Risk and Risk Analysis

What do you mean by Risk in management?
      A simple definition would be it is a presence of uncertainty or in other words, it is a scenario in which there exists a possibility of deviation from a desired or expected outcome. 

       A more elaborate explanation requires understanding that implementation of any company strategy often involves a portfolio of options. The certainty of uncertainty requires organizations to systematically evaluate the impact of risks.  This is where the risk management and proactive that is comes into picture. Risk management involves the total process of identifying, measuring, controlling, and  minimizing or eliminating the likelihood of a risk occurring. 

What is a Risk Analysis?

It is a process of assessing the range of possible outcomes, their probabilities, causal factors, and their interrelationships. Some approaches used in risk analysis are Decision trees, Monte Carlo simulation etc which help determine the acceptability of expected performance and risk of each of the decision alternatives. 

Risk analysis can help provide useful insights to management, for example:

• How likely am I to make my target?
• How different are two competing strategies, risk adjusted?
• What is the main risk to a successful strategy?
• What will the impact of competitors be?
• What technical or regulatory factors influence the success?
• How much confidence can I place in the strategic results or analysis?

What are the various steps in a risk analysis?

Any risk analysis approach comprise of following steps:

1) Plan a model (Develop a modeling strategy which should specify an objective(s)): 

   It is very important to specify what objective is being fulfilled with the analysis and the model should be quantifiable such as NPV, total sales, market share etc. Model not only helps to identify possible outcomes but also augments better understanding of the problem itself. Moreover, this is a great tool to communicate any judgement made accordingly. Moreover, a model helps to highlight key factors related to any outcome. So, plan a model that is best aligned for the business.

2) Identify possible source of risks:
   When identifying risks, following three factors should be considered: Variability, Uncertainty and Subjectivity. Variability is a the random nature in any process or situation even though the process and its parameters are understood (e.g. coin-tossing, sampling from a normal distribution with given parameters etc.). Uncertainty is the lack of knowledge about the value of some parameter, or the factors that determine the behavior of a process.  Subjectivity is the actual impact of different outcomes on the observer or its economic “utility”. 

3) Risks layout and Quantification
     In this step, risks are tabulated for example using a spreadsheet model of the strategy that includes the risks and their mechanism of influence. Each risk factor should be quantified in probabilistic terms (usually probability distributions).  Other statistical concepts such as the correlation of various uncertain factors may be employed.

4) Explore results with Sensitivity analysis
     Perform sensitivity analysis on the model to explore various scenarios.The objective would be to identify the main drivers of the risk for proactive risk responses. For example, Monte Carlo Simulation can be implemented for which there are various add-ons to Excel available, for instance @RISK from palisade.com

5) Post analysis
     With a better understanding of bottom-line performance outcomes through risk analysis, we will have expected values from various decisions based on which decisions should be adjusted  or given appropriate values if applicable. Also, various mitigation approaches for the risks should be formulated. The finding of the risk analysis should be clearly summarized to decision makers.

Following diagram best summarize the total process:

What do you gain when you study International Management?

What you will gain from an International Management course is best summarized by an opening line from the article “the death of the global Manager” – “the global manager was a coveted position for many years but things have changed – now we are all global managers”. Certainly, as the Harvard Professor Bartlett contends, the world is now a different place than say a decade ago because of developments in informational technology, and the transfer of products, processes, ideas and of course people across the international boundaries. As business leaders, it has become imperative now more so than ever to understand how to operate in a global environment. 

So what did I learn?

            During the semester, I gained insights into the complexities of managing across borders and cultures. Additionally, I have understood nuances in cultural differences that might not have realized. The course provided a rigorous yet lively discussion of different issues that may arise while managing operations across borders.

            First, I understood the bird-eye view of international management including the concepts in international business such as why firms seek to expand in international business. Previously, I had this wrong notion that business expand only to seek market. Now, I understand it is not the case. The company expands not just to seek new market but also for strategic reason such as to get a competitive edge or for the cost reduction. It was also interesting to realize that international manager must not only understand economic and cultural environment of the host country but also political, legal and the technological environment. The economic environment includes concepts such as free trade area, customs union and so on. We also discussed about NAFTA as well as EU and how they are different. Issues in globalization were also discussed. The paper about Walmart bribery case in Mexico provided a lively discussion involving FCPA (Foreign Corrupt Practices Act). For the cultural environment, we learned about Hofstede’s framework. It was interesting to note how countries can be ranged in scales measuring “Individualism vs Collectivism”, “Power Distance”, “Uncertainty Avoidance”, “Masculinity vs. Femininity” and “Time Orientation”. The HKD case vividly illustrated how (mis)understanding the cultural and economic environment can affect the choices made in international business transactions. The knowledge of how the value chain of a company can be leveraged to expand internationally is very useful so as to maximize the comparative advantage of the host country in terms of risk associated, knowledge available, costs, market and source. This proved to very useful for us while doing our company project. Understanding various foreign modes of entry is also very important. I realized there are more options than simply exporting or franchising or equity based joint ventures. In the process, I gained the knowledge about counter trade, contract manufacturing, licensing, non-equity strategic alliances as well as wholly owned subsidiaries. We also had a lively discussion during the Nora-Sakari case about the proposed JV in Malaysia which drove home how the companies can negotiate when trying to achieve international partners and so did the lessons from Lincoln Electric case. Similarly, the Cristina Gold case provided yet another example about need for organizational structural changes as the company expands overseas.

            The Strategic analysis exercise involving SFAS (Strategic Factors Analysis Summary) matrix provided a quantitative approach to otherwise qualitative judgment on whether to expand the company to the target market to not. The spreadsheet was effectively used during our company project also. The Tata case (including discussion on Taj Hotel) the provided a strong case about how one company can redefine the corporate social responsibility.

Conclusion –

            In the International Management course, you will gain a holistic view on the management of company across international boundaries and cultures. Depending on your university, throughout the course, through cases, mini-cases, articles and videos, you should expect to learn various operational issues one may face including legal and intercultural issues as well as corporate social responsibility in today’s highly interconnected world. Hopefully, you will be taking part in a classroom project to gain a real world application to appreciate significance of these issues from a viewpoint of a business leader.