Week 3: Good concepts and tools for risk management & How entrepreneurs manage risks
Good concepts and tools for risk management & How entrepreneurs manage risks
Concepts : Risks Management(Matthew qua jin chuan TP079471)
Integrating risk into decision making
One of the good concepts of risks management is integrating risks into decision making. An example of not considering risk as we make a decision is, Matthew hearing that his friend has gained a lot of money from online trading. Therefore, he as well wanting to gain money tried it but he did not study the risk or how to trade. Matthew blindly traded and has lost all of the money he traded. This is an example of not considering risk before making a decision.
There are a few ways to integrate risks into decision making .One of them are identifying risk. We can gather a team to identify potential risk with our decision or learning past data and past results. Other than that ,we should also prioritize risk. We should rank risk based on their likelihood and how big of an impact it would cause us. Lastly we could develop mitigation strategies. Examples of mitigation strategies are avoidance, reduction and transfer. Avoidance is that we should change our plans to avoid the risk, reduction is implementing measure to reduce the likelihood of the impact of the risk and transfer is shifting the risk to another party.
By having this concept for our risk management, business owners or entrepreneurs could increase their chances in expanding their business and achieving success. Risk is one of the greatest factor when it comes to chasing a goal and the bigger the goal the bigger the risk. Therefore, we should all integrate risks into our decision making to avoid or reduce our risk of failure.
SWOT analysis is a planning procedure that aids in overcoming obstacles and deciding which fresh leads to explore for your business (Schooley, 2024). SWOT is an acronym for opportunities, threats, weaknesses, and strengths. Influenced by studies by Stanford Research Institute's Albert Humphrey, SWOT analysis first appeared in the 1960s and 1970s and was initially used to the strategic planning of Fortune 500 businesses.
SWOT analysis is frequently applied before the process of strategic planning. The framework is regarded as a useful tool to make certain decisions because it helps a company identify previously undiscovered prospects for success. It also draws attention to hazards before they become too big of a problem for the company (Bigelow, n.d.).
Starting with the project's strengths is the very first step. Subsequently, the members of the team must list out all the project's shortcomings and other areas that need improvement (Brown, 2023). This is where the project's dangers will manifest themselves. It is also possible to detect positive and negative risks using opportunities and threats respectively. All results must be organized into a grid for easier cross-referencing and analysis.
The SWOT approach has some
pros and cons. One of the most obvious advantages are it is suitable for
different types of businesses and corporations due to its versatility. It is
also a straightforward and user-friendly tool that doesn’t require any special
training or expertise. However, it still presents certain disadvantages. The
analysis might become outdated if the environment evolves dynamically as it
only offers an overview of the current
situation. Besides that, a fragmented
view could result from the SWOT matrix's simplicity, which ignores how
different components interact and influence one another.
Monte Carlo simulation was created
in the late 1940s by Stanislav Ulam in partnership with his colleague John von
Neumann. This innovative approach offers a comprehensive view of all potential
decision outcomes and facilitates the assessment of risk impact. Consequently,
it empowers decision-makers to make informed choices even amidst uncertain
conditions.
The main idea of the Monte Carlo
simulation in calculating the volume of risk (VaR-Value at Risk) is to
construct a detailed picture of the portfolio risk by computer simulation. When
such a variety of random changes in asset prices is observed, one logical
solution is to determine the size of this change (market risk) by simulating many
random variables with certain characteristics. In this way, a complete picture
of the price dispersion is constructed with an emphasis on the last known
price. The use of random variables accompanied by the corresponding
probabilities allows to calculate all possible variations in the price of the asset.
（Anton Antonov & Siyka Demirova，2023）
The Monte Carlo method is one of the most
powerful mathematical techniques that, through calculation, analyzes risk and
allows solving physical and mathematical problems through computer programs,
Using historical data, creates and predicts models of possible future results
by substituting a range of values, calculating results over and over again,
using a different group of random values of the probability functions to
predict the possible results of some uncertain event related to problems of all
kinds.（Gaytán Cortés & Juan，2023）
How to manage risks
Risk identification
Risk identification is an important and basic process where people identify and take note those treats and chances that can threaten and affect the objective or profit of the business (Tchankova ,2002). This process of risk identifying can be related to the internal factors of the business and external factors such as market environments etc. There are few steps that can be taken to execute the process of risk identification.
Firstly, entrepreneurs can understand what are those risks that may affect the business whether already existing or will occur in the future. External factors that may affect the business like market changes, competition, regulatory changes, economics trends. For internal factors which involved organizational structure, business culture and resources. The accurate identification of risks will greatly help in preparation and development of risk prevention plans.
Besides that, engaging stakeholders such as shareholders, partners, employees, customers and suppliers in the process of the risk identification process will significantly increase the chance to identify potential risks that have not been discovered yet. This is because involvement of a larger group of people will gain different insights and opinions that are useful and valuable. For example, entrepreneurs could held meetings and workshop regularly with stakeholders to discuss about risks and incident that happened or may happen during operation of the business.
To prevent historical issues or risk happening again to the business, entrepreneurs could also review historical data or reports of the business operation. This could help to analyse deeper into the cause of risks and relationship of the past incidents with those potential risks. Consultation of experts and business analysts also will help to get a better overview of the report and prescribe a plan to cope with those potential risks.
Risk mitigation is
the strategy of managing potential threats to minimize their impact on a project
or business (Finn, 2023). Entrepreneurs employ a variety of risk mitigation
strategies tailored to the specific risks their ventures face. Avoidance is a
proactive strategy where entrepreneurs alter their business plans or
operational methods to sidestep risks altogether, such as deciding against
entering markets that pose high regulatory challenges (Kirvan, 2023).
Reduction involves implementing measures to decrease either the likelihood or
the impact of risks; an example of this would be diversifying suppliers to
minimize the risk of supply chain failures (Rikkou, 2023). Transfer is
another strategy where risks are shifted to a third party, typically through
insurance or by outsourcing certain business functions, thereby offloading
potential liabilities. Finally, Acceptance is used when the cost of mitigating
a risk outweighs the potential damage it may cause. This approach involves
acknowledging and preparing to handle the consequences of risks that are deemed
an inherent part of the entrepreneurial process (Mikes, 2024). Together,
these strategies form a comprehensive framework that helps entrepreneurs manage
threats effectively, ensuring they can focus on growth and innovation.
As
an entrepreneur, managing risk through a disaster recovery plan is very important
as it ensure an organization can respond to a disaster or other emergency that
affects information systems, and minimize the effect on business operations (Townsend, 2023) An effective
plan must have a good recovery team, who are responsible to keep the data safe,
restore the system and maintain the business continuity after a disaster, such
as natural disaster or cyber-attack. A recovery team must not only include IT
experts but also representatives of other parts of the business who have a role
to play during recovery operations. Next, create a comprehensive plan is
important. It should include data backup and recovery procedures, ensuring all
critical data is regularly backed up and stored securely offsite or in the
cloud (Odnoletkov, 2023). A well-established disaster recovery plan can reduce
recovery times, minimizes data loss and downtime, and ensures rapid recovery, enabling
business to resume operations quicker with minimal disruption after disaster. Furthermore,
create a clear emergency
response plan that outlining immediate actions to take during a disaster. This plan
should include evacuation procedures, emergency contacts, and communication
protocols. Lastly, continuously review and update your disaster
recovery plan to address new risks and changing business needs (Yasar et al., 2024). In conclusion,
by proactively planning for potential disasters, you safeguard your business
operations, protect your assets, and maintain customer trust, ultimately
ensuring long-term success and stability.
Anton Antonov & Siyka Demirova（2023）Monte Carlo simulation in risk assessment in mathematical generation of long data
Brown, L. (2023, December 31).
Top 8 Risk Management Tools and Techniques in [2024]. Invensis Learning.
https://www.invensislearning.com/blog/risk-management-tools-techniques-in-pm/
Finn, T. (2023, November 30). What is risk mitigation?. IBM. https://www.ibm.com/topics/risk-mitigation
Gaytán Cortés, Juan（2023）The Monte Carlo method of random simulation samples
The Monte Carlo method of random simulation samples (redalyc.org)
Kirvan, P. (2023, October 18). 7
risk mitigation strategies to Protect Business Operations: TechTarget. CIO.
https://www.techtarget.com/searchcio/feature/7-risk-mitigation-strategies-to-protect-business-operations
Mikes, A. (2024, February 16). Managing
risks: A new framework. Harvard Business Review.
https://hbr.org/2012/06/managing-risks-a-new-framework
Odnoletkov, P. (2023, May 30). What is a
Disaster Recovery Plan and Why is it Important for Your Business? - MBC Managed
IT Services. MBC Managed IT Services. https://www.mbccs.com/what-is-disaster-recovery-plan/
Rikkou, D. (2023, January 12). Risk management for entrepreneurs: Importance of mitigating and managing risk. LinkedIn. https://www.linkedin.com/pulse/risk-management-entrepreneurs-importance-mitigating-managing-rikkou
Schooley, S. (2024, January
3). What is a SWOT Analysis? (And When To Use It). Business News Daily.
https://www.businessnewsdaily.com/4245-swot-analysis.html
Bigelow, S. J. (n.d.). SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats Analysis). TechTarget.
https://www.techtarget.com/searchcio/definition/SWOT-analysis-strengths-weaknesses-opportunities-and-threats-analysis
Tchankova, L. (2002), "Risk identification – basic stage in risk management", Environmental Management and Health, Vol. 13 No. 3, pp. 290-297. https://doi.org/10.1108/09566160210431088
Townsend,
R. (2023, January 26). What is a Disaster Recovery Plan and Why is it
Important? Nexstor. https://nexstor.com/what-is-disaster-recovery-plan/
Yasar, K., Brush, K., & Crocetti, P. (2024, April 29). disaster recovery plan (DRP). Disaster Recovery. https://www.techtarget.com/searchdisasterrecovery/definition/disaster-recovery-plan
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