AGSM 440

April 5April 5• AnnouncementsAnnouncements

HW#12 team peer review due todayHW#12 team peer review due todayFinal draft of the Economic Analysis due 4/10Final draft of the Economic Analysis due 4/10

HW#14, 15, and 16 assigned todayHW#14, 15, and 16 assigned today Risk Assessment reportRisk Assessment report

Analysis of Risk in Business Proposals

What is the point of doing risk analysis?

Isn’t it the job of the project team to eliminate risk by selecting the most appropriate values?

Aren’t sources of risk random and unknown?

If there are both positive and negative risk, won’t they cancel out on average?

Example

You want to buy a new HDTV. In this transaction, you want to maximize your capability and minimize your cash outlay.

What are the risk associated with that transaction?

Risks

• I will pay too much by buying it at a store instead of online.

• A sale will occur just after I make the purchase.

• I will buy a product with poor quality.• The TV will become obsolete shortly

after I buy it.• The product I want won’t be available if

I wait for a better price

How to minimize purchase risk

• Price risk• Call or visit stores to learn their prices.• Ask if any sales are coming up.

• Quality Risk• Read consumer ratings of the competing

products• Obsolescence Risk

• Read about new products• Availability Risk

• Check on manufacturing or shipping

What are the Types of Risk??

Types of Risk

• Learnable risks – uncertainty can be reduced by study, investigation or experimentation

• Random risks – uncertainty is affected by external events whose occurrence can’t be predicted. This risk can be anticipated, and perhaps probability assessed, but timing can’t be predicted.

Learnable Risks

• These are the type that can be minimized by gaining more information

• Sources:• Literature• Vendors• Competitors• Historical data• Partial implementation and

experimentation

Random Risks

• Since we can’t predict when they will occur, at least identify them and the impact they will have when they do occur.

• Examples• Price and demand fluctuations• Weather or catastrophes• Competitor actions

Handling risks

• When possible, identify a range of potential conditions and analyze for that entire range• Example: price or product availability

fluctuations• Consider multiple fluctuating variables,

include worst case interactions• For specific events that might occur,

determine the response in advance• Example: hurricane disrupts production

Handling risks

• Risks that can be predicted to occur but at unknown times or frequencies can be handled with • Insurance• “Rainy day” funds• Price hedging (a type of insurance)

• Insuring against a negative event• Won’t stop the negative event from happening• Reduces the impact of the negative event

Suggested procedures

• Start with your economic analysis• Go through all of the factors included

to determine a range of likely values. • Identify potential interactions between

risk factors• determine the appropriate combinations of

those interacting factors

Interactions

0

1

2

3

4

5

6

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8

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Price

Availability

Suggested procedures

• Determine how to represent the potential situations• Best case and worst case scenarios

• most appropriate for learnable risks with little interaction

• Range of values• most appropriate when facing continually

varying factors such as prices or product availability

• Some situations may need both

Cycle-bar Trimmer

Suggested procedures

• Present the effects of uncertainty in charts or tables

• Text should give explanations of the conditions represented in the charts or tables

• Details of the calculations should go into appendices

• Identify which of the risks are learnable, and minimize those uncertainties by investigation and citation of sources

Suggested procedures

• For unpredictable risks, include insurance or other risk modifying strategies in your economic analysis

Risk Analysis Section in Report

The goal is to communicate those parts of your solution analysis that are subject to uncertainty, and project the range of results that might occur if your recommendations are enacted.

In-Class Assignment

• Make a list of factors that will impact the acceptability of your solution• Identify each factor as learnable or

random (try to list at least three of each)• For learnable factors, indicate sources of

information that can minimize uncertainty• For random factors, indicate a most likely

value, maximum and minimum that will be used risk analysis

• List appropriate risk mitigating strategies

Class Wrap-up

• HW#12 team peer review due today• Final draft of the Economic Analysis

due 4/10

• HW#14, 15, and 16 assigned today•Risk Assessment report