1. Risk and uncertainty management
Hello! In this video we'll learn about risk and uncertainty management.
2. Managing risks and uncertainties
Risk and uncertainty management enhance decision models by anticipating problems, minimizing impacts, and increasing the likelihood of achieving positive outcomes.
We've seen that decisions are made of objectives, alternatives, constraints and uncertainties.
3. Managing risks and uncertainties
Probabilities allow decision-makers to quantify uncertainties assigning numerical values to the likelihood of events.
4. Managing risks and uncertainties
These uncertainties often generate risks; representing potential for loss or negative outcomes.
5. Managing risks and uncertainties
Severity is a measure of the potential harm or negative impact raised if a risk event materializes.
6. Managing risks and uncertainties
Lastly, risk management plans describe strategies to mitigate, transfer, avoid, or accept risks.
Next, we'll introduce a tool to assess the likelihood and impact of risks.
7. Risk assessment matrix
A Risk assessment matrix is a tool for evaluating and prioritizing risks based on their likelihood and severity. Let's see a step-by-step guide to build a risk matrix.
First, identify the risks! Usually, they are attached with the uncertainties in the decision problem.
8. Risk assessment matrix
Then, evaluate the likelihood of each risk. Use probabilities to quantify likelihood numerically.
9. Risk assessment matrix
Now, evaluate the impact of each risk. Imagine the consequences if the risk materializes and classify the severity.
10. Risk assessment matrix
Now build a matrix placing each risk according to the likelihood and impact defined in the previous steps.
11. Risk assessment matrix
Lastly, develop a strategy to deal with each risk in your matrix.
Let's now apply these steps in one example.
12. Assessing risks in a product launch
Toothpaste+, a well-known dental care company, decided to expand by launching a frozen beef lasagna product. By the way, this is based on a true story.
13. Assessing risks in a product launch
Some risks in this decision are:
Poor market acceptance.
Limited "know-how" on the frozen food industry.
And regulatory challenges.
14. Assessing risks in a product launch
Let's assign the likelihood of poor market acceptance as very likely; Limited "know-how" as Likely and Regulatory issues as unlikely.
15. Assessing risks in a product launch
Now classifying the impact of each risk: Poor acceptance could have a high impact, as well as limited "know-how". Regulatory challenges, we could assign a medium impact.
16. Assessing risks in a product launch
With the risks, their likelihood and impacts defined, we can now build the risk matrix.
17. Assessing risks in a product launch
In the Y-axis, we have the likelihood. In this example, varying from Unlikely, to Very Likely.
18. Assessing risks in a product launch
The X-axis contains the impact level, ranging from Low, Medium and High.
19. Assessing risks in a product launch
Now we place each risk in the matrix according to its likelihood and impact.
Risks in red, towards the top-right corner should be prioritized due to higher impact and likelihood.
20. Assessing risks in a product launch
We can now prioritize each risk in the decision, defining a strategy and mitigation actions for it.
21. Assessing risks in a product launch
For poor market acceptance, the top-priority risk, the strategy is to avoid it by placing mitigation actions, such as launching the lasagna under a different brand, launching a market test and investing in advertising.
22. Assessing risks in a product launch
The second risk, related to limited know-how, could be reduced by mitigating actions such as conducting researches or hiring specialized consultancy.
23. Assessing risks in a product launch
And the regulatory risks could've been accepted due to a lower priority. Mitigating actions won't be applied in this case.
I'm sure this lasagna case would have a different outcome with a proper risk assessment!
24. Let's practice!
Enough for now, let's practice a bit more!