RISK TAKING
Presentation 2
GROUP 9.
Presented By:
ENC221-0066/2018 DENNIS OKANDA
ENC221-0371/2018 BRIAN KIPKORIR KIPLAGAT
ENC221-0105/2018 CYRUS KIMUTAI KIPRONO
ENC221-0107/2017 OTIENO ISAAC NICHOLAS
ENC 221-0320/2016 MAGRET CHEPKIRUI.
INTRODUCTION.
Risk, in the realm of entrepreneurship, extends beyond the potential deviation between
expected and actual outcomes. Entrepreneurship inherently involves navigating uncharted
territories, making risk management a critical aspect of strategic decision-making. Beyond
accidents, natural causes, and deliberate attacks, entrepreneurs grapple with uncertainties in
market dynamics, evolving consumer preferences, and technological disruptions.
Entrepreneurial ventures are characterized by a proactive engagement with risk, where
calculated risks are often synonymous with innovation and growth. In the entrepreneurial
landscape, risk management becomes a dynamic technique for not only measuring, monitoring,
and controlling financial and operational risks but also for fostering an environment that
encourages creativity and bold decision-making.
Entrepreneurs must strike a delicate balance between embracing risk to seize opportunities and
implementing effective risk management strategies to mitigate potential negative impacts. The
ability to navigate uncertainties and adapt to changing circumstances is intrinsic to the
entrepreneurial spirit, making risk management an indispensable tool for steering businesses
toward sustainable success in the volatile landscape of entrepreneurship.
Types of Risk.
there are various types of risks that entrepreneurs and businesses may encounter. Here are
explanations for each of the types you mentioned:
1. Financial Risk:
Financial risk refers to the possibility of loss resulting from inadequate financial management,
market fluctuations, economic conditions, or other factors affecting a company's financial
health.
Examples: Market volatility, credit risk, currency exchange rate fluctuations, and investment
risks.
2. Operational Risk:
Operational risk involves the potential for loss arising from internal processes, systems, people,
or external events other than credit, market, or liquidity risks.
Examples: Human error, technological failures, supply chain disruptions, and natural disasters
impacting operations.
3. Capital Risk:
Capital risk, also known as equity risk, is the potential for loss of investment capital. It
encompasses risks associated with the ownership of shares in a company or other forms of
equity.
Examples: Market risk affecting the value of stocks, dilution of ownership through additional
equity issuance, and poor financial performance leading to a decline in share value.
4. Liquidity Risk:
Liquidity risk is the risk that a company may not be able to meet its short-term financial
obligations due to an inability to convert assets into cash quickly.
Examples: Inability to sell assets quickly, a sudden spike in demand for cash, or disruptions in
financial markets affecting the ability to borrow or sell securities.
5. Interest Rate Risk:
Interest rate risk is the potential for losses arising from changes in interest rates, impacting the
cost of borrowing or the return on investments.
Examples: Fluctuations in interest rates affecting loan repayments, bond values, and the cost of
capital.
6. Sovereign Risk:
Sovereign risk, also known as country risk, is the risk associated with investing or doing business
in a particular country due to political, economic, or regulatory factors.
Examples: Political instability, changes in government policies, currency devaluation, and
economic downturns specific to a country.
These types of risks are interconnected, and effective risk management involves identifying,
assessing, and mitigating these risks to ensure the stability and sustainability of a business.
Entrepreneurs need to develop comprehensive risk management strategies that address these
various dimensions to enhance their ability to navigate uncertainties and challenges in the
business environment.
Principles of risk management:
1. Integral Part of Processes:
• Within operational frameworks, risk management seamlessly intertwines with
daily processes. For instance, a manufacturing company systematically evaluates
potential supply chain disruptions and production bottlenecks as an inherent
part of its operational procedures.
2. Part of Decision Making:
• In the entrepreneurial landscape, risk considerations play a pivotal role in
decision-making. When launching a new product, entrepreneurs intricately
analyze market dynamics, competition, and production challenges, using this
information to make strategic decisions that balance potential rewards with
associated risks.
3. Creates Value:
• Robust risk management practices not only shield against potential losses but
also generate value for stakeholders. A financial institution, by ensuring a secure
financial environment, attracts investors, builds trust, and enhances its market
reputation, thereby creating value for its stakeholders.
4. Systematic and Structured:
• Project managers employ a structured risk management process to enhance
project success rates. Before a project commences, risks are identified, analyzed,
and prioritized systematically, allowing for efficient resource allocation and
increased project resilience.
5. Addresses Uncertainty:
• In dynamic industries like technology, companies address uncertainties through
continuous risk monitoring. A tech startup, for instance, navigates the ever-
changing tech landscape by proactively identifying potential disruptions, allowing
for timely adjustments to remain competitive.
6. Dynamic and Responsive to Change:
• Businesses that operate in rapidly evolving markets adjust risk management
strategies in response to change. A retail business, operating both online and
offline, continually reassesses risks associated with cybersecurity, market trends,
and supply chain disruptions to maintain agility.
7. Controllable, Improvable, Enhance able:
• Implementing risk management in software development ensures a controllable
environment. Through regular code reviews, testing, and feedback loops,
potential issues are identified and addressed, contributing to continuous
improvement in the development process.
8. Based on Best Available Information:
• Investment firms base risk management decisions on thorough market research
and financial analysis. By relying on the best available information, these firms
make informed investment choices, optimizing the risk-return profile of their
portfolios.
9. Tailored to Meet Objectives:
• Healthcare organizations tailor risk management to specific patient care
objectives. Risks related to patient safety, regulatory compliance, and medical
advancements are assessed and managed in alignment with the organization's
overarching goal of providing high-quality healthcare services.
10. Transparent and Inclusive:
• Multinational corporations foster a culture of transparency in risk
communication. All relevant stakeholders, including employees, shareholders,
and regulatory bodies, are kept informed about the company's risk exposure.
This ensures that decision-making processes are inclusive and aligned with
shared goals.
Process of risk management
1. Risk Identification
- Involves determining potential sources of risk, both internal and external
- Critical for identifying threats, weaknesses that could impact objectives
- Common techniques:
- Objective Based: Analyze events that endanger goals
- Scenario Based: Develop scenarios showing alternatives
- Risk Checking: Consult databases listing known risks
-Doing thorough identification as the first step enables better assessment and mitigation of risks
2. Risk Assessment
- identifying risks, next key step is risk assessment
- Involatile evaluating likelihood a risk event will occur
- Also examines potential cost/impact if the risk occurs
- Assesses frequency and probability as well
- Effective assessment provides data needed to gauge priority and choose management
methods
3. Selection of Risk Management Techniques.
- Four main techniques used to address identified risks:
- Avoidance: Not performing activity; avoids risk but loses potential gain
- Reduction: Lower likelihood or impact of risk
- Retention: Absorb loss internally (self-insurance)
- Transfer: Shift risk to third party (e.g., insurance)
4. Implementation.
It entails the following all the planned methods to counter the effect of the risks
5. Review and evaluation of the risk management plan.
This is due to the dynamic nature of the enterprise thus risk management risk plan should be
updated periodically.
Limitations
1. Time and Resource Wastage if Risks Are Improperly Assessed and Prioritized:
• When risks are not accurately evaluated and prioritized, it can lead to the
misallocation of resources. For instance, if a business focuses extensively on
mitigating a low-impact risk while neglecting more critical threats, valuable time
and resources are wasted on addressing less significant issues. This misalignment
can impede overall operational efficiency and hinder the achievement of
strategic objectives.
2. Likely to Divert Resources That Could Have Been Otherwise Profitable to the
Enterprise:
• Inadequate risk assessment may result in the misdirection of resources away
from potentially profitable endeavors. For example, if a company overemphasizes
risk aversion and allocates excessive resources to risk mitigation, it might miss
out on seizing lucrative opportunities. This limitation could hinder innovation,
market expansion, and other ventures that could contribute to the enterprise's
profitability and growth.
3. Prioritizing Too Highly or Risk Management Process Could Hinder Project Completion
or Initiation:
• Overemphasis on risk management, if not balanced appropriately, may lead to
project delays or even prevent project initiation. If every potential risk is given
excessive attention, it can create a risk-averse culture that is overly cautious. This
cautious approach may result in perpetual risk assessments, causing project
paralysis and preventing the organization from moving forward. Striking the right
balance is crucial to ensure that risk management contributes to project success
without becoming a barrier to progress.
4. Inhibiting Innovation and Creativity:
• Rigorous risk management processes, if overly stringent, can stifle innovation and
creativity within an organization. For instance, a technology company overly
focused on avoiding all potential technical glitches might shy away from exploring
cutting-edge solutions due to a fear of associated risks. This can hinder the
company's ability to stay competitive in a rapidly evolving market.
5. Reduced Agility and Responsiveness:
• If risk management processes are too rigid and not adaptable to changing
circumstances, the organization may become less agile. For example, a
manufacturing company that is overly committed to a predefined risk mitigation
plan might struggle to adapt quickly to unexpected market shifts or disruptions in
the supply chain. This lack of responsiveness can lead to missed opportunities
and increased vulnerability.
6. Potential for Paralysis by Analysis:
• Excessive scrutiny in risk assessment without decisive action can lead to a state
of "paralysis by analysis." For instance, a project team might continuously analyze
potential risks without making progress on the project itself. This analysis
paralysis can hinder decision-making and prevent the organization from seizing
time-sensitive opportunities.
7. Underestimation of Emerging Risks:
• Overreliance on historical data and established risk management frameworks
may result in the underestimation of emerging risks. For example, a financial
institution might focus on known market risks but overlook new and unforeseen
risks associated with rapidly changing global economic conditions. This oversight
can expose the organization to unexpected vulnerabilities.
8. Neglect of Strategic Risks:
• If risk management is primarily focused on operational and financial risks,
strategic risks may be overlooked. For instance, a retail company concentrating
on day-to-day operational risks might neglect the strategic risk associated with
shifts in consumer preferences or emerging competitors. This oversight can
impact the long-term sustainability and competitiveness of the business.
9. Failure to Capitalize on First-Mover Advantage:
• A risk-averse approach, if not carefully balanced, can lead to missed
opportunities for a first-mover advantage. For instance, a company hesitant to
invest in a new market due to perceived risks might lose the opportunity to
establish itself as a pioneer, potentially ceding the advantage to more agile
competitors.
10. Increased Compliance Burden:
• Overemphasis on risk management for compliance purposes may lead to an
unnecessary administrative burden. For example, a financial institution focusing
extensively on regulatory risks might divert significant resources to compliance
documentation, detracting from core business activities and potentially affecting
overall efficiency.
An effective risk management should include the following:
1) Planning How the Risk Could Be Managed:
Effective risk management begins with a comprehensive planning phase. During this stage, organizations
identify potential risks and develop strategies to manage and mitigate them. This involves conducting
risk assessments, evaluating the likelihood and impact of each risk, and determining appropriate
responses. For example, a construction company planning a large infrastructure project would assess
risks such as weather-related delays, regulatory changes, and supply chain disruptions. By proactively
planning how these risks could be managed, the company ensures a more resilient and adaptive
approach to potential challenges.
2) Assigning a Risk Management Officer with the Right Competence:
Designating a competent and qualified individual as the risk management officer is crucial for the
success of the risk management process. This individual should possess a deep understanding of the
industry, relevant regulations, and risk management methodologies. For instance, in a financial
institution, the risk management officer might need expertise in financial markets, compliance, and a
strong analytical background. Their role involves overseeing the implementation of risk management
strategies, coordinating risk assessments, and ensuring that the organization is well-prepared to navigate
potential challenges.
3) Maintaining an Active Database of Projected Risks:
A dynamic and up-to-date database of projected risks is essential for effective risk management. This
database serves as a repository of information related to identified risks, their characteristics, and the
status of risk mitigation measures. In practice, this could involve using risk management software to
catalog and update risks regularly. For example, a technology company may maintain a database that
includes potential cybersecurity threats, market volatility, and technological obsolescence. This active
database facilitates continuous monitoring and adaptation of risk management strategies as the business
environment evolves.
4) Creating a Risk Reporting Channel:
Establishing a clear and accessible risk reporting channel ensures that information about potential risks
flows efficiently within the organization. This can take the form of regular risk assessment meetings,
online reporting tools, or designated communication channels. For instance, employees in a
manufacturing plant may have a direct channel to report safety concerns or operational risks. A
transparent reporting mechanism fosters a culture of risk awareness and encourages timely
identification and communication of emerging threats.
5) Preparing Mitigation Plans for Risks That Are Likely to Occur:
Beyond merely identifying risks, an effective risk management process involves developing detailed
mitigation plans for those risks deemed most likely to occur. Mitigation plans outline specific actions to
reduce the impact or likelihood of a risk. For example, a software development company might have a
mitigation plan for potential project delays due to unforeseen technical challenges. These plans are
proactive measures that empower organizations to respond swiftly and decisively when faced with
anticipated risks, minimizing potential disruptions and ensuring continuity in operations.