Chapter 11: Risk Management
Definition and Purpose
Risk management involves identifying, assessing, and controlling risks to minimize potential
negative impacts while maximizing opportunities. It is a systematic process aimed at reducing
uncertainty and ensuring organizational resilience.
Basic Principles of Risk Management
Risk management should:
● Create value by ensuring benefits exceed costs.
● Address uncertainties and assumptions.
● Be integrated into organizational processes and decision-making.
● Be dynamic, iterative, and responsive to changes.
● Promote continual improvement using the best available information.
● Be systematic, structured, and periodically reassessed.
Process of Risk Management (ISO 31000)
The steps include:
1. Establishing the context.
2. Identifying potential risks.
3. Conducting risk assessments.
Elements of Risk Management
Key components include:
● Identifying and assessing threats.
● Evaluating vulnerabilities of critical assets.
● Determining risks based on likelihood and consequences.
● Proposing ways to reduce risks.
● Prioritizing risk reduction strategies.
Relevant Risk Terminologies
1. Risks associated with investments (e.g., business risk, financial risk, liquidity risk).
2. Risks in manufacturing, trading, and service industries.
3. Risks in financial institutions.
Potential Risk Treatments
Four main techniques are suggested:
1. Risk avoidance.
2. Risk reduction.
3. Risk sharing.
4. Risk retention.
Areas of Risk Management
Common applications include:
● Enterprise risk management.
● Project management risks.
● IT risk management.
● Risks in petroleum and natural gas industries.
Steps in the Risk Management Process
Organizations can enhance their risk oversight by:
1. Establishing a dedicated risk committee.
2. Implementing a formal risk management system.
3. Regularly evaluating the system's effectiveness.
4. Sharing best practices and lessons learned across the organization.
Chapter 12: Practical Guidelines for Reducing and
Managing Business Risks
Common Areas of Risk in Business
Risks often stem from five key catalysts:
1. Technology changes or failures.
2. Organizational change.
3. Inefficient processes.
4. Human factors (e.g., errors or resistance).
5. External factors (e.g., market dynamics).
Simple Risk Management Process
1. Assess and analyze risks systematically by identifying and quantifying them.
2. Avoid or mitigate risks wherever possible.
3. Control, monitor, and manage risks continuously.
Key Steps in Managing Risks
A. Risk Assessment and Analysis: Identify potential risks and evaluate their impact on
business decisions.
B. Risk Management and Control: Implement strategies to avoid or mitigate risks while
fostering a positive risk management culture.
C. Controlling Enterprise-Wide Risks: Monitor risks consistently to ensure they remain
manageable.
Practical Techniques to Improve Profitability
To enhance profitability, businesses can:
● Focus decision-making on high-profit areas.
● Address underperforming products or services strategically.
● Ensure new offerings contribute positively to overall profitability.
● Optimize development, production, and procurement processes.
● Leverage existing customers for greater value creation.
Techniques for Assessing Profitability
Common methods include:
1. Using discounted cash flow analysis for investment evaluation.
2. Avoiding financial pitfalls like weak budget controls or poor cash flow management.
By applying these principles, businesses can better manage uncertainties while improving
operational efficiency and profitability.
