Difference between Risk and Uncertainty
Question:
Discuss about the Determinants of Enterprise Risk Management.
This very specific article has depicted in-depth vista about the importance of integrated risk management in order to control the entire flow of international business. While running the entire process of business, managers have to face innumerable uncertainties as well as risks. In this particular article, the author has made a clear difference between risk and uncertainty. However, the study has focused to describe the three major uncertainties that a multi-national corporation may have to face for running their business. On the other hand, some of the major ways of solutions for overcoming those uncertainties is provided in this study.
In general point of view, the concept of risk is primarily used with finance, economies strategic management and so many. The author in this article has stated that risk is the effect of uncertain environmental components occurs at the workplace of an organization. While running the entire business process organizations have to face some uncertain situations due to which risk factors arise. As a result, it reduces the level of performance predictability that ultimately hampers profitability of business.
Askari and Askari (2012) stated that analyzing the risk factors is highly significant for every business organization. Business managers of different organizations tend to implement some alternative business strategies and policies so that any kind of risk can be overcome. The author in this article has specifically mentioned that organizations may have to face immense political risks, competitive risks and financial risks. Before entering in the new market, organizations may have to face major political risks that hamper their business process. The entire taxation policies, government rules and regulations may not be suitable for the organization to run their business effectively. On the other hand, launching a business wings in the competitive market is a major risk. The organization has to face immense challenges in achieving brand image and reputation amidst the competitive market. As emphasized by Aebi, Sabato and Schmid (2012), the business managers have to accept threats from the competitors in maintaining product quality as well as service quality. Therefore, before establishing a brand in the current market the organization has to make an effective risk analysis.
The overarching term on the other hand is primarily used in strategic management and organizational theory. Uncertainty as per the point of view of this author refers to the situation occurred within a workplace in an unpredictable manner. The author has categorically stated that the two specific terms risk and uncertainty are inseparably related to each other though significance of these two terms differs. Risk is the effect of uncertain situations occurred at the workplace. While running the entire process of business the employees have to face innumerable uncertain situations, which are completely unpredictable. These kinds of unpredictable situations increase rate of risks. Therefore, based on uncertainty the business experts can predict risks.
Major Uncertainties Faced by Multinational Corporations
Lavastre, Gunasekaran and Spalanzani (2012) stated that business experts can reduce the risk factors after identifying its negative effects. On the other hand, uncertainty is completely unpredictable. The business experts after evaluating the uncertain situations tend to implement some alternative business strategies for overcoming the risk factors. For an example, occurrence of sudden technological barrier is an uncertain situation for which the business experts were not prepared. After this kind of sudden occurrence, the organizational manager has to focus on analyzing the risk factors and implement alternative strategies and policies.
Managing uncertainty is very much challenging for business experts. On the other hand, managing risk factor is easier as the information is available. For an example, due to any kind of environmental barrier the business experts have to face immense difficulties in running their entire process of business effectively. On the other hand, after facing the environmental challenges the organizational managers tend to identify the risk factor first. Based on the risk factors the managers implement some effective alternative strategies and policies. Kardes et al. (2013) opined that after evaluating various differences between these two overarching terms it can be concluded that uncertainty is the cause of increasing risks. Therefore, business experts before analyzing risk factors have to identify the uncertain situations first.
Multi-national companies while running their entire process of business in various geographical boundaries and locations have to face innumerable uncertainties among which three major situations are most prominent. These are as follows:
General uncertainties include political instability, government policy instability, macroeconomic uncertainties, social uncertainties, and natural uncertainties. Political uncertainties arise due to the chancing policies and rules of political system. Due to different kinds of political turmoil such as tax policies, unnecessary war and revolutions, instable position of political parties the business organizations have to be affected in running their business wings effectively. Eiteman, Stonehill and Moffett (2012) opined that political uncertainties such as fiscal as well as monetary reforms, price control, threats on the nationalization are the several causes of business turmoil. On the other hand, social uncertainty arises due to the uncertain changes of government rules and regulations. After reformations of new regulations and acts some of the people belonging to society tend to show their respect in maintaining these policies. As a result, the country has to face immense political turmoil, which results a negative effect on business. For an example, after the incident of Brexit, the organizations of UK had to face immense economic barriers. International business organizations have faced innumerable challenges in establishing their entire business process in the market of UK after separation of Britain from EU. The primary reason of this kind of business turmoil for MNC is political uncertainty.
Solutions for Overcoming Uncertainties
Britain in order to avoid extreme liberalization decided to leave EU, which resulted a complete political and economic misbalance on the overall business sector all over the World. As emphasized by Dionne (2013), business experts faced immense challenges in entering in the new market of UK due to economic turmoil. On the other hand, after the separation of EU and UK, business organizations are unable to maintain international challenges. Employee rates have become uncertain. Large number of employee turnover took place for occurring economic turmoil in Europe. As a result, the organizations belonging to Europe have faced immense environmental uncertainties.
However, due to these kinds of political uncertainties organizations have to face immense challenges in rendering the success of business. Bernardini et al. (2012), stated that business experts have least opportunities in delivering their products and services to the international market. As a result, the scope of business expansion in the international becomes limited.
As per the point of view of this author, industry uncertainty occurs due to three specific reasons that include input market uncertainty, product market uncertainty and competitive market uncertainty. Input market uncertainty implies the situations that are related to the qualities and quantities of inputs in the production process. Sometimes, it is observed that business organizations tend to change their suppliers and distributors for rendering a change in products (Bromiley et al., 2015). It may have a negative effect as well. If the consumers tend to show their negative feedback after using the products and services, the business experts have to change their suppliers immediately.
The Iconic, one of the most recognizable supermarket chains of Australia in retail industry had decided to change their supplier for rendering an innovation in their products. At the initial stage, The Iconic only focused to maintain fashionable clothes suitable for young generation. In order to expand their business process the business experts have decided to change supplier for rendering diverse clothes suitable for various group of people. In order to expand their brand scope the business experts have chosen to change the suppliers. However, after taking this decision, The Iconic is getting extreme negative feedback from the customers due to the lack of product quality. In order to input different kinds of products, the organization may have to face input uncertainty, which actually decreases the reputation of brands.
Product uncertainty arises due to the change of needs and demands of industry’s output. With the gradual and dynamic progress of civilization, customers’ needs and demands are changing gradually. In this kind of situation, the business experts have to face uncertain situations. Hammer (2015) opined that with the gradual progress of customers’ trends, the organizations have to focus on providing products and services. Otherwise, the customers show their reluctant attitude in using the products from that organization. Consequently, business experts have to face innumerable difficulties in maintaining brand image and reputation. For an example, MacDonald at the very beginning of their journey focused to sell burgers. As per the customers’ demands, the business experts decided to add product variety by implementing various flavored beverages. After rendering product variety, this particular company has grabbed the attention of customers more effectively.
Environmental Factors that Cause Business Risks
Competitive uncertainty is the most effective market threat that business organizations have to face especially while entering in the new market. Large numbers of business organizations exist from a similar industry. As per the point of view of Reboredo (2013), implementation of innovative product or service in a particular organization is the cause of major threat for other companies. Customers like to pay their attention in using services from those organizations, which renders innovative designs in their products. Therefore, an effective market strategy of a rival company is the cause of serious competitive uncertainty for others.
For an example, Coles is one of the most prestigious brands occupying a dominant place in various multinational countries. At the initial stage of their journey, the business experts focused to draw the attention of international premium customers. However, after the emergence of Woolworths, this specific organization like Coles has faced a major challenge from its competitor. Woolworth has primarily targeted low cost customers along with maintaining the quality of products. As a result, the customers can avail the products of Woolworths in affordable price range. In this kind of situation, the business experts of Coles have to face competitive uncertainty due to the limited range of target market. In comparison to the target market of Woolworths, Coles is possessed with limited number of target group. As a result, in last five years the organization has faced immense difficulties in maintaining their business sustainability in market (Waemustafa & Sukri, 2015).
Kern et al. (2012) stated that firm specific variable implies different uncertain factors that every business firm has to face due to the issues related to labor, research and development, operation, behavior and so on. Uncertainty of labor arises due to the rapid growth of employee absenteeism. After implementing extreme level of autocratic leadership at the workplace, employees gradually lose their interest in providing their best effort towards services. On the other hand, the rate of absenteeism increases due to the implementation of dominating environment. In this kind of situation, the business experts have to face uncertainties in running their wings effectively in the market. Operating uncertainty implies uncertainty related to raw material storage, production and entire supply chain. Due to the communication gap among the employees the business managers fail to maintain an effective balance between supply and demand of the products and services.
In this kind of situation, the organization has to face uncertainties in their entire operation process. Customers get deprived of receiving the services in proper time. As a result, business organization fails to maintain their organizational image effectively. In addition, after the emergence of advanced technology the business organizations have very much dependent on the advancement of technology (Colicchia & Strozzi, 2012). Due to any kind of sudden technological crisis, the entire flow of operation process becomes uncertain. This particular uncertainty is very much harmful for developing the entire process of business. For an example, in few years back Yebhi.com has raised a major issue due to sudden technological barrier. The customers had to wait for a long time for receiving the services. As a result, they lost their patience on the service quality of this organization. Yebhi.com is a well-known e-commerce retail brand, which has already achieved immense recognition in the international market. Due to technological error, the business experts could not connect their voice with service users. Due to this kind of uncertainty, the organization has faced immense challenges in maintaining their business glory.
Impact of Political and Social Uncertainties
Three major categories of responses for managing risk factors for a multi-national corporation are as follows:
- Financial risk management:
- Strategic risk management:
- Integrated risk management:
Financial risk management:
In order to reduce the financial risk factors the organization can purchase insurance and buy financial selling instruments. The capability to lock in a fixed up price is the primary risk-reducing feature of futures. It can forward contracts of both the buyers as well as the sellers. Multinational corporations are widely used widely use Financial hedging in order to manage foreign exchange risk. Seuring and Gold (2012) stated that business firms by purchasing insurances can protect their internal properties. For an example, while enhancing technological as well as physical equipments for expanding entire business process, the executives do not have to face any kind of risk factors due to this insurance. If any kind of sudden accident takes place at the workplace, the business experts would get their property back. As a result, organizations by making insurance policy can manage the financial risk factor that can ultimately protect the company from being affected and injured.
Strategic risk management:
In order to avoid various risk factors at the time of implementing corporate strategies, some of the major initiatives can be taken. The research and development team can be motivated for collecting immediate feedback from the customers. With the dynamic progress of market, needs and demands of the customers are changing. In this kind of situation, research and development team of every business organization has to be more active and participative for collecting an in-depth overview about new market trend (Walker & Jones, 2012). In order to reduce the rate of environmental uncertainties, the strategic managers have to analyze environmental factors first. Based on the climate and weather the experts have to make effective business plan. Any kind of logistics and supply chain process should not be processed in bad weather. Otherwise, the delivery of products may not meet the deadline. In order to avoid any kind of uncertainties regarding employee liberty, the organization can follow participative form of leadership style at the workplace instead of using autocratic form of leadership. In participative form of leadership, the employees can get enough liberty of sharing their views and opinions regarding the success of business. As a result, both the employees and the employers can work under agile work environment.
Integrated risk management:
One of the most effective strength of implementing integrated risk management is that it can facilitate an explicit recognition of trade off among exposures to different uncertainties. Integrated risk management is associated with scheme funding. In order to make effective corporate governance the concept of integrated risk management is implemented within the organization. For an example, the establishment of joint venture is one of the most effective integrated risk reduction strategies. Yazid, Razali and Hussin (2012) opined that the organizations in quest of expanding their entire process of business tend to enlarge their internal resources. Moreover, at the time of any kind of sudden crisis, the business experts can share their burden after implementing joint venture.
Input, Product, and Competitive Market Uncertainties
However, while evaluating various uncertainties some of the major issues faced by multi-national corporations are highlighted. After identifying those specific issues an effective recommendation can be provided:
- Making an effective research about competitors’ market strategy:
Quer, Claver and Rienda (2012) stated that competitors’ market strategies grab the attention of customers. In this kind of situation, the business experts by involving their research and development process tend to gather in-depth information about competitors’ market strategies. Based on the competitors’ market strategies and policies the business experts have to reform their internal strategies for drawing the customers’ attention in market.
- Maintaining effective communication with the suppliers:
It has been observed that lack of communication is one of the most effective factors based on which production managers and suppliers have to face difficulties (Dunning, 2012). With the gradual change of market demand, organizations have to render innovation in their products as well as services. In this kind of situation, the business experts should make an effective communication with the suppliers so that they can get proper raw materials.
- Collecting immediate feedback from customers about their needs:
Along with getting an overview about competitors’ market threats, the organization has to collect effective feedback from the customers as well. Based on the customers’ demands and trends the organization has to modify product as well as service quality. Multi-national corporations in quest of gathering feedback from the customers can use social media vehicles. Kerzner and Kerzner (2017) opined that the impact of social media in current business scenario is wide that can involve the people of different geographic locations together. Business experts by sitting at their own workplace can gather necessary feedback of the customers. In addition, direct marketing is one of the most effective ways of collecting customers’ feedback immediately.
- Providing effective training and development session to employees for enhancing technological skill:
As per the opinion of Aven (2012), employees may not have enough flexibility in operating the advancement of technology. In this kind of situation, employees may have to face challenges in controlling the business process due to the lack of sufficient skill and competency. However, in order to gain proper competency, the business experts should provide training session to the employees so that they can easily overcome sudden technological barriers.
Conclusion:
This very specific study has provided detailed analysis about the various strategies and policies about managing international business risk. The entire study has evaluated an overview about the differences between risk and uncertainties. Based on the article, three major uncertainties are there that a multi-national corporation can face while running their entire business process. Critical overview is provided based on the three uncertainties such as general uncertainties, industry uncertainties and firm variables. The study has given three major categories of responses that MNC might adopt for managing risk. However, some of the major recommendations have also been provided in order to overcome the issues raised in this very specific article.
Innovation as a Solution to Competitive Uncertainty
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