This document discusses managing risk and uncertainty in business. It begins by noting high failure rates of new ventures and the importance of risk management. It then defines key concepts like risk, uncertainty, and the risk management process. This involves identifying risks, analyzing their probability and impact, developing risk response plans, and monitoring risks. Different types of risks are outlined like competitive, economic, operational and strategies discussed to mitigate risks like avoidance, transfer, and acceptance. The document emphasizes that risk management is an ongoing process to minimize threats and uncertainties facing a business.

1. Managing Risk and
Uncertainty in
Business
T. OSANYINTUYI

2. Learning Objectives
At the end of the session, participants will be
able to:
define the concepts of risk and uncertainty;
describe the risk management process; and
analyse business risks to determine their
importance

3. Introduction
“Data from the U.S. Census Bureau reveal
that, aggregated across all sectors, 55%
of new ventures die within the first five
years. Of the remaining, 35% fail during
the next five”
 https://blog.kstart.in/how-smart-entrepreneurs-manage-risk-and-
uncertainty-249aac6d5d01

4. Introduction
 Imagine for a minute this scenario. You have spent your entire
savings, gone into debt with some friends to open your dream
business – a small restaurant in a lucrative part of your city
when you notice the lease sign from another building close by
has been removed from the window. Hmmm.
 It turns out that the building has been leased by KFC!
 Do you cry or have you taken this kind of thing in mind when
you were planning your business?

5. Introduction
 Every business faces some risks and
uncertainties
 It is good practice to take cognizance of and
make plans to deal with risks, i.e. businesses
should seek to formally manage risks.

6. Concept of Risk
 An event that, if it occurs, causes either a
positive or negative impact on a business
 A business risk is a future possibility that may
prevent you from achieving a business goal.
 Keys attributes of Risk
 Uncertainty – it could happen, or it might well not
too
 Positive and Negative – positive risks are known as
opportunities
 Cause and Consequence

7. Risk vs Uncertainty
 Risk involves uncertainty
 The distinction between risk and uncertainty derives
from Frank Knight’s (1921) views, where he states
thus:
 “To preserve the distinction . . . between the
measurable uncertainty and an unmeasurable one we
may use the term “risk” to designate the former and
the term “uncertainty” for the latter.” (p. 233)

8. Risk vs. Uncertainty
 Risk can be regarded as randomness described by a
probability distribution and Uncertainty as
randomness that does not follow such a distribution.
 Uncertainty may thus reflect difficulties of assessing
the probability of different events as well as difficulty
in describing the possible states of the world (as in
Donald Rumsfeld’s memorable phrase “unknown
unknowns”)

9. Risk Management
Risk management is concerned with
identifying risks and drawing up plans to
minimise their effect.

10.  The BusinessDictionary defines risk management as:
the identification, analysis, assessment, control, and
avoidance, minimization, or elimination of
unacceptable risks.

11. Risk Management Process
 Risk identification
 Identify business, project and product risks
 Risk analysis
 Assess the likelihood and consequences of these risks
 Risk response planning
 Draw up plans to avoid or minimize the effects of the risk
 Risk monitoring
 Monitor the risks

12. Types of Business Risks – Group
Activity
 Identify a business
 Identify 10 potential risk / uncertainty factors
that can adversely affect the business’s
profitability

13. Types of Business Risks
 The risks facing a typical business are broad and include
things that you can control such as your strategy and things
beyond your control such as the global economy.
 Competitive Risk - The risk that your competition will gain
advantages over you
 Economic Risk - The possibility that conditions in the
economy will increase your costs or reduce your sales
 Operational Risk - the potential of failures related to the day-
to-day operations of an organization such as a customer
service process

14. Types of Business Risks…
 Legal Risk - the chance that new regulations will disrupt your
business or that you will incur expenses and losses due to a
legal dispute.
 Compliance Risk - the chance that you will break laws or
regulations
 Strategy Risk - risks associated with a particular strategy
 Reputational Risk - the chance of losses due to a declining
reputation as a result of practices or incidents that are
perceived as dishonest, disrespectful or incompetent

15. Types of Business Risks…
 Program / Project Risk – risks associated with a business
program or project
 Innovation / Technology Risk - risk that applies to
innovative areas of your business such as product research
 Country Risk - exposure to the conditions in the countries in
which you operate such as political events and the economy
 Credit Risk - the risk that those who owe you money fail to
pay

16. Types of Business Risks…
 Exchange Rate Risk - the risk that volatility in foreign
exchange rates will impact the value of business transactions
and assets.
 Interest Rate Risk- the risk that changes to interest rates will
disrupt your business.
 Taxation Risk - the potential for new tax laws or
interpretations to result in higher than expected taxation
 Process Risk - the business risks associated with a particular
process.

17. Types of Business Risks…
 Resource Risk - the chance that you will fail to meet
business goals due to a lack of resources such as
financing or the labor of skilled workers
 Political Risk - the potential for political events and
outcomes to impede your business.
 Seasonal Risk - a business with revenue that's
concentrated in a single season such as a ski resort.

18. Risk Analysis
 Assess probability, seriousness, and urgency of each
risk.
 Probability may be very low, low, moderate, high or
very high.
 Risk effects might be catastrophic, serious, tolerable
or insignificant.
 Urgency might be immediate, short term, or long
term.
 Risk analysis may be quantitative or qualitative

19. Analyzing Risk - Qualitative
 Subjective
 Educated Guess
 High, Medium, Low
 Red, Yellow, Green
 1-10
 Prioritized/Ranked list of ALL identified risks
 First step in risk analysis!

20. Analysing Risk - Quantitative
 Numerical/Statistical Analysis
 Determines probability of occurrence and
consequences of risks
 Should be focused to highest risks as determined by
Qualitative Risk Analysis and Risk Threshold

21. Risk analysis: criticality
 In addition to assessing the probability of the risk
event, risk analysis also assesses the criticality or
impact of the risk on the business
 Criticality can be categorized (e.g. insignificant,
tolerable, serious) and / or a score attached to it.
 It may also be possible to estimate and compute
impact on the business in monetary terms e.g. in
terms of revenue or profit loss.

22. Risk analysis
 The probability score / value of each risk and the
criticality / impact score / value can be arranged in a
probability-criticality matrix and the scores / values
multiplied to determine the importance of each risk
on the business.

23. Risk Probability-Criticality Matrix
Risk score
High
5 10 15 20 25
4 8 12 16 20
3 6 9 12 15
Low
2 4 6 8 10
1 2 3 4 5
Low High
Criticality score

24. Probability and Impact Analysis /
Expected Value Analysis
 The ‘biggest’ risk
isn’t always the
biggest risk
 Risk analysis
enables us to
identify the
important risks to
plan for
Risk Probability Impact Expected
Value
1 25% $45,000 $11,250
2 50% $2,000 $1,000
3 30% $100,000 $30,000

25. Risk Response
 “What are we going to do about it?”
 Techniques/Strategies:
 Avoidance – Eliminate it
 Transference – Pawn it off
 Mitigation – Reduce probability or impact of it
 Acceptance – Do nothing
 Strategy should be commensurate with risk
 Hint: Don’t spend more money preventing the risk than the impact of
the risk would be if it occurs 
 The Risk Response Plan/Risk Response Register

26. Risk Response Strategies
 Avoidance – can we change something to avoid the risk.
 Transference – Transfer the risk or responsibility of the risk to a third
party. Insurance, performance bonds, warranties, guarantees.
 Mitigation – Usually involves increased costs/budget, but overall the
goal is to try and lessen the risk to an acceptable level.
 Examples:
 Choosing a more established vendor (reduces the problem)
• Diversifying into other products (reduces impact)
 Acceptance – Active – Good (contingency Planning…IF, THEN),
Passive – Bad (PUT OUT THE FIRES)

27. Risk Monitoring
 Assess each identified risk regularly to decide
whether or not it is becoming less or more probable.
 Also assess whether the effects of the risk have
changed.
 Each key risk should be discussed at management
progress meetings.
 Continuous, Iterative Process

28. Conclusion
 Businesses, particularly new ventures and even
existing ones, all face risks and uncertainties
that may lead to failure
 Risk management provides a framework for
businesses to constantly think about these
risks and uncertainties, with a view to
minimizing their impact on the business.

29. Thank you for participating