Risk Management

What is risk？

Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks". Almost any human endeavor carries some risk, but some are much more risky than others.

As a general and very simplistic definition:

Risk is the potential that an event will have an outcome different from the outcome that is expected to occur.

Risk and action

We all view risk differently, and there are risks around us, so we need to understand the various dimensions of risk. What can we do before to deal with the risks?

There are some key steps to deal with risks more effectively.

Understanding the risks we face.

We must have a clear idea what those risks are if we want to managing risks effectively. In the case we read, we can know there are some risks that Papa Rondo is facing.

There are so many competitors, how can he make sure he can beat them to become the winner in this industry?

The money problem, Papa needs to borrow finance to purchase and install grape crushing equipment together with new wine fermentation and storage tanks. And he doesn't know whether this equipment could add value to Papa's business.

Grape is easy to perish; he must make sure grape can be harvested at the 'perfect moment' to ensure quality wine production. Because it is important to Papa's reputation within the industry as a reliable supplier.

A series of contractor delays and unexpected technical problems brought the project to a halt, it made the situation was made by general confusion, inaction, and lack of any coordinated response.

These are some risk Papa met in the beginning.

Measuring those risks

Wherever possible, risk should be measures both in order to understand the probability of a risk event occurring and also to understand the size of the impact should it occur.

According to the degree of impact of risk we can measure the risks.

In the risk 3, we know grape is easy to perish, if Papa Rondo doesn't have grape, he can produce wine; it must a serious impact to his factory.

Deciding what to do (managing risk)

There are three options to deal with risks.

take the risk as it is (accept it);

take action to minimize either the probability of the risk event occurring or the impact should it happen (mitigate it)

do not accept the risk (avoid it)

Making risk decision

When making decisions we must start with a clear view of where we are today. What we need to do is determine what we want to be, over various time horizons, and then consider the consequences of undertaking the various options open to us (accepting, declining or mitigating the risks).

The probability/impact matrix is a way to help make decision. We can be combined with possibility and degree of impact to see that the level of risk

The following is the risk that Papa Rondo may encounter in the industry. And we can see the level of these risks from this probability/impact matrix.

Risk and reward

When we considering risk, we always thought it is bad thing. But actually, everything has two sides, so risk must be balance against reward.

If we can make right decisions when we deal with risks, we will get rewards.

I want to use risk 4 to give an example. If Papa Rondo knows this risk before, he can train the workers well; they will work well, so they can bring high profits to the factory. And Papa's factory can Increase share price, market share, he also can get Industry awards and recognition; the wine will get High public esteem/customer satisfaction and Good reputation.

Identify and analyze risk

Identifying the risk sometime can be easy, but not all the time. People may become blind when they are facing many things at the same time. So some risks may not be thought of. But risks that not identified are not likely to be managed. So we must identify risks first.

When we are analyzing risk, we can combine with economic environment,