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Managing Risks: A New Framework - Coggle Diagram
Managing Risks: A New Framework
Preventable risks
definition: internal risks arising from within the organization, that are controllable and ought to be eliminated or avoided
active prevention: monitoring operational processes and guiding people’s behaviors and decisions toward desired norms.
Strategy risks
definition: Strategy risks are quite different from preventable risks because they are not inherently undesirable. A strategy with high expected returns generally requires the company to take on significant risks, and managing those risks is a key driver in capturing the potential gains
a risk-management system designed to reduce the probability that the assumed risks actually materialize and to improve the company’s ability to manage or contain the risk events should they occur.
three ways of tackling strategy risk
Independent experts
risk:much of the risk arises from coping with known
laws of nature
, the risk
changes slowly over time
e.g.: JPL a.established
a risk review board
made up of
independent technical experts
b. role: challenge project engineers’ design, risk-assessment, and risk-mitigation decisions
Facilitators
risk: stem largely from
seemingly unrelated operational choices
across a complex organization that
accumulate gradually a
nd can remain
hidden for a long time.
central risk-management group
eg: Hydro One run dozens of workshops to identify and rank the principal risks; Employees use an
anonymous voting technology to rate each risk
---------------- -
risk map
, recommends
action plans
, and
designates an “owner”
for each major risk.
Embedded experts
risk:the financial services industry the volatile dynamics of asset markets and the potential impact of decisions made by decentralized traders and investment managers
embedded experts within the organization continuously monitor and influence the business’s risk profile, working side by side with the line managers whose activities are generating new ideas, innovation, and risks—and, if all goes well, profits eg: JP Morgan Private Bank
External risks
definition:arise from events outside the company and are beyond its influence or control. Sources of these risks include natural and political disasters and major macroeconomic shifts
Companies should tailor their risk-management processes to these different categories
the economic slowdown after the global financial crisis,
Infosys
identified a new risk related to its objective of
developing a global workforce
category
1.Natural and economic disasters with immediate impact
Tail-risk stress tests.
2.Geopolitical and environmental changes with long-term impact.
Scenario planning.
3.Competitive risks with medium-term impact
War-gaming
Why Risk Is Hard to Talk About
1.overconfident about the accuracy of our forecasts and risk assessments and far too narrow in our assessment of the range of outcomes that may occur.
2.anchor our estimates to readily available evidence despite the known danger of making linear extrapolations from recent history to a highly uncertain and variable future
3.compound this problem with a confirmation bias
4.tend to escalate commitment, irrationally directing even more resources to our failed course of action
5.Organizational biases also inhibit our ability to discuss risk and failure;
Groupthink is especially likely if the team is led by an overbearing or overconfident manager who wants to minimize conflict, delay, and challenges to his or her authority.
Avoiding the Function Trap
develop a companywide risk perspective by anchoring their discussions in strategic planning,
1.
Infosys,
generates risk discussions from the
Balanced Scorecard
, its management tool for
strategy measurement and communication
“growing client relationships”
uses a dual structure: a central risk team that identifies general strategy risks and establishes central policy, and specialized functional teams that design and monitor policies and controls in consultation with local business teams.
Volkswagen do Brasil : VW’s risk-management unit uses the company’s strategy map as a starting point for its dialogues about risk; generates a Risk Event Card for each risk on the map;identifies who has primary accountability for managing the risk