Most Under-Estimated Business Risk in Face of Uncertainty: Blindness to Ever-Increasing Threats in World of Business Risk…

Underestimated business risk, in hindsight, may seem obvious… Yet many companies fall prey to an ever-increasing world of business risks… management often believes that a risk-event just came out of nowhere, or it could not have been anticipated… Business risk is probabilistic; an event that may happen, or it may not… and often management is either, blind to the risk factors, or just neglects to identify the risks that might impact the organization.

Often business may suffer from a risk-event even before knowing that one is actually occurring, and typically the root cause is a management ‘blindness’ to the business risk factors, such as; change in consumer behavior, increase competition, change in government policy, market disruption, product obsolescence… Also, there may be loss of company assets due to– fire, flood, earthquakes, riots, war, political unrest… which may cause serious interruption to business operations…

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Many companies are often ill-equipped to deal with uncertainty and business risk. Yet every day companies base business plans on uncertainties, and do not adequately consider business risk, whether they be– next month’s sales, next year’s costs, tomorrow’s stock price… According to Sam Savage; business plans based on ‘average’ assumptions are wrong, on average… and typically business risk is depicted as a single number in a spreadsheet to represent future uncertainty– statistical uncertainties are pervasive in business decision-making every day…

According to David Leonhardt; many companies make two basic, and opposite, types of business risk assumptions, i.e.: When an unlikely risk-event is difficult to imagine, business tend to underestimate its likelihood; so management assumes it would not happen at least not to them… On the other hand, when an unlikely risk-event is all too easy to imagine, management often go in the opposite direction and overestimate the risk…

Fourth Allianz Business Risk Barometer 2015: This years survey conducted among more than 500 business risk managers and corporate insurance experts from businesses in 47 countries found following; companies are facing new challenges from a rise of disruptive scenarios in an ever-increasing interconnected global business environment… And according to survey certain types of business risk are of continuing concern, e.g.;  market interruption and supply chain linkage (46% of responses), natural catastrophes (30%), fire and floods (27%)… In addition, cyber (17%) and political risks (11%) are the most significant movers…

According to Chris Fischer Hirs; the interdependency of many industries and processes means businesses are now exposed to an ever-increasing number of disruptive scenarios. Hence, negative effects can quickly multiply and one risk can lead to several others. Natural catastrophes or cyber attacks can cause business interruption not only for one company, but to whole supply chain, industry sector, critical infrastructure…

Business risk management must reflect this new reality by identifying the impact of all ‘inter-connectivity’ early in the process, which can mitigate or at least help prevent significant business risk… It’s also essential to foster ‘cross-functional’ collaboration within organizations to quickly identify potential business risk…

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In the article Executives Underestimate Business Risk of Security, Privacy to Consumers by Deloitte writes: Research uncovered a notable discrepancy between consumer product industry executivesperceptions of consumers attitudes toward security and privacy, and consumers’ stated views on the topic… Many consumer product (CP) industry executives may be out of touch with consumers’ opinions on the importance of data security and privacy… Results of an online survey of U.S. consumers and 70 CP industry executives suggest that consumers care a lot more about the security and privacy of personal data than many CP executives seem to realize… CP companies’ treatment of the personal data they collect from consumers appears to factor prominently in consumers’ purchasing decisions…

According to the survey data: 80% of consumers who responded to the survey say they are more likely to purchase from CP companies they believe protect their personal data; 72% avoid purchasing from companies they believe do not take adequate measures to protect consumers’ personal data; 70% say they would be more likely to buy from a CP company that a third-party verified as having high standards for data privacy and security; 59% say knowing a company experienced a data breach would negatively impact their likelihood of buying from that company…

Industry executives are putting their companies at significant business risk by not fully understanding consumers concerns… According to Frank Milano; the more sensitive data a company collects the greater its attractiveness to hackers and the greater the risk for data breaches… Companies may avoid alienating consumers and losing their hard-earned trust by being transparent about data collection and digital marketing practices… and giving consumers more control over their own personal data…

Executives also tend to overestimate effectiveness of their companies’ data privacy and security policies and value consumers receive in exchange for sharing their personal data, e.g.; the survey data shows that 77% of executives believe that their companies’ data privacy policies are clear and well-understood by consumers, while roughly 73% of consumers say they would like to see more clarity in companies’ data privacy policies… also 47% of executives believe consumers regard the risks of sharing their personal data is worth the personalized promotions, advertising, coupons they receive from companies in return…

However, only 25% of survey consumers agree with that assessment… also 47% of executives think consumers view the risks of sharing personal data as worth the brand recommendations they receive from companies… however, only 18% of consumers agree with that conclusion… Clearly there is a serious disconnect of perceptions between consumers and company executives…

In the article Managing Business Risk: Where Are You on the Curve? by Ralph Jacobson writes: Business risk must be in the forefront as management most critical agenda item… Knowing how to assess and properly manage business risk is an organization competency that must be fostered for long-term sustainability… This requires techniques and tools… that will facilitate effective strategic thinking, decision-making, decisive action…

One such technique that can be used to help management transition in world characterized by significant business risk factors is represented by an S-curve. The S-curve is a tool for evaluating risk and determining various kinds of actions that can be taken at specific points in time, e. g.; the S-curve technique suggests when growth and change in growth happens along an almost  predictable trajectory of three distinct phases…

brisk1 untitledUnderstanding where/when an issues falls on the S-curve determines the most effective action… One of the powerful attributes of the technique is that it can provide a timely way to determine when a new discontinuous change occurs and its relationship to the  existing state of the business. The S-curve strives to predict the collision of two worlds: The concept of S-curve helps to frame the situation so that players can depersonalize the negative energy and help each-side find value in the other-side. It’s in this manner that management can help balance business risk, e.g.; long and short-term conditions; existing and new financial models…

Without the use of this type of technique and tool business risk issues are prone to serious intra-organizational conflict– hence, the potential for very contentious risk issues can move from politically imposed solution, to more collaborative solution that embraces a larger set of possibilities…

The importance of business risk management can never be underestimated when you are involved in any business venture or making decision that might impact the very survival of a business. Identifying and mitigating business risk properly and correctly before they can make a serious impact on business is paramount to having a successful business… The importance of risk management is often seen in hindsight when ignored  business risk factors result in a failed business issue… In retrospect business risk issues fail because management was not properly prepared to engage the specific risk that had the potential for serious negative impact on the business… By having a business risk plan, business can prevent or mitigate most of underestimated business risk factors that might occur…

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According to Srini Pillay; many companies fall prey to unforeseen business risk, because management may believe that probably of occurrence is low, or that they are immune from the risk, or they just turn a blind-eye to the possibility, or the risk could not be foreseen or anticipated… While these excuses may be true for many issues, but a more plausible explanation is business risk ‘blindness’, which occurs due to the way the human brain is wired… business risk ‘blindness’ is the tendency to overlook immediate business risk when making decisions due to human factors, such as; fear, greed… a condition that occurs all too often in many organizations…

Business risk is inherent in decision-making, hence one of the most important management skills for ensuring long-term success is the ability to effectively evaluating all risk factors in making business decisions… No matter how obvious business risk might seem in hindsight, it’s critically important to detect the impact of specific risk factors on a business, in foresight…