Assessing Risk & Planning for Uncertainty (AQA A Level Business): Revision Note

Why assess and plan for risk and uncertainty?

• Risk describes a situation where the likelihood of a particular outcome can be estimated, based on data or past experience

  • E.g. A restaurant knows from several years of sales data that around 10% of its reservations result in a no-show each month

    • Because this pattern is based on past experience, the business can estimate the likelihood and plan for it, for example by slightly overbooking tables

• Uncertainty describes a situation where the outcome, or even its probability, cannot be reliably predicted at all

  • E.g. A business cannot know in advance whether a completely new government regulation will be introduced next year, or what form it might take

  • There is no relevant past data or pattern to draw on to estimate the likelihood of this happening

Benefits of assessing and planning for risk

• It protects the business from being caught off guard

  • Anticipating potential problems allows a business to prepare a response in advance, rather than reacting under pressure once a crisis has already begun

Example

Tesco had built contingency plans for supply chain disruption before the COVID-19 pandemic

This allowed it to respond faster than many smaller retailers when panic buying caused sudden demand surges in 2020

• It limits the financial impact of negative events

  • Planning tools such as insurance and contingency funds can significantly reduce the losses a business suffers if a risk materialises

Example

EasyJet, like many airlines, purchases fuel price hedging contracts in advance, which limits its financial losses when oil prices spike unexpectedly

• It protects stakeholders

  • Employees, customers, suppliers and shareholders all benefit from a business that is resilient to shocks, rather than one that is exposed and unstable

• It supports better strategic decision-making

  • Understanding the level of risk involved helps managers judge which opportunities are genuinely worth pursuing

• It builds stakeholder and investor confidence

  • Lenders and investors are more likely to support a business that can clearly demonstrate it has properly assessed and planned for risk

Example

Unilever's consistent and credible approach to risk management has helped it maintain a strong credit rating, giving lenders confidence and keeping its cost of borrowing relatively low

• It protects long-term competitiveness

  • A business that has planned for risk is often better placed to recover from a crisis than a less-prepared rival

Types of risk

• Businesses face several distinct categories of risk, each arising from a different part of the business or its environment

• Recognising which type of risk a business is facing helps managers judge the right way to plan for it

The main types of risk

Financial risk

• The risk of losses relating to a business's finances, such as cash flow problems, rising borrowing costs, or falling demand

Example

Persimmon and other UK housebuilders saw profits fall sharply as rising interest rates in 2022 to 2023 reduced mortgage affordability and buyer demand

Strategic risk

• The risk that a major strategic decision, such as a new product launch or market entry, fails to deliver the results expected

Example

Quibi, a short-form video streaming service, raised $1.75 billion but shut down within six months of its 2020 launch, after seriously misjudging consumer demand for its format

Operational risk

• The risk of disruption to a business's day-to-day production or service delivery, for example through equipment failure or supply chain problems

Example

The global semiconductor shortage of 2021 to 2022 forced Ford into a temporary factory shutdown, as they could not obtain enough microchips to complete vehicle production

Compliance risk

• The risk of failing to meet legal, regulatory or industry standards, potentially resulting in fines, legal action or a loss of licence to operate

Example

Volkswagen's 2015 'Dieselgate' scandal, in which the company installed software to cheat emissions tests, resulted in fines and settlements exceeding $30 billion worldwide after the fraud was discovered

Reputational risk

• The risk of damage to a business's public image or brand, which can occur even without a direct financial or legal failure

Example

United Airlines' market value fell by around $1.4 billion within days of footage in 2017 showing a passenger being forcibly removed from an overbooked flight, despite no laws having been broken

Cybersecurity risk

• The risk of a business's data or systems being compromised through hacking, ransomware or other cyberattacks

Example

The 2023 MOVEit software breach saw hackers exploit a security vulnerability to steal employee data from hundreds of organisations worldwide, including British Airways and the BBC