Wrangling with Risk Management for Competitive Strategy

Competitive Strategy for Dummies book cover

The following is an excerpt from Competitive Strategy for Dummies. Published under license from John Wiley & Sons, Inc.

Certainty is when a set of circumstances or outcomes can be fully predicted or known. Uncertainty is when nothing is known or understood about a set of circumstances or outcomes. In between certainty and uncertainty is risk – a place where you know and understand some things, but not the full set of circumstances.

You therefore pay a premium (a fee) as a hedge against your lack of knowledge and understanding. You must also take steps to develop, as fully as possible, your knowledge and understanding of the given set of circumstances so that your fee is as low as possible. For example, you don’t know precisely when you’re going to have accidents and emergencies, but you do know that these things are bound to happen at some time. You insure (pay a fee) for when they do happen, so that you can cover yourself and your obligations when the time comes.

One way of looking at risk is that you can insure against risk; you can’t insure against uncertainty. Stated another way, you can insure against accidents, as with the preceding example, but you can’t insure against what you absolutely don’t know (and which is therefore uncertain). You have to be able to give an idea of what risk you and the insurer are facing!

Your drive when confronting risk must therefore be to fill in the gaps in your knowledge and understanding as far as possible so that you:

  • Know and understand as much as you possibly can.
  • Know and understand what you’re insuring against.
  • Can decide whether the risk is worth insuring against.

The core of risk management – knowing and understanding what can, may and does go wrong – is to assure you and your organization that you can implement your competitive strategy, undertake specific ventures and respond to opportunities with as much certainty as possible.

Looking at key areas

Effective risk management is based on thorough and frequent environmental scanning and analysis. Constant examination of what’s going on inside and outside your organization yields a lot of useful information about risk.

You’re looking for early warnings about changes in any or all of the following (be prepared, this a very extensive list!). Ask yourself, ‘What can possibly go wrong?’ about each of the bullets:

  • The availability of finance, and related costs of finance (interest rate, exchange rate changes and so on).
  • Changes in market size and structure.
  • Changes in customers’ spending power, tastes, needs, wants and demands.
  • Changes in technological capacity, especially whether such changes are going to affect your competitiveness or cost base.
  • Overall information technology and data processing capacity.
  • Changes in the labor market, especially the price, value and relative security of workers with specific expertise, knowledge or skills.
  • Entry of new players into your markets and the strengths and weaknesses that they bring.
  • Exit of existing players from your markets and the extent to which you can fill any gaps that they leave – or whether their exits in fact destabilize the whole sector.
  • The stability and security of your internal operations, specifically your ability to protect confidentiality, secure finance and identify theft and fraud.
  • Staff management issues, especially behaviors such as bullying, victimization, discrimination and harassment,
  • The effects of staff relations on overall organizational performance.

As you go through the list and try to identify possible problems, try to look at risk in directly practical terms, from the point of view of what can possibly go wrong in a specific area. Some specific questions may be:

  • What are the consequences of computer/technology/IC/IT system failure or crash?
  • What are the consequences of doubling or halving supply-side prices?
  • What are the consequences of fraud, vandalism or sabotage?
  • What are the consequences of negligence or ineptitude?
  • What are the consequences, as well as the opportunities, of taking particular decisions about going into (or stepping out of) particular ventures and proposals? 
If your people are still producing bland or general answers to the preceding questions – or worse, saying things like, ‘Nothing can go wrong; this is foolproof’ – you must ask and ask and ask again until they get to grips with the details.

Richard Pettinger is a principal teaching fellow at University College London, where he researches general management and behavioral influences. He is the author of Competitive Strategy for Dummies, excerpted above.

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