Strategic Planning Elements of Risk Management

Question: Discuss about the Strategic Planning for Elements of Risk Management. Answer: Defining Risk A definition of risk which is appropriate for this subject, is and I quote Risk is the potential for the realisation of the unwanted, negative consequences of an event. Introduction The ideal purpose of this paper is to generate an understanding about damage, injury and the subsequent loss which occurs and to further the understanding about the risk connected with that happening. Because of this understanding, how risk and risk management are perceived in different industries depends on the performance abilities of that particular industry and sometimes on the management within the industry. Hence, the pure scientific approach which can be adopted for the study of risk should be described through the efforts put in for objectively describing, measuring and explaining risk, the inherent damage and the subsequent loss, as per Bell, Masaoka Zimmerman, (2010). Energy Damage and Non-energy Losses Now, energy which is used for the creation of injury or damage can be described, explained and even measured once the intensity of the damage or loss is known. Established fact is that the energies exist around or within the environment and are considered to be an essentially existing both in the natural as well as the artificial environment. Although, says Rainey, (2010), the injuries or damages are usually measured in financial terms, it is essential to take into account their moral impact. A Threat can arise either from a measureable source of energy or from a non-measureable non-physical source. Hence, Loss should always be connected with reduction in value of the asset and should not be connected either with injury or damage, which are actually intermediary processes. A monetary theft or loss of consumer confidence are not energy damage processes, as explained by Rainey, (2010). Mechanisms To measure a damage, there should be an Energy Source and a Recipient who must be vulnerable to that energy which impinges on it. Moreover, the energy has to move from its source to the recipient or vice versa. This movement of the energy is termed as the Space Transfer Mechanism. Another synonymous term which can be applied to the non-energy threats, is vulnerability pathway. Further, to become the cause of the damage, it is essential that intensity of energy, at the point where it comes in contact with the recipient, should exceed the damage threshold of the recipient, as detailed by Resch, (2011). Risk Register In order to build a base for the structure of Risk Identification for assets, it is essential to make a list of their type, such as: People Vehicles Buildings Production Process Suppliers of materials and energies Customers Value If a hypothetical organization in the mining sector is considered and these factors are applied, then the organisation will have seven Risk Classes. Each class can be further subdivided, depending on the nature of the threat, as per Allison Kaye, (2015). Consider the people class who are prone to injury because of the energies prevalent in the production process. In the case of the mining sector, the energies of significance could be: Gravity (people and objects falling) Mobile Machineries running on power Hand-tools running on power Noise Generated Chemicals, such as adhesives, paints, solvents Hence, it can be concluded that risk class under type People has five main sub-types of energy threat sources. Similarly, risks which are from non-energy threats can be categorised. Finally, this makes it possible to construct a Risk Register which is objectively determined, is comprehensive and also systematic as these are the necessary qualities for a user friendly Risk Register, as detailed in the table below, say Allison Kaye, (2015). Risk Register Format Energy Group Form Potential Energies Gravitational Sliding, Falling, Rolling Structural Strain Bent Beam, Twisted Shaft, Spring Compressed Fluids Hydraulic and Pneumatic Kinetic Energy Linear or Rotational Motion Electrical Energy Changes in the Electro-magnetic Field, Electrostatic Charge and Potential Electric Energy in Volts Thermal Energy Air Temperature, Flames, Fluids Chemical Energy Corrosion, Explosion, Fire Acoustic and Vibrating Energy Noise, Mechanical Vibration Mechanical Energy Mechanical Machine Power In the given Case Study, the threat comes from the electrical energy source. As described in the table, this energy source can become a threat in the form of (i) Changes in the Electro-magnetic Field; (ii) Electrostatic Charge; and (iii) Potential Electric Energy in Volts. All these forms of threat carry the potential of causing damage not only to the equipment, environment and the people but can also be the potential source of financial loss, which can have a short-term as well as long-term effect on the project. In order to overcome such potential damages and losses, it is justified if the management takes corrective action by investing a determinable amount of $600,000 in order to safeguard the project from the undeterminable damages and losses, says Rainey, (2010). Relative Significance of Risks As discussed above in the case study matter, once the management notifies the risks in the Risk Register, it becomes beneficial for the management in further describing the other essential entries for an overall analysis of the risk which can occur for the organization, as detailed below, as per Willard Hitchcock, (2015). External or Internal Imposition of the Risk Loss of profit due to an increase in material costs is an example of external imposition. Loss of profit due to strike by employees is an example of internal imposition. External or Internal Locus of Control over the Risk The locus of control for a strike can be internal or external for the company and depends on circumstances. The locus of control of material prices can be internal if sufficient inventory reserves are maintained, assert Rahim Idowu, (2015). Effectiveness of Existing Controls The existing controls can be made more effective by creating opportunities for improving them. Time Dynamics Time factor gathers importance depending on whether the risk is getting bigger or smaller. Nominal Scale A Nominal Scale is descriptive word scale which can be used for describing any of these parameters. If we consider Exposure, it could be described as: Daily; Weekly; Monthly; Annually; or Infrequently. Similarly, nominal scales can also be developed for other parameters, such as value ranges: UT$1000, UT $10,000, UT$100,000, UT$1M, UT$10M Ordinal Scales If these factors are given individual parameters on a scale from 1 to 5, where 1 shall denote good and at the end of the scale, parameter 5 shall denote worst end of the scale. Such tabulator form and graphing is known as Ordinal Scales, as shown in the table below, as per Shimomura Kimita (ed.), (2012). Exposure Rank Order No. LWC Rank Order No. Daily 5 UT$1,000 1 Weekly 4 UT$10,000 2 Monthly 3 UT$100,000 3 Annually 2 UT$1M 4 Infrequently 1 UT$10M 5 Risk Algorithm In case a ranking scale is given to the parameters, then it creates the possibility of comparing a Risk which involves a daily exposure with a LWC of UT $100,000 with the Risk which has an annual exposure with a LWC of UT$1M. This can be done only if the method chosen is of adding or multiplying the respective rank order numbers. In the assumption taken above, the answer will be 5+3=8 as compared with 2+4=6, if the addition method is adopted. In case the multiplication method is adopted, the comparative figures obtained will be 5x3=15 as compared with 2x4=8, as per Clegg, Wilhelm Olson, (2014). These are known as Risk Algorithms and the answers which are obtained are known as Rank Score. If this process is carried out with other assumptions, then the maximum rank score obtained for a risk, from this table will be either 10, in case of addition method or 25, in case of multiplication method. In a practical situation, there can be numerous risks identified, namely Risk No.1, Risk No.2 and so on. Ranking Scores can make it possible for listing them in an order, as shown below. In this table, the ranking score algorithm allows to arrive at a maximum risk score of 35, say Rahim Idowu, (2015). Risk ID No. Rank 3 35 7 25 2 20 4 18 6 14 1 14 5 10 The purpose of making this algorithm is to find which risk needs more immediate attention and which can be attended to at a later time. Here, Risk No. 3 should be promptly attended, followed by risk no. 7 and so on. In making such graphs, ranking of risks can be based on: The Risk value The moral implications of the Risk The extent of a social or legal concern Making improvements to existing Risk standards. Risk Analysis Damage or Loss Process Takes Time It has been observed that although assets have inbuilt systems to avert Energies and to follow their inherent Mechanisms, still chances of a threat occurring to an extent that the assets vulnerability is affected are always there so that the asset loses value. In the table below, an illustration of such a time sequence shows the process of occurrence-consequence. The illustration shows that when an Event occurs, control is lost thereby creating potential damage to the asset. The Event shown is a gas leak, where involvement of chemical energy of the gas occurs and in the process damage or loss or both can result. Since no event can occur without a reason, this is known as Mechanism, as per Willard Hitchcock, (2015). OCCURRENCE TIME ZONE 1 TIME ZONE 2 TIME ZONE 3 Pre-Conditions Mechanism Event Outcome Consequence Hose Abrasion GAS LEAK EXPLOSION Injury to people; Damage to Equipment; Financial Loss Diagram showing The Time Mechanism Analysis Model This event can result from various different Mechanisms, such as the valve is left opened or there is a malfunction in its components. However, after every event, the process progresses further, leading to the Consequences of Damage or Loss. This is known as Outcome. As discussed above, an event may have different Outcomes. In the above example one such outcome can be that the gas cloud simply blows away without causing severe damage. Hence, it is the Outcome which specifies the intensity of the damage. An Event can thus be defined as the point of time when control is lost over the damaging properties of a threat, assert Willard Hitchcock, (2015). Use of Matrix for Measuring Risk In the Risk Matrix table shown below, each of the parameters of Risk Diagram are given a Nominal Scale value. The scale for Consequences may progress from Minimal to Critical. Numbers from 1 to 5 can be associated with each parameter of the Ordinal Scale for use in the matrix. The sample shown below has been taken from a recent Australian standard. When used, this type of matrix offers many different options which can be considered for identifying various forms of risks and subsequently, attempts can be made to come to an agreement on an adequate combination of the likelihoods and consequences which are the proper representative of the identified risk, says Resch, (2011). The agreements on the likelihood and consequence, for example, might come to the point where the likelihood factor is taken as moderate and the consequence factor is taken as major. It has been found that if the word scale is properly explained, it helps in understanding the outcome considerably. Like in the explanation given above, the factor major can be used for defining a loss of above $1m for the organisation, or it can be used for identifying an injury to a worker which is of permanent nature, or it can even define an environmental damage which can be serious enough to attract a heavy fine. Based on such assumptions and explanations, the following version of an Australian Standard has been used in the following matrix, assert Sanders Wood, (2014). A Standard Risk Assessment Matrix for Outcome Analysis The Likelihood categories used for Outcome Analysis are: Level Likelihood Description 1 Almost certain Expected to occur in majority of situations 2 Likely Probability of occurrence in majority of situations 3 Moderate Occurrence expected at some time 4 Unlikely Occurrence may happen 5 Rare Occurrence under exceptional situations The Consequence Categories for Outcome Analysis The colour coding used in cells is indicative of the volatility of the risk using Outcome Analysis. In the Australian Standard referred above, this explanation stands as: Extreme Risk; immediate action required High Risk; senior management attention required Moderate Risk; management responsibility must be specified Low Risk; manage by routine procedures List of References Allison, M. and Kaye, J. 2015, Strategic Planning for Non-profit Organizations: A Practical Guide for Dynamic Times, 3rd ed. John Wiley Sons, Hoboken, NJ. Bell, J., Masaoka, J. and Zimmerman, S. 2010, Non-profit Sustainability: Making Strategic Decisions for Financial Viability. John Wiley Sons, San Francisco, CA. Clegg, B., Wilhelm, K. and Olson, E. 2014, An Introduction to Sustainable Business Practices. FT Press, New Jersey. Rahim, M.M. and Idowu, S.O. 2015, Social Audit Regulation: Development, Challenges and Opportunities. Springer, London. Rainey, D.L. 2010, Sustainable Business Development: Inventing the Future through Strategy, Innovation, and Leadership. Cambridge University Press, Cambridge. Resch, M. 2011, Strategic Project Management Transformation: Delivering Maximum ROI Sustainable Business Value. J. Ross Publishing, Lauderdale, FL. Sanders, N.R. and Wood, J.D. 2014, Foundations of Sustainable Business: Theory, Function, and Strategy. John Wiley Sons, Hoboken, NJ. Shimomura, Y. and Kimita, K. (ed.) 2012, The Philosopher's Stone for Sustainability. Springer Science Business Media, Berlin. Willard, M. and Hitchcock, D. 2015, The Business Guide to Sustainability: Practical Strategies and Tools for Organizations, 3rd ed. Routledge, Oxon.