Decision making is a very important aspect of business management. Any decision reached has the power to shape and influence the performance of an organization or business. Management decisions are therefore supposed to be fair and realistic to avoid negative impact which is always witnessed in many organizations and business firms. It is worth noting that decisions are based on surrounding conditions in terms of expected results and long term or short term effects of such decisions. Risky circumstances are the most challenging to managers and other decision makers. Being able to identify a situation as either risky or not risky is of paramount significance in corporate management and in the general world of business (Smith, 1995, p. 22). This paper focuses on the issue of decision making form a risky perspective in corporate management. The paper explores key risk management decisions together with their direct and indirect costs and benefits in corporate management.
Before making any form of decision, it is important for managers to understand the levels of risk involved. Risk is simply defined as the combination of the likelihood of an event occurring and the expected consequences. Risk exists in every business undertaking whether in public or in the private sector. It constitutes to opportunities which may affect business performance in either a negative or positive direction. Risk management is therefore an essential tool in augmenting good performance. It is a central part of any organization with regard to strategic management. Addressing the risks involved in any activity is usually aimed at increasing the benefits within every activity (Summer, 1995, p. 21). Good risk management is therefore a way of indentifying and treating risks before they impact negatively on the organization. Addition of maximum sustainable value is considered as the main objective of risk management. It encompasses all the factors which may lead to the upside and downside of many factors which affecting an organization.
Risk management is a continuous process which has to run through the strategy of any organization regardless of whether the risk level is at its peak or does not exist. This has to address all the risks surrounding past activities, present and future activities. The foundation of risk management has to be entrenched in the entire culture of an organization with full support which has to be backed with top management (A Risk Management Standard). Minus the support of senior management, risk management cannot in any way play any role. This is because decision making solely depends on the managers who play the managerial role through influential decision making. All managers have to be responsible in decision making with an open mind of defining the future of an organization (Frenkel et al. 2005). Although risk management plays a pivotal role in business, it has to be emphasized that decision making has to involve every person in the system since at no one time in the history will management be an individual’s responsibility. It is a collective responsibility which calls for consultative approach in seeking views and in formulating the most workable plan which poses minimum risks.
Risk management decisions are determined by risk factors which may prevail at a given time during the operations of an organization. An understanding of these risky situations needs to be the basis of decision making in attempting to lower the negative effects associated with such activities. According to Merna and Al-Thani, risk decisions have to focus on the particular criteria of evaluating the perceived risks. Such strategy needs to indentify key business risks at a timely stage and consideration of the possibility of such risks crystallizing and impacting the business (Merna & Al-Thani, 2008, p. 20). The plan also has to give priorities to particular aspects of the business through allocation of resources with an aim of lowering risks. In their 2008 detailed research, Merna and Al-Thani affirm that risk decision has to focus on both the gains and the threats posed by certain business circumstances.
In making risk decisions, managers and all involved parties have to recognize that risks are all over and every person lives with them. What varies is the manner in which decisions to combat these are made and the ultimate impact on an organization. No manager would be happy to operate in a business environment that offers full risks. Sources of risks significantly affect the manner in which decisions regarding these risks are made. All these have to be considered before a final decision is made. This allows for identification and analysis of the most appropriate response to be considered. As noted by Merna and Al-Thani, sources of risks range from political, economic, environmental, legal, natural and criminal safety among others. These sources define the nature of the decision to be adopted by the management in counteracting the impact of the existing threats (Merna & Al-Thani, 2008, p. 21).
One of the common decisions made by managers relate to project risks. Project risk decision is very sensitive in defining the failure or success of any project. Almost every organization has a running project or an upcoming one depending on the priority of the project. The problem associated with projects is that managers make risk decisions which affect the manner in which the project is carried out. Consequently, many projects fail to fit within the estimated costs. A decision which determines the amount of money to be spent in running a project is considered to be risky among many mangers. Another key risk decision under projects is the projection date upon which the project has to be completed. This affects the running of other activities of the business especially when the organization fails to beat the deadline set for the completion of the project.
Static risk decisions are also common in many business organizations in the world. This relates to possible losses expected and the concern of everybody in averting the threat. For instance, when a company suspects that its products are likely to lose market in future, a risk decision has to be made in order to contain the situation. Among possible options would be cutting off production of affected products and adopting joint ventures with companies which are strong (Merna & Al-Thani, 2008, p. 21). Customer risk also makes mangers to make risk decisions in corporate management. This mainly arises from the existence of competitors and rivals. The creation of a larger customer base is usually considered as the most appropriate decision when dealing with customer risks. Moreover, managers make risk decisions in approving purchases. Allowing the acquisition of certain products may adversely affect the performance of an organization especially when the perceived threat does not occur.
Regardless of the decision taken by the management, it is worth noting that these decisions have direct impact on the operations of an organization. Risk decisions have both direct and indirect costs and benefits on an organization. When an organization decides to make more purchase due to expected changes in the market, the direct cost of such a decision is expenditure. Since such costs might not have been budgeted for, funds which would have been used to support other activities of the organization are used. Another direct cost of risk purchase concerns issues to do with warehousing and ensuring that the purchased products can last up to the time when the market environment stabilizes (OECD, 2010, p. 242). It is also important to note that when purchases are made due to the perceived increase in prices in future, loses might be incurred if this does not happen. For instance, if a mobile phone dealer stocks excess phones and the prices do not change in future, this would be considered as an indirect cost. The benefit of making such a risk decision is that profits are made when the anticipated time comes.
Costs and benefits of risk decisions in corporate management are very common. Since risks are all over, it is clear that every manager stands a chance of encountering risky situations which call for risky decisions. According to the research done by the Organisation for Economic Co-operation and Development, costs and benefits are common (Conrow, 2003). Direct costs and benefits are usually incurred and realized immediately when the decision is implemented. On the other hand, indirect cost and benefits may not be realized at the very moment when these decisions are made.
Concerning decisions which result into an organization running a project, the cost and benefit tune is the same. There is no single project that can be run and achieve it set objectives without enough funds. The need for these funds therefore leads to expenses which have to be incurred by the organization. An organization may decide to use part of its profits to run a given project or source funds from other alternatives. Regardless of the option considered, such a decision is always accompanied by high levels of expenditure. On the other hand, there is no doubt that every member of the organization will be happy when a given project succeeds and meets its set objectives. For example if a company decides to the risk of establishing another branch for their company in a different location, an increase in productivity would be realized (Barrese & Scordis, 2003). On the other hand, more indirect expenses and costs would be incurred to pay extra employees and meet other mandatory needs of the new company.
As recommended by many experts a thorough survey, research and consultation is essential before risk decisions are made (Crouhy, Galai & Mark, 2006, p. 17). This can go an extra mile in estimating direct and indirect which may be likely to be incurred in the event such a decision is implemented. Managers therefore have a mega role in ensuring that decisions which are made are workable with reasonable costs and benefits. Although indirect costs and benefits care not considered much, there estimation is equally essential in cutting down future costs. Above all, every manager and organization has to appreciate that risks are always there but what makes the difference is the decision made concerning a given risk circumstance.