Downloadable - About University

11
Risk and uncertainty
management
Introduction
In earlier chapters we have shown how decision models can help
managers to gain insights into decision problems that involve substantial
elements of risk. However, the risks themselves have been treated as
being unchangeable and we have assumed that the manager simply has
to accept them and make the best decision in the light of them. This is
not the way that many managers view their role. 1 In fact, rather than
passively accepting risks, managers see it as their duty to take actions
to reduce them. Indeed, many managers would go further than this and
say that their role is also to identify opportunities.
With this perspective, the development of the decision model is seen
as only part of a process that is designed to stimulate further thinking
on how risks can be modified or how the chosen course of action can
be made to yield even better returns than the current model indicates. 2
As Chapman and Ward 3 point out, the two goals of reducing risk and
pursuing opportunities need to be balanced – some opportunities will
lead to increased risk, while reducing risk may be achieved at the expense
of forgoing new opportunities. The term ‘uncertainty management’
is being increasingly used to describe the process of achieving this
balance and decision models can provide a structure for this process.
For example, a model may indicate that we should go ahead and launch
a new product, but that this is associated with a 20% risk of a net
present value (NPV) of −$15 million. The model can now be used for
identifying the sources of uncertainty and selecting those that provide
the best prospects for taking actions to reduce risk or discovering new
opportunities. Creativity techniques like brainstorming can then be
employed to complement the decision analysis so that new potential
solutions emerge. Perhaps production equipment, which may need to
be upgraded after only a few years, can be rented from the manufacturer