Managing Risk (AQA A Level Business): Revision Note

Market research and sales forecasting

Market research

• Market research is the process of gathering, analysing and interpreting information about a market to reduce the risk of making a poorly informed decision

Advantages of market research

• It reduces strategic risk

  • Testing an idea with real customers before committing significant investment lowers the chance of a product launch failing

• It reduces financial risk

  • Improving the accuracy of demand estimates reduces the chance of overcommitting resources to a product customers do not actually want

Example

Greggs trials new products in a limited number of stores before deciding on a full national rollout

This helps it gauge real customer demand before committing to the cost of nationwide production and distribution

• It reduces the risk of losing competitive position

  • Ongoing research into competitors and trends can identify a threat early enough for the business to respond before real damage is done

Disadvantages of market research

• It only genuinely reduces risk if it is affordable and rigorous

  • Poor-quality or unaffordable research leaves the underlying risk largely unmanaged

• It can create a false sense of reduced risk

  • A positive result does not guarantee real-world success

Example

Peloton's rapid expansion of production capacity in 2021 was based on strong demand data collected during pandemic lockdowns, which suggested at-home fitness would remain permanently popular.

This research had reduced the perceived risk of increasing scale so aggressively, but once gyms reopened in 2022, demand collapsed, leaving Peloton with a huge inventory surplus, forcing mass redundancies and a change of chief executive

• Findings can quickly become outdated in a fast-moving market

  • The risk they were meant to manage can re-emerge

Sales forecasting

• Sales forecasting is the process of predicting future sales using historical data and trends

  • Along with market research, it helps a business manage risk by improving the quality of information available before a decision is made

  • This reduces the chance of an avoidable mistake

Advantages of sales forecasting

• Manages financial risk

  • Matching inventory, staffing and cash flow to realistic expected demand reduces the risk of the overtrading or cash flow strain covered earlier in this course

• Manages operational risk

  • An early warning of falling demand allows production or staffing to be adjusted before problems build up

• Manages the risk of losing access to finance

  • A credible forecast reassures lenders and investors that a business understands its own exposure to risk

Example

Next's detailed pre-Christmas sales forecasting manages the operational and financial risk of either running out of popular stock items or being left with unsold inventory that has to be heavily discounted

Disadvantages of sales forecasting

• A forecast is only as reliable as the assumptions behind it

  • An unexpected shock can make it wrong quickly, meaning the underlying risk has not gone away, only been temporarily hidden

• Over-reliance on a forecast can itself become a risk

  • A business may be slower to notice and react to real-time signs that contradict it

• Poor-quality data increases rather than reduces risk

  • A decision based on an inaccurate forecast can be worse than one based on no forecast at all

Example

Currys issued a profit warning in late 2022 after its Christmas sales forecasts, based on previous years' trends, failed to account for the sudden squeeze on household spending caused by high inflation and rising energy bills

Contingency and crisis management plans

Contingency planning

• Contingency planning is the process that occurs when a business tries to predict risky or unwanted events, then develops a process for how the business will respond to the occurrence of any such event

  • Regular risk assessments of potential disruptions and their impacts are carried out

  • Procedures commonly cover risks such as fire or weather-related emergencies

    • Evacuation plans are communicated and practised regularly

    • Key staff are given emergency responsibilities

    • Alarm systems are tested

    • Preventative measures protect stock and equipment, such as the installation of fireproof doors

• Contingency planning can help a business to survive and recover from a period of crisis

• However drawing up detailed contingency plans requires time and investment

Evaluating contingency planning

Crisis management

• Crisis management refers to the immediate handling of a disruptive and unexpected event

  • It includes communication, coordination, resource mobilisation and decision-making under pressure

    • Short-term significant disruption is likely and long-term business survival is affected

    • Radical solutions such as autocratic leadership and centralised decision-making could ensure business continuity

    • Work activity may need rapid reorganisation

    • E.g. many businesses swiftly implemented remote working for staff during the Covid-19 pandemic

Examples of crisis situations

• Crises do not have to be large-scale 

  • The unexpected loss of a CEO, a warehouse fire or an outbreak of infection within a business can cause a significant crisis that requires a prompt, transparent and well-communicated response

  • If a business were to lose all of its customers' data, this would be classed as a crisis and require an immediate response from management

Factors affecting crisis management

• Crisis management and contingency planning cannot eliminate the risk of business disruption

• Even the best plans can go wrong when a crisis hits

• The fact that businesses engage in this kind of planning does provide significant benefits, including

  • Business resilience can be improved

  • Negative impacts may be reduced

  • Stakeholders are likely to have greater confidence in the business

Succession planning

• Succession planning is the process of identifying and developing internal staff to fill key leadership positions in future

  • It involves managing the strategic and operational risk created by the sudden or unplanned loss of a key individual

Advantages of succession planning

• Directly reduces strategic risk

  • A prepared successor can step in immediately, rather than leaving the business without clear direction during a leadership vacuum

• Reduces operational risk

  • An internal successor already understands the business's systems, culture and key relationships, unlike an untested external recruit

• Reduces the risk of a poor appointment

  • A business under pressure to replace a leader quickly is more likely to make a rushed, damaging decision than one with a plan already in place

Example

Apple's succession plan meant the strategic risk created by Steve Jobs's illness and eventual departure in 2011 was managed well in advance, rather than being dealt with reactively

Disadvantages of succession planning

• It does not eliminate risk entirely

  • A prepared successor could also leave unexpectedly, meaning the plan itself needs regular review

• It can create a new risk of internal conflict

  • Overlooked candidates may become demotivated, increasing employee turnover risk elsewhere in the business

Diversification

• Diversification involves a business spreading its products, suppliers or markets to reduce reliance on any single one and lower overall risk

  • It manages risk by ensuring that a problem affecting any single one does not threaten the survival of the whole business

Advantages of diversification

• Reduces financial risk

  • Avoiding dependence on a single revenue stream means a downturn in one product or market does not seriously damage overall performance

• Reduces operational risk in the supply chain

  • Sourcing from multiple suppliers or countries lowers the chance that a single disruptive event halts production entirely

Example

Apple diversified some of its iPhone assembly away from China towards India and Vietnam from 2020 onwards, directly reducing the operational risk of depending on a single country for production

• Reduces the risk of demand fluctuation

  • Spreading across different products or markets can smooth out seasonal or cyclical dips in performance

Disadvantages of diversification

• Managing multiple products, markets or suppliers introduces its own operational risk

  • Increased complexity raises the chance of coordination problems

• Diversifying too far can dilute management expertise

  • This increases the strategic risk of underperforming everywhere rather than excelling in one well-understood area

• Splitting orders across suppliers can increase financial risk through higher unit costs, having lost the bulk buying discounts a single large supplier would offer

Other ways to manage risk

Insurance coverage

• Insurance is a financial arrangement in which a business pays regular premiums in exchange for compensation should a specified risk occur

  • Insurance manages risk primarily by transferring the financial consequence of a risk event to a third party, in exchange for a predictable, known cost

• Its main advantage is that it converts an unpredictable, potentially catastrophic financial risk into a small, certain cost - the insurance premium

• However, it does not reduce the likelihood of the risk event happening at all - only its financial impact

  • Policy exclusions mean some forms of risk remain unmanaged

Example

Major UK festivals, including Glastonbury, purchase event cancellation insurance specifically to manage the financial risk of having to cancel due to extreme weather or other unforeseen circumstances

Investment and training

• Investing in equipment and staff training manages risk by reducing the likelihood of the underlying problem occurring, rather than simply preparing a response to it

Example

British Airways invests heavily in ongoing crew training and flight simulators specifically to reduce the operational and safety risks involved in running a large airline

Cybersecurity measures

• Cybersecurity is the measures a business takes to protect its computer systems, networks, and data from unauthorised access or attack

  • Implementing these measures manages risk by reducing both the likelihood of a successful cyberattack and the scale of damage if one does occur

Example

Following the major cyberattacks on M&S and the Co-op in 2025, many UK retailers significantly increased investment in cybersecurity measures such as multi-factor authentication, managing the risk of a similar breach affecting their own systems