Published by MBA Skool Team, Published on January 05, 2013
Have You Seen Future?? I am sure not, unless you are having some time machine or so. In Future, the probability of a favorable event is as likely as unfavorable, but as they Say in Accounting “Do not anticipate profit but provide for all possible losses”. Here by losses I mean that probability of an Unfavorable event or the Inevitable Disruption which might haunt an organization in future. In terms of Organization this disruption can be due to Systematic risk (i.e. Business Cycles, Interest rates, Cost of raw materials etc) or Unsystematic risk factors. (Govt. Policies and intervention, inflation, Currency fluctuations, Interest rates changes by central bank, other macroeconomic factors etc).
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Systematic risks are under the control of the organization and their criticality depend upon the industry. For instance, a consumer Durable industry player manufacturing Color televisions incurs 80% of its costs through raw materials i.e. picture tubes, which makes it necessary for such players to check their internal risks for maintaining margins. Now comes the other risk which is beyond the control of an organization and hence much more critical. It today’s technological era it is a challenge for top level management to take decisions based on self intuition or mechanical software’s but, generally managers prefer a mixture of both.
In Industry, The most common practice to anticipate future is based on past outcomes which are referred through the past preserved Information. Generally, Organizations maintain separate departments for such information known as MIS.
The information is increasing manifolds through the passing of time and to crunch and analyze that data into useful information is a daunting task, which makes analytics the crucial vertical in any organization. Some organizations prefer in house analytical practices though certain robust technologies, structured tools and technology to take important strategic decisions while some prefer to outsource it due to cheap labor, technology & cost constraints.
An organizations strategy to foresee the inevitable disruption also depends upon its exposure to risk.
In Case of Banking industry, Leverage (the Double edged sword) will have a huge impact on the value of Bank’s rate sensitive assets and liabilities thus acting a trigger, to follow risk mitigation norms; maintaining adequacy of regularity capital, economic capital etc.
The Impact of this disruption can be so lethal that it might cost a very existence of the bank. (In case of euro debt crisis due toxic assets or Credit default swaps.)
In Today’s Competitive scenario an organization can either follow the passive role (i.e. waiting for the trigger, The Basel Committee Norms for Banking industry or BIS) for mitigating there disruptions or Secondly, by bringing the change without the trigger i.e. by developing certain specific norms/ regulations over the regulatory norms for unforeseeable future risk. An organizations can also follow the active role by leading from the front i.e. by bringing the change (Classic examples for technological giants like Apple or Sony.)
For an organization, strategic decisions to mitigate risk also depend upon the organizational structure, hierarchy and leadership style of the manager. i.e. if an organization is having a Line structure then risk mitigation decisions will solely depend upon the optimism of the top level management. i.e. there will be less involvement of bottom half in decision making but never the less quite instant as per the need of the hour. In Contrast, in case of a Functional organization structure, the decisions will be according to the functions performed by them in the organization through proper brainstorming, data analysis etc. But, the decision might take huge time which might worsen the situation. Later, is most common in organizations as it provide ample chance for employees to show their creativity and the decision making is not done on the basis of intuition thus, increasing the probability of favorable outcome.
Thus, due to certain recent certain disruptions like Sub Prime crisis and Euro debt crisis has forced the forced the firms to anticipate and provide for the worst case scenario since the “Survival of the Fittest” is the name of the Game.
This article has been authored by Rakshit Bapna from SIBM Bangalore.
Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.
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