Risk Management Assignment Critiquing Models of Risk Perception
The purpose of the risk management assignment is to undertake a short literature review and in particular critique the different models of the risk perception. You are to choose one theory or model that helps to explain why and how we perceive risk.
It is evident in the risk management assignment that the activities or events that are taking place across the world has become very uncertain. With the increase in this uncertainty, risk have also increased. This risk is perceived by people in a different way. The subjective judgement of an individual that is related to the occurrence of any kind of negative consequences is known as Risk perception. The in-depth understanding of the values of a nation can increase the ability of risk perception (Dodoo & Hugman, 2012). The aim of this report is to discuss about risk perception and the models that are associated with risk perception.
There are several theories or models that are associated with risk perception. The objective of this section is to focus on critical analysis of these theories and models.
The risk perception theory that deals with the psychological aspects of an individual is known as valence theory. According to the study conducted by Zhu, Xie & Gan, (2011), valence is considered to have a close relationship with risk perception. It helps in dividing the emotion of a person into two types, positive and negative. This theory states that when a person has positive emotions, they are unable to perceive risk and when a person has negative emotions their risk perception ability is high. On the contrary, according to the study conducted by Fischhoff, (2013), valence theory might not be effective in perceiving risk if the person has mixed emotions. Thus, this aspect of dividing the emotion of a person in two types is one of the major weaknesses of this valence theory.
This is also considered to be one of the socio-psychological models, which helps in describing the process in which risk can be perceived with alteration in the social and cultural factors. According to the study conducted by Wirz, et.al., (2018), SARF model helps in reshaping the risk which further helps in contributing to the consequences of risk. As per this model, hypothesized and actual situations are taken into consideration for perceiving risk. However, as stated by Stanciugelu, et.al., (2013), this model is considered to create a link between attenuation as well as amplification. Furthermore, SARF model is considered to fall under single theoretical framework.
Enterprise risk management
According to the study conducted by Bromiley, McShane, Nair & Rustambekov, (2015), ERM is considered to have gained popularity among organizational leaders because it helps in identifying or perceiving risks that an organization might face in the near future. However, according to the study conducted by Grace, Leverty, Phillips & Shimpi, (2015), ERM not only help organizations to perceive risk but it also helps the organizational members to eradicate risks and improve the performance of the firm.
Cultural theory of risk
According to the study conducted by McNeeley & Lazrus, (2014), cultural theory of risk focuses on describing the importance of culture that helps an individual to perceive risk, make decisions and change their attitude and behavior. This model also states that the views of people from different parts of the world is important in framing risks.
Justification of Undertaking Enterprise Risk Management
Enterprise risk management (ERM) has appeared as a significant business trend for risk management that has been developed on traditional principles. This has emerged because of the paradigm shift occurring in the field of risk management in the recent years. As opined by Brustbauer (2016), the new trend us inclined towards undertaking an all-risk encompassing approach instead of assessing risks from an individual perspective. This risk management model is now being used in various large-scale, medium and small-sized organizations for considering an overall approach to address all risks. Thus, evaluating this model would be beneficial in understanding how organizations are using ERM for managing their risks. According to Malik& Holt (2013), ERM has been defined by KPMG as a structure and systematic approach that aligns strategies, processes, operations, technology, people and knowledge for evaluating and responding to uncertainties or risks facing the enterprise while creation of value. It has been a new phenomenon bringing revolution in the risk management techniques of the organizations by including not only health and safety or financial risks but also addressing technological, reputational and other risks. Thus, it is beneficial to gain deeper insight about this model by identifying its strengths, weaknesses and application.
Strengths and Weaknesses of the Model
ERM consists of various strengths because of its holistic approach undertaken for risk management in the organizations. As opined by Farrell & Gallagher (2015), enterprise risk management model helps in ensuring increased risk-management awareness in the organization by undertaking a firm-wide approach of managing risks, involving mature strategic management and operational decisions and enhancing competitive advantage of the firms. This clearly represents that the model helps in developing business strategies capable of reducing losses along with exploiting opportunities. Thus, ERM model apply the theoretical concepts for providing guidance and suggesting details about risk management to the firms. Supporting this view of ERM undertaking a holistic approach for considering all types of risks, Choi, Ye, Zhao& Luo (2016) have pointed out how this model uses a procedural approach for managing uncertainties along the path and their potential effects on the outcome. It helps in addressing three different categories of risks, namely, procedural, internal and external. External risks include partner, regulatory and market risks, internal risks involve planning or strategy, organizational, financial, technological and human resource risks and procedural risks are costs, quality and schedules (Choi, et al., 2016). These risks are managed in the sequential steps of identifying, assessing, evaluating and managing through both external consulting and internal feedback. Furthermore, Scarlat, Chirita & Bradea (2012) has also supported the view by arguing how ERM provides all organizational members with a holistic view of probable events that might prevent the achievement of desired objectives. The model uses a set of metrics or indicators for tracking the changes occurring in risk conditions and further identifying new risks, which lead to better management of such risk events. Thus, with such an efficient ERM model, firms gain various benefits such as improvement in key business relationships, increased revenues, reduced defection and risk of bankruptcy, optimization of critical points, prioritization of decisions and fostering a risk culture (Scarlat, et al., 2012). Callahan & Soileau (2017) have also pointed out how effective implementation of ERM helps in mitigating or avoiding various risks by identifying and evaluating them. This model further focuses on balancing threats and opportunities through coordination between risk assessment and management, thereby resulting in cost reductions. Thus, these enable the firm in effectively handling potential risks. In addition, Kopia, Just, Geldmacher & BUßIAN (2017) have opined that ERM helps in creating value by encouraging the top management to manage and analyse risk-return trade off by implementing suitable strategies. In this regard, the model covers various types of risks including operational, hazards, financial and strategic. Thus, the strength of ERM model is evident from various characteristics and benefits that has been displayed in different literature.
There also exist various limitations related to ERM in the organizations. According to Fadun (2013), there are various challenges associated with the implementation of ERM model, which is one of the most significant limitations. These include difficulty in risk terminology, selecting proper framework for managing risks, articulating the consequences, identifying, assessing, evaluating, treating and monitoring risks, generating a risk-aware culture, effective technology deployment and integrating other strategies into the ERM. However, the author has also mentioned various benefits that help in overcoming these challenges. On the contrary, Bharathy & McShane (2014) has opined that firms still face difficulties in implementing ERM model in their organizations because of the struggles involved in changing their risk management philosophy. These struggles occur as the managers and employees do not always possess the required capability of modelling risks for integrating them into an enterprise-wide scale for better management. This indicates the lack of expertise in deploying this model across all risk levels of the firms. Furthermore, Almeida, Teixeira, da Silva & Faroleiro (2019) have opined that ERM faces certain limitations in the field the ISO 31000 practices of risk management, which are applied through this model. This is because these standards have often been criticized to be extremely abstract and confusing, which makes it difficult for the managers to integrate them into the ERM model. Such absence of clear understanding hampers the process of effective implementation of ERM practices in the organizations. The fundamental challenges that firms experience because of weak basis of ISO standards used in ERM are various interpretation of the framework, adjusting this framework based on organizational requirements and absence of acceptance, agreement and understanding because of perceived complexity. Besides, Grose (2015) has pointed out five weaknesses associated with the systems-based approach of ERM for managing risks of the firms. Despite born in the financial services industry, ERM was incapable of anticipating the global financial crisis. This is because of the limitations such as lacking a proper framework, reactive instead of proactive approach, discards the wisdom of the insiders in managing and controlling risks, incapable of calculating mitigation costs and failure in prioritizing risks based on ranks. Thus, ERM model consists of both strengths and limitations, which have been explored in this section by reviewing existing literature.
Application of the Model
The application of ERM model in reducing and mitigating the risks in supply chain and logistics have become popular in the recent decades. According to Park, Lim& Kim (2012), the use of ERM in logistics risk management involve four phases as put forward in the AIRMIC, ALARM and IRM standard, which include risk assessment, risk reporting and decision, risk treatment and risk monitoring. The first phase involves thorough check of all logistics operations for identifying potential risks, while the second phase includes measuring impact and occurrence possibility of identified risks through metrics. The third phase involves assessing the risks through scientific analysis techniques such as decision tree, mapping technique, game theory, Monte Carlo simulation and others, while the fourth phase includes herding the risks with the help of actions plans and prioritization of risks (Park, et al., 2012). In the last two phases of controlling and monitoring, the risks are tracked for any improvements. Furthermore, Curkovic, Scannell, Wagner & Vitek (2013) have pointed out that supply chain risk management is an approach undertaken for reducing risks in the supply chain and logistics by using the ERM model. It also focuses on identifying risks, assessing them, undertaking decisions and implementing risk management actions and lastly, monitoring the risks. These strategies are undertaken based on the COSO 2004 framework of ERM model, which are integrated into this for managing risks in the supply chain. On the contrary, Monica & Pangeran (2020) have opined how integration of Balanced Scorecard and entreprise risk management model helps in mitigating various supply chain risks, such as, operational, supply risk, financial, demand and environmental risks. This integration enables in better analysis and evaluation of the risks to identify the ones having the largest impact on the achievement of strategic goals and performance of the organization. Besides, Curkovic, Scannell, Wagner & Vitek (2013) has represented the integral component of ERM, namely, supply chain risk management, which helps in systematically managing, identifying, assessing and evaluating risks present through the entire network of the supply chain. Here, the COSO framework of the ERM model enables the supply chain managers by developing a base for increasing awareness for understanding the need of integrating and executing SCRM. Thus, it is evident that the ERM model provides the basis of risk management in the supply chain and logistics operations of the organizations.
The report has conducted a literature review on the risk management model of ERM. It has pointed out the various strengths and limitation of the model in this regard by reviewing existing journal. Besides, the application of this model in the supply chain industry has also been provided in the report. However, some literature gap has been identified, where the articles have focused more on the benefits and challenges of ERM and its use in supply chain. Thus, there still exists future scope of exploring its strengths and limitations alongside proper method of application.
Almeida, R., Teixeira, J. M., da Silva, M. M., &Faroleiro, P. (2019). A conceptual model for enterprise risk management. Journal of Enterprise Information Management. doi:10.1108/jeim-05-2018-0097
Bharathy, G. K., & McShane, M. K. (2014). Applying a systems model to enterprise risk management. Engineering Management Journal, 26(4), 38-46. Doi: 10.1080/10429247.2014.11432027
Bromiley, P., McShane, M., Nair, A., &Rustambekov, E. (2015). Enterprise risk management: Review, critique, and research directions. Long range planning, 48(4), 265-276.Doi: 10.1016/j.lrp.2014.07.005
Brustbauer, J. (2016). Enterprise risk management in SMEs: Towards a structural model. International Small Business Journal, 34(1), 70-85.DOI: 10.1177/0266242614542853
Callahan, C., & Soileau, J. (2017). Does enterprise risk management enhance operating performance?.Advances in accounting, 37, 122-139.doi:10.1016/j.adiac.2017.01.001
Choi, Y., Ye, X., Zhao, L., & Luo, A. C. (2016). Optimizing enterprise risk management: a literature review and critical analysis of the work of Wu and Olson. Annals of Operations Research, 237(1), 281-300.doi:10.1007/s10479-015-1789-5
Curkovic, S., Scannell, T., Wagner, B., &Vitek, M. (2013). A longitudinal study of supply chain risk management relative to COSO’s enterprise risk management framework. Modern Management Science & Engineering, 1(1), 13-36.https://www.simecurkovic.com/wp-content/uploads/2021/05/COSOMMSEPaper.pdf
Curkovic, S., Scannell, T., Wagner, B., &Vitek, M. (2013). Supply chain risk management within the context of coso's enterprise risk management framework. Risk management assignment Journal of Business Administration Research, 2(1), 15.
Dodoo, A., &Hugman, B. (2012). Risk perception and communication in sub-Saharan Africa. Drug safety, 35(11), 1041-1052.DOI: 10.1007/BF03261990
Fadun, O. S. (2013). Promoting ‘enterprise risk management’adoption in business enterprises: Implications and challenges. International journal of Business and management invention, 2(1), 69-78.https://solomonfadun.com/Dr%20Fadun%20Publications/Promoting%20ERM%20Adoption%20in%20Business%20Enterprises-2013-7.pdf
Farrell, M., & Gallagher, R. (2015). The valuation implications of enterprise risk management maturity. Journal of Risk and Insurance, 82(3), 625-657.Doi: 10.1111/jori.12035.
Fischhoff, B. (2013). Risk perception and communication. In Risk analysis and human behavior (pp. 17-46). Routledge.
Grace, M. F., Leverty, J. T., Phillips, R. D., &Shimpi, P. (2015). The value of investing in enterprise risk management. Journal of Risk and Insurance, 82(2), 289-316.Doi: 10.1111/jori.12022
Grose, V. L. (2015). Five Weaknesses of Enterprise Risk Management. Omega Systems Group Incorporated
Kopia, J., Just, V., Geldmacher, W., &BUßIAN, A. (2017). Organization performance and enterprise risk management. Ecoforum Journal, 6(1).http://www.ecoforumjournal.ro/index.php/eco/article/viewFile/573/361
Malik, S. A., & Holt, B. (2013). Factors that affect the adoption of Enterprise Risk Management (ERM). OR Insight, 26(4), 253-269.doi:10.1057/ori.2013.7
McNeeley, S. M., &Lazrus, H. (2014). The cultural theory of risk for climate change adaptation. Weather, climate, and society, 6(4), 506-519.DOI:10.1175/WCAS-D-13-00027.1
Monica, E. G., &Pangeran, P. (2020). The Integration of Balanced Scorecard and ISO 31.000 Based Enterprise Risk Management Process to Mitigate Supply Chain Risk: Case Study at PT Anugerah Bintang Meditama. International Journal of Multicultural and Multireligious Understanding, 7(10), 616-628.
Park, T. H., Lim, S. M., & Kim, J. B. (2012). An Application of ERM to Risk Management in the Logistics: A Case. Journal of Navigation and Port Research, 36(4), 321-327. Doi: 0.5394/KINPR.2012.36.4.321
Scarlat, E., Chirita, N., &Bradea, I. A. (2012). Indicators and metrics used in the enterprise risk management (ERM). Economic Computation and Economic Cybernetics Studies and Research Journal, 46(4), 5-18.http://www.ecocyb.ase.ro/20124pdf/Emil%20Scarlat%20(T).pdf
Stanciugelu, I., Frunzaru, V., Armas, I., Duntzer, A., & Stan, S. (2013). Social amplification of risk and crisis communication planning-a case study. Scientific Bulletin-Nicolae Balcescu Land Forces Academy, 18(2), 197-205.
Wirz, C. D., Xenos, M. A., Brossard, D., Scheufele, D., Chung, J. H., &Massarani, L. (2018). Rethinking social amplification of risk: Social media and Zika in three languages. Risk Analysis, 38(12), 2599-2624.Doi: 10.1111/risa.13228
Zhu, D., Xie, X., & Gan, Y. (2011). Information source and valence: How information credibility influences earthquake risk perception. Journal of Environmental Psychology, 31(2), 129-136.Doi: 10.1016/j.jenvp.2010.09.005