I
f this chapter makes you think carefully enough about risks, it has done its job. There are
four key steps.
1 Think – identify the risks that could affect you.
2 Assess – use the techniques presented here to help.
3 Plan and position – incorporate them in your strategy, position yourself
accordingly.
4 Monitor – keep constant watch for expected and unexpected batterings, and react
immediately.
Identify risks and improve planning
As you worked through your assessment of your business (Chapters 4 and 5), you built up
a list that included weaknesses and threats. When you developed your strategy (Chapter
6) you attempted to deal with these and even position yourself to take advantage of
them. No doubt when you worked through the financials (Chapters 7–10) you noted a
whole new set of uncertainties and risks. Twenty to think about are listed on pages 225
to 256. They are selected at random and in no particular order. You should be able to add
your own. Each variable will have a different relative importance for your business.
At the end of the day, there is no alternative to good management – which includes
the ability to identify and negotiate hazards using a wide range of skills and experiences. I
suggest that you make a list of the major risks that affect your business and arrange them
in order of likeliness. Then ask how well your strategy handles them.
The more carefully that you identify the risks, the better your planning. Take a simple
example. If you do not give thought to crisis management, you will not have a disaster
recovery plan. Perhaps by focusing your attention, this chapter has proved its worth already.
TECHNIQUES FOR HANDLING RISK
There are procedures that you can follow and things that you can do to identify and
minimise your exposure. I urge you to look back at Nine steps to successful project plan-
ning on page 132. You will recall that this encourages you to break problems into small,
manageable parts; attempt to dispose of the riskiest activities first; proceed in small,
reversible steps; set targets for each step; and establish a culture that reacts immediately
to variances.
IDENTIFY RISKS AND IMPROVE PLANNING 253
254 CHAPTER 11 MANAGING RISKS
Scattered throughout this book there are other suggestions for handling risks. This
chapter introduces a few more techniques. It divides into three parts.
1 Some common techniques for quantifying and assessing risks.
2 Ways that you can use simple financial analysis to prioritise options and choose
between them.
3 Pulling it together for what-if and worst-case analysis, and checking that you have
a really solid strategy.
There is a risk – even a certainty – that after reading the next few pages you will either
hate me or love me. I am about to take you on a voyage through a simple topic that some
people (see below) have tried to make obscure and tedious with unfamiliar terminology
and boring tabulations. However, to me it is one of the most interesting manifesta-
tions of the obvious, with great value in business and enormous benefit when drawing
up business plans. It is called the normal distribution, because if you distribute a bucket
of numbers this is how they normally look. Now I have given the game away. The some
people I referred to just now are statisticians. I avoided using the word too soon, because I
did not want to put you off. Now you know. Take a look. You will love it. If it is new to you,
you might gain insights that you have never thought of before.
The fast track to managing risks
1 Think hard, identify risks in advance.
2 Quantify risks.
3 Use suitable techniques and procedures to handle risks (do not worry if
these sound scary, they are simple in practice):
Look back at page 132 – which shows how projects succeed.
Use the normal curve to quantify risks, probabilities and confidence.
Use other quantitative techniques, including break even analysis,
marginal analysis, capacity planning and inventory control.
Use net present value and hurdle rates to assess projects.
Use what-if analysis.
Review alternative scenarios.
Develop a worst-case forecast and strategies for coping with it.
4 Develop risk-handling strategies, plans, policies and procedures.
5 Position yourself accordingly.
6 Monitor and react.
IDENTIFY RISKS AND IMPROVE PLANNING 255
Special mission – limiting factors
In previous chapters you undertook special assignments – watching for core
competencies, competitive advantages, etc. In Chapter 6 you identified your critical
success factors. From these, and other things that you come across in this chapter,
make a list of your limiting factors – maybe constraints on capacity, staffing levels,
funding and so on. Understanding these will help you to identify and manage risks.
t
Risks to consider
1 Industry. What are your competitors dreaming up?
2 Market. How is it changing? How will this affect your sales?
3 Your product. Watch out for quality problems, cost overruns, declining
demand.
4 Sales. Poor sales cut profits; high sales squeeze capacity.
5 R&D. Make sure that you do not pour money into a black hole (expect perhaps
if you are NASA).
6 Quality assurance. Poor quality costs money at the production line.
7 Quality control. Poor quality control damages your reputation and sales.
8 Resource constraints. Watch for lack or excess of skills, facilities, materials …
9 Productivity. Poor productivity pushes up product costs.
10 Capacity. Excess (idle) capacity costs money. Capacity constraints cost sales.
11 Inventory. Not enough kills sales. Too much drains cash flow.
12 Investment. Insufficient investment in marketing, machinery, training, career
development or research can leave you unable to compete.
13 Information technology. Are you prepared for system disasters? Corrupt
backups? Obsolescent systems? Inadequate processing capability? Insufficient
management information?
14 Administrative blockages. The sheer volume of order- or cheque-processing
can bring an unprepared business to its knees.
15 Business management. Poor management hurts morale and profits. Failure to
notice external threats can leave you holding a bankruptcy notice.
16 Corporate politics. Infighting depletes energy, strangles efficiency and can
seriously affect your company’s reputation if it reaches the outside world.
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