RISK CONCEPTS

NANING ARANTI WESSIANI

DEPARTMENT OF INDUSTRIAL ENGINEERING
STRATEGIC DIRECTIONS

Drivers of value
creation

Factors that destroy

the values creation
STRATEGIC DIRECTIONS

Drivers of The comprehension of risk

value creation

Factors that Risk to take Risk to avoid

destroy the
values
creation
INTRODUCTION
• Hence to grow any business entails risk judgement and
risk acceptance
• A business’s ability to prosper in the face of risk is a prime
indicator of its ability to compete.
• However, risk exposure is becoming greater, more complex,
diverse and dynamic
• As a consequence of the diversity of risk, risk management
requires a broader approach
DEFINITION OF RISK #1 – Hampton, 2009
• The term risk has a variety of definitions.
• In most cases, ‘‘risk’’ has one of three meanings:
1) Possibility of Loss or Injury – this is the most commonly recognized concept. We
have something to lose, and we might lose it through an accident or misfortune.
2) Potential for a Negative Impact – this is the generic definition. Something could go
wrong. We might face a decline in the value of a brand, or competitors might
penetrate our markets. The negative impact may be vague and unknown, but it
would produce a negative outcome.
3) Likelihood of an Undesirable Event – this moves us into the world of statistics and
quantitative analysis. We see a risk on the horizon. What is the likelihood it will
materialize? What will be the impact if it occurs? Can we quantify the damage? What
will be our best case if it occurs? Our worst case?
DEFINITION OF RISK #1 – Hampton, 2009

• Enterprise risk is the likelihood that actual results

will not match expected results.
• In this perspective, risk has two characteristics:
1) Variability.
2) Upside of Risk.
VARIABILITY
• Expected results from operations or decisions may not match with the
forecasts.
• The organization spent considerable time on strategic planning and
budgeting.
• Everyone had contingency plans to anticipate and respond to changing
conditions.
• The world is variable, and that is a characteristic of risk.
• This variation from expectations is fundamental in the concept of
enterprise risk.
UPSIDE OF RISK
• This is often not part of the calculation when one is thinking about risk.
• Traditional definitions deal with loss, injury, or other negative impacts, but
that is not the whole story.
• When an enterprise engages in its activities, it accepts risk.
• Results may be better or worse than expected.
• Enterprise risk explicitly considers both possibilities, as the upside of risk is
the reason for accepting exposures and opportunities.
DEFINITION OF RISK #2 – MERNA, 2008
DEFINITION OF RISK #2 – MERNA, 2008
• Once the probability, cause and effect of an occurrence can be determined then a
probability distribution can be computed.
• From this probability distribution, over a range of possibilities, the chances of risk
occurring can be determined, thus reducing the uncertainty associated with this
event.
• Example: Crossing the road without looking’ will most likely result in ‘injury
DEFINITION OF RISK #3 – MONAHAN, 2008

Anything that produces a

distribution of various outcomes
of various probabilities

UNCERTAINTY
DEFINITION OF RISK #3 – MONAHAN, 2008

• Risk thrives on risk drivers or causes and

manifests itself in events that have
consequences (or outcomes)
• Risk manifests itself in events that have
consequences
DEFINITION OF RISK #3 – MONAHAN, 2008
RISK UNIVERSE

Building a tunnel for a road under an existing

structure (e.g., a city)

Risk ???
RISK & UNCERTAINTY
• A decision is said to be subject to risk when there is a range of
possible outcomes and when known probabilities can be
attached to the outcome.
• Uncertainty exists when there is more than one possible
outcome to a course of action but the probability of each
outcome is not known
RISK PARAMETERS
RISK LEVEL
SOURCE OF RISK
• In many business cases, risks assessed initially at corporate and
strategic business levels have to be reassessed as the project
progresses, since the risks may affect the ongoing project.
• A source of risk is any factor that can affect project or business
performance, and risk arises when this effect is both uncertain
and significant in its impact on project or business performance
SOURCES OF
RISK
SOURCE OF RISK
• The corporate level  political, financial and legal risk
• The strategic business level  economic, natural and market
risks
• Project risks  technical, health and safety, operational and
quality risks.