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Some Thoughts on Risk and Organizations
This is "work-in-process" thinking. You can participate and help develop these thoughts further (or challenge them).
The organization's purpose is to create value by interacting with its environment (customers, suppliers, technology, competition, markets, government, etc.). Value is created by providing goods and services that fulfill the needs of the organization's customers or constituents.
Risk is the property that causes value to vary in uncertain ways. The source of risk is change in the environment. The environment is a complex set of relationships and interactions among organizations and other elements. The complexity and fluidity of the interactions creates uncertainty: no one organization has the ability to either completely control, influence or foresee all possible changes in the environment.
Value created by the organization varies as the needs of its customers change in response to changes in the environment. Risk can mask the opportunity to create more value or threaten the value being created: a change takes place which is within the response capability of the organization, but the organization fails to respond (risk is not "managed").
An organization creates value throughout its growth cycle, but in different In the formative stage, disorder is the primary process or source of value creation: creatively reaching out to the environment to connect with customer needs. Too much focus on disorder (chaos) means that the organization may never connect to its environment in a way that provides value to customers. Managing risk means developing and keeping a blend of some order within the general process of disorder.
In the early normative stage, order becomes the process through which the organization creates value by replicating and improving on the initial model discovered through positive feedback from the environment in the formative stage (first breakpoint). The process of orderly replicating and improving on the managed model of value sows the seeds of risk in the later normative stage: the organization "bets" on the value creating model and continues to replicate and improve on it in its own image. If the organization manages risk properly (stays in touch with changes in the environment by intentionally blending in some disorder along with the order), the growth pattern can continue indefinitely. However, most organizations tend to invest heavily in their value creation model, to enforce order through command-and-control hierarchies, and to ignore subtle changes in the environment until they are no longer subtle and too late to prevent decline (second breakpoint).
In the mature third stage of fulfillment, what used to work does not work any more. The value creating model absorbs more resources per unit of output as the organization tries to manage the environment instead of responding to it. The organization is in decline, and the environment threatens to absorb it. Attempts to revitalize the old product create more value for some customers, but the decline has set in. Reengineering (substituting disorder for order to a great extent) is a drastic step to accept the effects of more risk in order to reconnect with the environment along a new path of growth (Renewal).
What is it mean to "manage risk effectively?"
The organization has little influence on the seemingly random and endless web of relationships in the environment. Attempts to influence and control more than a few immediate factors is often quite expensive, and the results are unpredictable.
Managing risk must therefore come from within and act to change the organization and its response to changes in the environment. Rather than try to guess what risks will affect the organization, the organization builds in certain characteristics to improve its ability to respond to change. Chief among the characteristics that improve the organizations' abilities to respond to risk:
- The main business process of either disorder or order, whichever is paramount, is blended with some amount of the opposite process.
- The organization is a "learning organization." That is, it actively seeks to monitor change in the environment and learn from it.
- The organization is process-centered instead of ego-centered. The focus is on serving customer needs instead of serving the egos of management or investors.
- The focus of the organization is on the present and future together -- neither is sacrificed for the other.
Managing risk means ensuring sensitivity to detect risk, ensuring flexibility to respond to risk, and ensuring capability of resources to mitigate risk.
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