Tag Archives: business uncertainty

It’s Oxymoron– Managing Risk and Uncertainty: An Organization Without Risk is Organization Stuck in a Rut…

Risk is a basic ingredient for innovation… Risk implies uncertainty and an inability to fully control the outcomes or consequences of an event… It’s an uncertain world and organizations must accept the fact that they operate in a world of unknowable risk… According to Donald J. Riggin; regardless of the nature of risk it’s impossible to manage; in fact, the expression ‘risk management’ is an oxymoron, because if risk was manageable it would no longer be considered risk…

However, understanding risks is a critical step to knowing how to deal it… According to Steve Tobak; the notion that– Big Risk beget Big Reward is nonsense… Whether it’s the world’s top– hedge fund traders, venture capitalists, real estate tycoons… these billionaire insiders look for opportunities that provide asymmetrical risk/reward… This is fancy way of saying that ‘reward’ is drastically disproportionate to ‘risk’…

In the article Decision-Making Under Risk and Uncertainty by Samia Rekhi writes: The starting point in decision-making is the distinction among three different states of a decision environments: certainty, risk, uncertainty. The distinction is drawn on the basis of the degree of knowledge or information possessed by the decision-maker… Certainty can be characterized as a state in which the decision-maker possesses complete and perfect knowledge regarding the impact of all of the available alternatives…

Often when making decisions the two terms ‘risk’ and ‘uncertainty’ are used synonymous… Both imply ‘lack of certainty’, but there is a difference between the two concepts; risk is characterized as a state in which decision-makers have imperfect knowledge– incomplete information but enough to assign a probability estimate to possible outcomes of a decision…

These estimates may be subjective judgments or they may be derived mathematically from a probability distribution… Uncertainty is a state in which the decision-maker does not have enough information to make a subjective probability assessments… It was Frank Knight who first drew a distinction between risk and uncertainty; risk is objective, whereas uncertainty is subjective… risk can be quantified, whereas uncertainty cannot… Uncertainty implies that probabilities of various outcomes are unknown and cannot be estimated… It’s largely because of these two characteristics that decision-making, in risk environment, involves primarily subjective judgment…

All business decision-making have common characteristics. The traditional approach requires precise information and thus often leads management to underestimate uncertainty and risk factors, which can be downright dangerous for an organization… According to Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguer; making sound decisions under uncertainty requires an approach that avoids the dangerous binary view of risk…

Available relevant business decision information tends to fall into two categories… First, it’s often possible to identify clear trends, such as; market demographics… Second, it’s also possible to identify not so clear trends, such as; customer psychographics…The uncertainty or risk factors that remains tend to fall into one of four broad levels …

  • Level one: Clear enough future: The uncertainty is irrelevant and risk factors are relatively low for making decisions… hence, management can make reasonable precise decisions… Also management can use traditional information gathering, such as; market research, analyses of competitor costs and capacity, value chain analysis, Michael Porter’s five-forces framework, and so on…
  • Level two: Alternative futures: The future can be described as one of a few discrete scenarios… Although probability analysis is useful it cannot precisely identify which outcome is most likely to occur…
  • Level three: Range of futures: A range of potential futures can be identified… A limited number of key variables define the range and most likely outcome can lie anywhere within the range. There are no natural discrete scenarios for the outcome. Organizations in emerging industries or entering new geographic markets often face this uncertainty…
  • Level four: True ambiguity: A number uncertainties and risk factors create an environment that is virtually impossible to predict. And it’s impossible to identify a range of potential outcomes, let alone scenarios within a range. It might not even be possible to identify, much less predict, all the relevant variables that define the future. This situation is rare– black swan events– although they do exist.

Knowing how to assess risk is an organizational competency that must be fostered for long-term sustainability… To do so requires new language and tools to facilitate effective decision-making and decisive action. According to Ralph Jacobson; in developing business strategy it’s important to determine an organization’s ‘risk appetite’, i.e.; how much risk it’s willing, and can afford, to accept… This involves identifying and understanding the scope of risk required in a decision. Typically there are four options– avoid it, accept it, transfer it, share it…

But often decision-makers are confronted with unknowns– these are ‘unknown unknowns’… These unknowns are things that haven’t even been thought of as possible– black swan occurrence– rare but they do pop-up every now and then… situations where management tries to understand more about what they don’t know, than what you do know... These are precisely situations where innovation thrives– it’s when innovators push the edges, challenge status quo, break boundaries in the realm of uncertainty and risk taking. According to Dan Gregory and Kieran Flanagan; uncertainty suggests taking risks, going beyond the known and knowable– thinking scared, thinking stupid, thinking different…

Thinking scared is simply understanding that fear drives all decision-making– it might be the fear of taking action or fear of not taking action. These twin forces often govern negative behavior… but they can also be marshaled and used for positive motivation– the fear of missing out is perhaps most potent motivation in many organization. It’s human nature to resist change and this same nature can be used to drive innovation that embraces risk and uncertainty, and thinks beyond scared, thinks beyond stupid, thinks beyond different…

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…