk profiling is the identification and prioritisation of risks according to its depth and effect
Consider risks in all angles (safety, political, economic, environmental) while developing the risk profile for a successful output.
The risk is assessed by asking several relevant questions, to understand the different risk the organisation may go through. For example, the question does the company operate overseas is for determining whether the exchange rate risks affect the organisation etc.
Further, the past reports of the organisation are used for the determination of the risk profile of an organisation.
After fixing the risk profile, the organisation can categorise risks to manage them properly at the right time.
2.2 Review and comment on risk profiles of organisations on different industries.
• Each organisation faces risks that are influenced by the type of industry they are associated
• Similar risks will be faced by the organisation in the same industry. However, depending on the organisation’s operations, additional risks will arise.
• Organisations which identifies whether the risks will impact their industry as a whole or affect only their organisation and attempt to mitigatethose risks will be successful
• Industry Risk Profile or IRP was developed by Self Administration Organisation (SAO) for use at the national level which provides safety oversight of the industry sector
• Each organisation can customisethe Risk Profiling Service according to its own risk appetite and thresholds.
• 2.3 Discuss enterprise wide risk and the benefits and drawbacks of such an approach
• Enterprise-Wide Risk Management: overall management of risk that an organisation takes and holds to achieve its strategic aims. It identifies all external and internal risks, their positive and negative impacts on the organisation, prioritising, controlling and monitoring risks.
• One primary objective of the enterprise-wide risk management is to ensure that risk management is embedded in strategic decision making. So that a framework for riskbased decision making is designed.
• Capabilities of enterprise-wide risk management system are
• Assessing, designing and successfully implementing the risk management functions
• Finding solutions for interim management
• Training on the possible risks management to the employees, and make them face the risk as a common discussion
• BenefitsofEnterprise-wideriskmanagement
• Identifynew opportunitiesand challenges
• Improvethe organisation’s ability to identify risks and establishappropriateresponses
• Reduces surprisesrelatedto financial loss
• Improveresourcedeployment
• Focus on risk at all level will increase, which results in lowerrisk..
• Disadvantages of enterprise wide risk management
• No routine process defined for total management of risk, the process is just 'bits and pieces',i.e. focused on sensational risks of accounting.
• Mitigation cost is not calculated only the severity and likelihood of the loss is explained ERM Fails to Rank Risks, and there are no resources to mitigate every identified risk.
• References
• Chao Peng, G. and Baptista Nunes, M. (2009) Identification and assessment of risks associated with ERP post-implementation in China. Journal of Enterprise Information Management, 22(5), pp.587-614.
• Harwood, I.A., Ward, S.C. and Chapman, C.B. (2009) A grounded exploration of organisational risk propensity. Journal of Risk Research, 12(5), pp.563-579.
LO 3 Investigate how innovation can be used to reduce risk aversion
in growing organisations.
3.1 Analyse the possible risks of innovation in an organisation
• Innovations are described as the powerful key that brings new benefits to both the organisation and customers and thus creates new markets and profits if judiciously implemented
• While introducing innovation in an organisation, one should be aware of the need to innovate and understand the benefits that innovation can bring.
• Benefits of innovation would be increasing profit, market quota, usage of new business opportunity, market development etc. if the innovation were appropriate. But if the innovation was implemented in the wrong way, all will be affected negatively.
• Risks of innovation
• The innovation should be capable of competing with the existing market and making sure that it satisfies all the legal regulations. No one can guarantee whether the implementation will be a profit or gain. Maximum research should be done while implementing.
• Longer the development timescale the risk will be greater.
• If a strong competitor copies the innovation and turns it to an industry standard, the innovation will transfer it into a standard solution of every company within the industry, so that it loses its innovation status of an organisation which in turn destroys the competitive advantage.
•3.2 Examples of how to manage innovation risk that innovation can be used to create advantages
• Internal risks:
• Comparing both the internal and external risks, the most precisely manageable risk for an organisation is the internally specified risks.
• Another internal risk associated with internal procedures of an organisations is the corruption, through which significant misconducts can occur in the company.
• The illegal practice conducted by a person or a group in an organisation through which individual benefit is attained by creating a loss of profit for the organisation is stated as corruption.
Staff turnover: The risk integrated with low numbers of staffs in an organization through which low productivity is developed. In a project, if the individual that have sufficient knowledge regarding the process is missing, then this can be stated as lack of leadership (McNeil, Frey and Embrechts, 2015).
Infrastructure: the estimation of required sources for developing and completing the project is stated as infrastructure requirements. The most common types of resources are- Internet, mode of travelling means and place for working.
• The conflicting project aims: Evaluating the current political structure of a nation and identifying the compliance of completing the goals and objectives of a project accurately.
• Cultural risks: Providing importance to the values and beliefs of stakeholders related to the project such as employees, partners and local bodies that benefits through the project after its completion. Cultural risks are mostly the sensitive factor that has to be taken care of immediately before the project starts.
• External risks:
• The unexpected risks faced by an organisation in various dimensions such as financial, economic and resource management are stated as external risks through which sudden issues can be generated inside an organisation (Hagel et al., 2014).
• Unexpected issues raised in political perspective through prevailing uncertainty in a nation, through which the possibility of social conflicts can be developed.
• Taking over the organisations procedures by creating a hostile situation by workers through the assistanceof trade unions.
• Possibility of bankrupt situations
• Sudden financial crisis
• Conflicts from external sources
• Alterations in rules and legislations
Reference
Hagel, S., Bruns, T., Pletz, M.W., Engel, C., Kalff, R. and Ewald, C. (2014)
External ventricular drain infections: risk factors and outcome. Interdisciplinary perspectives on infectious diseases.
McNeil, A.J., Frey, R. and Embrechts, P. (2015) Quantitative risk management: Concepts, techniques and tools. London: Princeton university press.
Laforet, S. (2011) A framework of organisational innovation and outcomes in SMEs. International Journal of Entrepreneurial Behavior & Research, 17(4), pp.380408.
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