3. Types of risks.pdf

HHB30704: Tourism and Hospitality Risk Management Chapter 3: Types of Risk Dr Azreen Rozainee Abdullah School of Hospitality, Tourism and Culinary Arts  HHB30704: Tourism and Hospitality Risk Management Chap...

HHB30704: Tourism and Hospitality Risk Management Chapter 3: Types of Risk Dr Azreen Rozainee Abdullah School of Hospitality, Tourism and Culinary Arts  HHB30704: Tourism and Hospitality Risk Management Chapter 3: Types of Risk Dr Azreen Rozainee Abdullah School of Hospitality, Tourism and Culinary Arts Today’s Objectives: Types of Risk Change Risk Operational Risk Unforeseeable Risk Financial Risk Knowledge Risk Speculative and Static Risk Internal and External Risk Change Risk Change risk operates at the strategic, operational and project levels. Changes can be imposed by variations elsewhere either within or outside the organisation, or can be planned and engineered by the organisation as a way to achieve objectives. Eg if an organisation realized that it has to install a new production line in order to meet a sudden and unforeseen increase in demand for a product. Operational Risk Operational risk relates to the production process. Operational risk can be defined as ‘the risk of direct or indirect loss, resulting from inadequate or failed internal processes, people and systems or from external events’. Operational risk also effectively includes anything that can impact on the overall performance of the organization and on the ability of the organization to create value Unforeseeable Risk Unforeseeable risk is the type of risk that cannot be accurately forecast before it occurs. Can be mitigated by taking appropriate precautions such as transfer risk by make insurance contract with insurer. (Such as on fire, flood and subsidence) Financial Risk These risks can apply at any of the four risk levels discussed at the earlier slides. Financial risk includes market, credit, capital structure and reporting risks. Eg: The possibility that shareholders will lose money when they invest in a company that has debt, if the company's cash flow proves inadequate to meet its financial obligations. Eg: the possibility of a corporation or government defaulting on its bonds, which would cause those bondholders to lose money Knowledge Risk Knowledge risk includes the information that is stored using IT, hardware and software, information management, knowledge management and planning. As the level of IT use increases, so organizations become more exposed to knowledge risk. Companies also face new and rapidly changing IT- based threats such as hacking, sabotage, malicious interference and espionage. Knowledge Risk Note: Knowledge risk is not the same as IT risk, although knowledge risk is linked to IT risk in most modern organizations. Knowledge risk involves a disruption of access to information, whereas IT risk relates specifically to a disruption to information technology, whether knowledge based or otherwise. Knowledge Risk Knowledge risk can also be non-IT based. In many ways the real value of an organization lies in its people. In most successful organizations there are a relatively small number of very important people. These people fulfill key roles and functions, and are essential for the continuing success of the enterprise. Internal Risk Internal risks originate within the organization, whereas external risks originate from the environment. Internal risks are to some extent calculable and controllable. (ex. an employee acting fraudulently) (Systematic Risk) External Risk External risks may be calculable but they are generally outside the control of the organization. (Unsystematic Risk) An example of an external strategic risk is the risk resulting from the emergence of a new major competitor into the same market, such as Microsoft entering the computer games market with the X-box console in 2001. Microsoft is such a big player that its emergence must affect the strategic planning and response of existing major players such as Sony.  Comparison between external and internal risk External Risk Internal Risk Interest rate risk Operational process risk Volatility risk Legal risk Convexity risk Liquidity risk Time-dependent risk Supply Chain risk Competitor risk Competence risk Customer demand risk Complexity risk Exposure risk IT and Technology risk Shareholder risk People risk Political risk Residual risk Legislative risk Speculative and Static Risks A speculative risk is one that can lead to gain or loss. The net outcome can be either positive or negative. (Ex. A bet on a horse) Speculative risk can be split into two primary components (business risk & financial risk) Speculative business risk (SBR) arises from the company trading with its assets. Speculative financial risk (SFR) arises from the gearing ratio, which is a measure of the financing of the organization. Static Risk A static risk is one that can only result in a net loss. (Ex. A fire in a building is a static as it can only lead to a net loss) The organisation can reduce the effects of static risks by insuring against them and by diversifying. Acquisitions and mergers provide a means of allowing the organisation to evolve into new areas but it also expose the organization to the static risk and makes the system more resilient against market risk shocks The Concept of Risk Interdependency The various risk types discussed in the earlier slides do not exist in isolation. In practice there are interrelationships between them. A variation in one type can impact on the various other types. Game time Each of you (in a group) is needed to choose a few risk types and create a scenario/ short drama. Let your friends guess the type of risk. Present it to class.