Welcome to the second lecture on the response to risk. We shall begin the lecture by highlighting the various sectorial responses to risks, the risk schooling and the cost and burden of risk to a society.
2.3 Lecture Outline
2.3.2 ‘It won’t happen to me’ syndrome
2.3.3 The risk schooling
2.3.4 Sector response; Personal, Organizational, National response to risk
2.3.5 The cost and Burden of risk.
‘It won’t happen to me’ syndrome
For a long time, general management suffered from ‘it won’t happen to me syndrome’ and many would go through the school system without sensitization on risk. The trend has been changing however with more positive attitude to risk developing and today we have individuals designated as risk managers. At personal level individuals could be risk takers-jumping on any bandwagon, risk neutral- fence seaters and risk averse-those avoiding it at all costs.
The risk schooling
Organizations undergo tremendous changes within a very short span of time, in the process a lot of things such as bankruptcy, job losses, and restructuring and hostile take- over occur. In view of the rapidly changing business environment, managers must be schooled in the perspectives of such changes which denote that the business environment is very fluid and risky. The orientation of managers should be to expect the unimaginable to happen. The most successful companies of yester years like unilever and Eveready batteries are today’s underdogs, while the yesterday’s underdogs are today’s most successful companies to envy and reckon with.
Sector response; Personal, Organizational, National response to risk
At personal level, there are situation that require that we adequately respond, for instance in this current times where effects of globalization may adversely affect a firm that is not proactive in its risk management plans, an individual may find himself retrenched at a very young age, due to economic pressures an individual may also not reach their economic potential may be because they were unable to respond appropriately to their situations and risks that if they had overcame they would be in a better position. For example a young graduate joining the labor market in the current times, the mantra could be ‘exit the organization mentally the very day you join it’. The implication of this is that prepare for your smooth exit in the organization so as to have less acrimonious separation with the employer in your retirement. Also have in mind that there are no permanent jobs these days, even when they call it permanent, because your organization is not permanent as well, it all depend on how it responds to its risks.
At the organizational level, response to risk is very critical to remain afloat, innovation, creativity and proactiveness is the hallmark of surviving the dynamisms of current business environment. It is not a guarantee that you will remain a giant in the business environment, your position as a market leader can only be assured if you are innovative, creative and proactive. Some of the dominant market players in the corporate scene today like Equity Bank and Safaricom were not their say 10-15 years ago and may not be sure if they will be there in the coming 10-15 years ahead if they do not innovate and manage the risks facing them proactively. Hence managers of such organizations have a duty to constantly respond to risks surrounding their business operations to be guaranteed of their continued existence and performance.
National response to risk calls for a thorough scrutiny of the policies that drive the national economy. Right from say education system and how that education system guarantees the individuals a way of life or not, risks begin to emerge. For example there is need to have a policy that guarantees all the primary students graduating from class eight a place in a secondary school, a vocational training centre or a polytechnic and or at worst be absorbed for a short course at the National youth service then be deployed in the informal sector through a government framework such as youth enterprise fund. By picking a few to join secondary school and leaving the others to sought out themselves because they did not meet qualify grades or points, the country creates a security disaster in the waiting. These young minds who still needs to be transformed find themselves helpless and hapless at a critical time in their developmental stage, they resort to join any gang that may give them hope and a listening hear, when all other doors closes at such an early age, anything can do, even if joining a criminal gang they will gladly join it without a second thought. Hence policy markers need to know that failure to adequately respond to national risk, like in the example of education above creates a big burden to the tax payers. The innocent children are at later stage branded very dangerous criminals, and more resources to put up police stations, recruit police officers and infrastructure to fight crime are expensed on innocent citizen who only needed right policy intervention at the right time in their life and would have changed the course of their lives and relieved the tax payers the wastages it has to incur to protect themselves from such innocent students now turned rogue criminals who kill and maim at will, while the government continue to waste the scarce resources to react to such situations, the best they could have done is to proactively ensure a smooth transition of all the student across the various levels of education and link them to the various sectors of the economy where there relevant manpower is needed.
The cost and Burden of risk.
The risk surrounding potential losses creates significant economic burdens for businesses, governments and individuals. Millions of shillings are spent every year on strategies for financing potential losses, especially when losses are not planned for in advance, items may cost even more.
Businesses may be reluctant to engage in projects that are otherwise strategically attractive if the potential losses appear to be unmanageable, thereby depriving the society of services judged to be too important.
The following are the cost and burden of risk to a society;
- The greatest burden of risk is that some losses will actually occur e.g. floods will destroy houses hence loss to the house owner. That is why individuals attempt to avoid risk or minimize its impact.
- Risk also has additional detriment apart from causing loss. The uncertainty as to whether loss will occur makes individuals establish risk minimization measures such as taking insurance cover or accumulating funds to meet such losses should they occur. The accumulated funds are reserved in highly liquid investments so that they are readily available to set off the losses. Such investments yield very low returns and hence investment waste due to low return investments.
- Without insurance as a risk minimization measure, each property will be required to accumulate their own individual funds so that the aggregate of individual funds will exceed the insurance funds hence another wasteful investments.
- Existence of risk may also have different effects on economic growth and capital accumulation which determines economic progress. Investors incur risks of a new venture only if the returns from the venture are high enough to compensate both static and dynamic risks. Such investors therefore make the cost of borrowing capital expensive to new venture owners. The venture owners must in turn charge higher prices to consumers; the economy will therefore have the cost of living increased in order to bear the burden of risk.
The uncertainty caused by risks produces feelings of frustrations and unrest, particularly in the case of pure risk more than others. Speculative risks are attractive to many individuals because it offers a chance to make gains or profits