RISK ANALYSIS

The Dimensions of Risk

Risk varies from business to business, but the dimensions of risk are similar across all businesses. The level of risk associated with a particular business or project will depend upon…

The Dimensions of Risk

Value of resources devoted to the project Proportion of total business resources Length of time for which resources will

be devoted to the project Inherent risk of the project Cost of exiting the project Recoverable costs were the project to

fail

Visibility of risks

Potential risks can be identified during business planning process

Strategies can be developed to reduce them

Business’s ability to manage unforeseen risks depends on experience of management and nature of event.

Answer to reduce risks: A comprehensive business plan.

Types of risk

Operational Industry Financial Political

Potential Risks

Operational (Internal)

• Key staff resign/poached by competitor

• Problems occur in production process

• Machinery breaks down/incompatible with raw materials

• Stocks become damaged

• Fire, theft and floods

• IT problems• Product is hot,

but business cannot meet demand

• Actions of a rogue employee result in large liabilities for business

Industry (External)

• New companies enters market

• Key supplier (of crucial raw materials) closes

• Demand for product falls

• Aggressive price cut from competitor

• New technology makes existing product obsolete

• Two competitors merge with major cost advantage

Financial

• Stockmarket collapse prevents a crucial fundraising equity issue or merger with a competitor

• Interest rates increase; business’s debt increases

• Exchange rate is high; cost of raw materials from abroad increases

• High demand for product leads to overstocking; lacking of available working capital to fund business activities

Political

• Sanctions imposed on country prevent access to customers or raw materials

• Taxation rates are changed/taxation policy is altered

• Grants, loans and subsidies are altered

• Trade unions organize industrial action

• Pressure from lobbyists requires change in business practices

• Business suffers organized vandalism by radical protestors

Risk Assessment

Indentifying risks by PEST SWOT Position Mapping Others

Quantifying risks

Quantity demanded of product Selling price of product Distribution costs Sales and marketing costs Cost of raw materials Interest rates Taxation rates Exchange rates

Strategies for managing risk Mitigating potential risks based on

influencing one dimensions of risk Eg. Business could choose to RENT

all plant and machinery rather than INVESTING in its own equipment. This will reduce initial resources invested

Another strategy is to form partnership or joint venture with a supplier or distributor to share some financial and operational risks

Strategies for managing risk For some projects, lease office space Rather than employing a large

number of full-time staff, contract staff could be used

Short-term contracts with suppliers can be negotiated initially as a further extension of the same strategy.