C. IDENTIFYING AND ASSESSING RISK What are strategic risks? Strategic risks are risks that relate to the fundamental decisions that the directors take about the future of the organization. It includes decisions for the type of resources, mergers and acquisitions and exit strategies. These will impact on costs, prices, products and sales, and also the sources of finance. Factors that influence strategic risk include: •
•
•
•
•
•
•
•
The type of industries or markets which the business operates The state of the economy Actions of competitors The stage in the product life cycle Price fluctuation from inputs Level of operating gearing Its research and development capacity and innovative skills Significance of new technology What are operational risks? Operation or process risk is the risk of loss from a failure of internal business and control processes. It includes: •
•
•
•
•
•
•
Losses from internal control system or audit inadequacies Non-­‐compliance with regulations or internal procedures Information technology failures Human error Loss of key-­‐personnel risk Fraud Business interruption – stock outs, strikes etc What the main difference between strategic and operational risks? Strategic risks relate to the organization’s long-­‐term place in, and relations with, the outside environment. Some do relate to internal functions but have a key bearing on the organization’s situation in relation to its environment. Operation risks are what could go wrong on a day-­‐to-­‐day basis, and are not generally very relevant to the key strategic decisions that affect a business. Organizations face many different types of risk and these include: •
•
Financial risks Liquidity risks •
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Cash Flow risks Gearing risks Credit risks Currency risk Interest rate risk Finance providers’ risk Accounts risks Market risk Product risk Legal risks Political risks Technological risk Fraud risk Internet risk Health and safety risk Environmental risk Probity risk Knowledge management risk Property risk Trading risk Trade risk Physical risk Disruption risk Cost and resource wastage risk Organizational risk Entrepreneurial risk Reputation risk Industry-­‐specific risks What does risk identification involve? Risk identification involves looking at the specific events and conditions that could result in risks materializing. Identifying conditions leading to risks include: •
•
•
•
•
•
Physical inspection Enquiries Checking Brainstorming Checklists Benchmarking Risk identification procedures: Risk identification procedures will have costs and require time and resources. It may therefore be influenced not by a desire to identify all risks, but instead may focus on identifying unacceptable risks. Exercises: •
•
•
•
•
•
•
Case study 165 Case study 167 (and question) 170 question Illustration 171 Case study 173 Case study 176 Case study 178 (and question) THE END.