risk analysis and risk mgt
TRANSCRIPT
and
Adrian Pegason&
Atty. Darwin TenajaDec. 2010
College of Governance, Business & EconomicsDepartment of Business Administration
FINANCIAL MANAGEMENTProf. R. Gabuya
overviewWhat is risk & risk mgt.
Why do we need risk analysis
Who uses risk management
How is risk management used?
The 7 basic process steps…
Component of risk
Overall categories of risk
5 primary means of risk mgt.
How?
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Prioritizing Which Risks to Address First
Risk mgt. is an individual decision
Porter’s 5 forces
Assessing the Balance of Power in a Business Situation
Usage
Risk mgt. team
3
overview
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What is Risk
Risk exists if there is something you don’t want to happen – having a chance to happen!!!
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What is Risk – Take 2
The probability that some event will cause an undesirable outcome on the financial health of your
business and/or other business/family goals
risk = probability of event x cost of event
- Single point forecasts are dangerous!
- Derive bounds for the range of possible outcomes
- Sensitivity testing of the assumptions
- Better perception of risks and their interaction
- Anticipation and contingency planning
- Overall reduction of risk exposure through hedging
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Why do we need risk analysis
Risk analysis helps you develop insights, knowledge and confidence for better decision making and risk management.
What is Risk Management?What is Risk Management?8
• Good management practice
• Process steps that enable improvement in decision making
• A logical and systematic approach
• Identifying opportunities
• Avoiding or minimising losses
Risk Management is a methodology that helps managers make best use of their available resources.
Who uses Risk Management?Who uses Risk Management?
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Risk Management practices are widely used in public and the private sectors, covering a wide range of activities or operations.
These include:
• Finance and Investment
• Insurance
• Health Care
• Public Institutions
• Governments
Effective Risk ManagementEffective Risk Management is a recognised and valued skill.
Educational institutions have formal study courses and award degrees in Risk
Management.The Risk Management process is well
established. (International RM process standards.)
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Who uses Risk Management?Who uses Risk Management?
Risk Management isnow an integral part of business planning.
How is Risk Management used?How is Risk Management used?
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The Risk Management process steps are a generic guide for any organisation, regardless of the type of business, activity or function.
There are 77 steps
in the RM process
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The basic process steps are:
Establish the context
Identify the risks
Analyse the risks
Evaluate the risks
Treat the risks
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‘Risk’ is dynamic and subject to constant change, so the process includes continuing:
Communication & consultation
Monitoring and review
and
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The Risk Management process:
The strategic and organisational context in which risk management will take place.
For example, the nature of your business, the risks inherent in your business and your priorities.
Communicate & consult
Establish the context
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The Risk Management process:
Communicate & consultMonitor and review
Defining types of risk, for instance, ‘Strategic’ risks to the goals and objectives of the organisation.
• Identifying the stakeholders, (i.e.,who is involved or affected).
• Past events, future developments.
Identify the risks
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The Risk Management process:
Communicate & consultMonitor and review
Analyse the risks
How likely is the risk event to happen? (Probability and frequency?)
What would be the impact, cost or consequences of that event occurring? (Economic, political, social?)
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The Risk Management process:
Communicate & consultMonitor and review
Evaluate the risks
Rank the risks according to management priorities, by risk category and rated by likelihood and possible cost or consequence.
Determine inherent levels of risk.
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The Risk Management process:
Treat the risks
Develop and implement a plan with specific counter-measures to address the identified risks.
Consider:• Priorities (Strategic and operational)• Resources (human, financial and technical)• Risk acceptance, (i.e., low risks)
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The Risk Management process:
Document your risk management plan and describe the reasons behind selecting the risk and for the treatment chosen.
Record allocated responsibilities, monitoring or evaluation processes, and assumptions on residual risk.
Communicate & consultMonitor and review
Treat the risks
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The Risk Management process:
Communicate & consult
Risk Management policies and decisions must be regularly reviewed.
Monitor and review
In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns, or government policies).
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The Risk Management process:
Communicate & consult
Risk Management policies and decisions must be regularly reviewed.
Monitor and review
In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns, or government policies).
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Mon
itor
ing
and
revi
ew
Com
mun
icat
ion
& co
nsul
tati
on
Establish the context
Identify the risks
Analyse the risks
Evaluate the risks
Treat the risks
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Components of Risk
Probability
of 5%
Probability
of 15%
Probability
of 60%
Probability
of 15%
Probability
of 5%
EVENT
Cause/Source
Hail
Odor lawsuit e.g. fpic.
Disabling farm accident
Surplus Production
Increasing interest rates
Potential Outcome #1
PotentialOutcome #2
PotentialOutcome#3
PotentialOutcome#4
PotentialOutcome#5
[minor nuisance] [catastrophic]
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Components of Risk – Undesirable Outcome
Put simply, the Undesirable Outcome is what hurts!
- lower than expected production- catastrophically lower production- inability to meet cash flow- loss of income- catastrophic loss of income- loss of life- loss of buildings & other resources- loss of health- inability to get a permit or loan
Denied
X
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Components of Risk – Event (Cause/Source of Risk)
The Event is what caused the hurt:
- weather event- injury/death of an employee- neighbors action against you- surplus production of milk- widespread poor grain production- low quality inputs- divorce or disagreement- downward slide in general economy- and countless more!!!
Family Goals& Objectives
Overall Categories of Risk
Legal Risk Price Risk
Environmental Risk
5 D’s Risk- Death- Disability- Disagreement- Divorce- Disaster
Production Risk
Human Resources
Risk
Financial Risk
Relationship/Public
Relations Risk
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Risk Increases the More You Don’t Know
All The Potential Outcomes
The Probability of Occurrence
Cost of a Undesirable Outcome
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All The Potential Outcomes
The Probability of Each Outcome Occurring
Cost of Undesirable Outcomes
Said Another Way:The more you do know and understand about
the better long term risk manager you will be.
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Five Primary Means of Risk Management
Reduce1. Reduce the probability that the event will occur2. Reduce the impact if the event does occur
Transfer 1. Transfer the cost of an undesirable outcome to someone else
Avoid1. Completely avoid potential events thus providing a zero
probability that they will occur
Do Nothing 1. Let the risk happen and be ready to bear the consequences.
e.g. pcso
Level of Production
Employee Performance
Interest Rates
Personal Injury/Death (you, employee, spouse)
Divorce
Disagreement
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32Production Risk
Risk: Poor weather event causing the undesirable outcome of lower than expected yields.
Risk Management???
160 19595
Corn Yields
Transfer the cost of the
risk via crop insurance
33Production Risk:Risk: of a poor weather event causing the
undesirable outcome of lower than expected yieldsRisk Management???
160 19595Corn Yields
Reduce the cost of the risk via spatial location, multiple variety selection, and other cropping practices.
34Financial RiskRisk: higher interest rates causing the undesirable outcome of lower than expected income/cash flow
Risk Management???
Do Nothing
Cash Flow
35Financial RiskRisk: higher interest rates causing the undesirable outcome of lower than expected income/cash flow
Risk Management???
Cash FlowTransfer the risk via fixed
rate loans Do Nothing
36Financial RiskRisk: higher interest rates causing the undesirable outcome of lower than expected income/cash flow
Risk Management???
Transfer the risk via fixed
rate loans
Reduce the cost of the negative
impact via lower debt financing
Do Nothing
Cash Flow
37Human ResourcesRisk: Cost of hired labor not showing up or making a
mistake causing lower production, injury, or deathRisk Management???
Reduce the Risk via:-Regular employee meetings-Training programs-Well written position descriptions-Incentive plans
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Transfer the risk via
disability and other
insurance
Human ResourcesRisk: Cost of hired labor not showing up or making a
mistake causing lower production, injury, or deathRisk Management???
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Avoid the risk by not hiring
any employees
Human ResourcesRisk: Cost of hired labor not showing up or making a
mistake causing lower production, injury, or deathRisk Management???
40Environmental RiskRisk: manure spill causing the undesirable outcome
of fines, lawsuits, and loss of incomeRisk Management???
Reduce the risk via:-Education-Facilities-Monitoring checks and systems-Field and manure trt. practices
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Transfer the risk via liability insurance
Environmental RiskRisk: manure spill causing the undesirable outcome
of fines, lawsuits, and loss of incomeRisk Management???
42Disability Risk
Risk: poor health causing loss of incomeRisk Management???
Incapacitated Avg. Health
Reduce incidence or impact of risk via:-Annual health exam - Quit smoking-Exercise -Disability Insurance-Co-Manager
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How???• Step 1: Be aware, identify the risks you face.• Step 2: Evaluate:
– the likelihood that the risk will occur, and – how bad the hurt will be if it does occur
• Step 3: Decide on how you will address the risk – reduce, transfer, avoid, nothing, or some combination
• Step 4: Implement– What is the most frustrating words used in management??
Answer: “If I had only ……”
• Step 5: Control– Monitor to assure that what you said you would do, you did, and
that you are getting what you want out of your your risk management strategies.
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Prioritizing Which Risks to Address First
Probability of Happening
Potential Impact
Act if cost effective
No action required
Immediate action
Action required
Small Catastrophic
High
Low
Source: Dr. Geoff Benson, North Carolina State University
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Risk Management Is An Individual Decision
No one "right" decision
The "right" decision depends on the characteristics of the
operation and individual decision-maker
Risk
Revenue
1
2
3
Porter’s 5 forces
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Is a framework for the industry analysis and business strategy development formed by Micheal E. Porter of HBS in 1979.Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven down to zero.
Assessing the Balance of Power in a Business Situation
The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're looking to move into.With a clear understanding of where power lies, you can take fair advantage of a situation of strenght , improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations too.
Usage52
Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist" they might use " Value Chain " afterward. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered naїve.According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers.
A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (line of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of usiness).
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Your RiskManagement
Team
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