Enterprise management, as well as, for example, state tasks of a socio-economic nature, can be carried out taking into account current uncertainties and risks. What are their specifics? How can they be calculated?
What is the essence of uncertainties and risks?
First of all, we consider the concept of risk and uncertainty, how these terms can be interpreted in various contexts.
Risk is usually understood as the probability of an adverse or undesirable event. For example, when it comes to business, it may be a change in market conditions so that the results of the economic activity of the enterprise will be far from optimal.
Uncertainty refers to the lack of the ability to reliably predict the occurrence of an event regardless of how desirable it can be. But, as a rule, uncertainty and risk are considered in the context of unfavorable conditions. The opposite situation - when it is impossible to predict the emergence of positive factors, is rarely perceived as uncertain, since in this case there is no need to determine the tactics for responding to relevant factors. While in negative scenarios, such tactics are usually needed. This is due to the fact that in conditions of uncertainty and risk, the most important decisions can be made - economic, political in nature. We will study how this can be done, in more detail.
How to minimize uncertainty and risks?
The adoption of certain decisions in an environment characterized by uncertainty and risk is carried out using concepts that minimize the likelihood of errors or various undesirable scenarios. This approach can be effective in a variety of situations.
Uncertainty and risk are thus peculiar to many areas of the life of a modern person. The approaches that are used in cases where it is necessary to minimize errors in certain actions can be based on:
- to identify stable factors that can influence the situation;
- on the analysis of resources and tools available to the person who makes the decisions;
- on determining temporary and unstable factors that can also influence the situation, but this is possible only in specific conditions (they also need to be identified).
Among those areas in which the corresponding concepts find the greatest demand - management. There is a point of view that in the context of business management, uncertainty is a managerial risk, and one of the main ones. Here we find, therefore, another interpretation of the term in question. In the field of management, the concepts within which the essence of various risks is investigated are very common. Therefore, it will be useful, first of all, to study how uncertainty and risk are taken into account in the process of making managerial decisions at the enterprise.
Managing business with uncertainty and risk
The following approach is common in business to overcome possible negative consequences when solving particular problems.
First of all, managers determine the list of objects whose behavior can be characterized by uncertainty and risks. This may be, for example, the market price of a sold product or service. In conditions of free pricing and high competition, it can be very difficult to unequivocally predict its course. There is a risk of uncertainty from the point of view of the prospects for the company to generate revenue. Its value due to falling prices may not be enough to pay off current obligations or, for example, to solve problems related to brand promotion.
In turn, an unexpectedly sharp rise in prices can lead to the accumulation by the company of an excessive amount of retained earnings. Which, perhaps, in a different situation - with the systematic dynamics of revenue receipt - management would invest in the modernization of fixed assets or the development of new markets.
After an object, characterized by uncertainty and risks from the point of view of business development, is identified, work is underway to determine the factors affecting the behavior of this object. These may be figures reflecting the market capacity and sales dynamics for enterprises that operate in a particular segment. This may be a study of macroeconomic, political factors.
The concept of risk and uncertainty, as we noted at the beginning of the article, can be associated with processes in various fields. Therefore, as a rule, the widest range of factors is taken into account here. For example, those related to the financial sector. Let us examine how the conditions of uncertainty and risk are studied in the course of decision-making on various monetary transactions.
Uncertainty and risk factors in the financial sector
Above, we noted that enterprise managers, developing an algorithm for making managerial decisions, first take into consideration an object that can be characterized by uncertainty and risks, after which factors that determine the likelihood of the occurrence of conditions under which they can work are identified.
The same thing can be done in the course of solving tasks related to financial management. In the field of monetary transactions, the object that may be affected by uncertainty (risk is a special case of it) is most often the purchasing power of capital. Depending on certain conditions, it can increase or decrease. For example, due to inflation in the state economy, exchange rate differences in the valuation of the national currency. Which, in turn, may depend on macroeconomic, political processes.
Thus, in the field of decision-making related to capital management, the levels of uncertainty (risk - as a particular, again, of its case) can be represented at different levels.
Firstly, at the level of economic macroeconomic indicators (for example, GDP dynamics, trade balance, inflation), and secondly, in the sphere of individual financial indicators (as an option, the national currency rate). Factors at both levels determine what the purchasing power of capital will be.
Having identified an object characterized by uncertainty and risks, as well as highlighting the factors influencing them, it is necessary to apply the methodology of practical application of the decision made. For example - developed by managers of the company or financial specialists. There are a lot of approaches for this. Among the most common is the use of a decision matrix. We will study it in more detail.
Matrix as a tool for decision making in conditions of risk and uncertainty
The technique in question is characterized primarily by universality. It is quite optimal for making decisions on objects that are characterized by economic risks and uncertainty, and therefore applicable in management.
The decision matrix involves the selection of one or more of them based on the highest probability of exposure to an object chain of factors. Thus, the main solution is chosen - designed for one set of factors, and if they do not work (or, conversely, turn out to be relevant), then a different approach is chosen. Which involves the impact on the object of other factors.
If the second solution is not the most optimal, then the following is applied, and so on, until it comes to choosing an approach that is least desirable, but gives a result. The formation of a list of decisions - from the most effective to the least effective, can be carried out using mathematical methods. For example, involving the construction of a graph of the distribution of the probability of the triggering of a factor.
The conditions of uncertainty and risk can theoretically be calculated using the methods of probability theory. Especially if at the disposal of the person who does this, there are sufficiently representative statistics. In the practice of economic and financial analysis, a large number of criteria have been formed according to which the probability of the operation of certain factors of uncertainty and risks can be determined. It will be useful to study some of them in more detail.
Probability criteria for uncertainty and risk analysis
Probability, as a mathematical category, is usually expressed as a percentage. As a rule, it represents not one value, but a combination of those - based on what factors are triggered. It turns out that several probabilities are taken into account, and their sum is 100%.
The main criterion for assessing the degree of probability of the occurrence of certain factors is considered objectivity. It must be confirmed:
- proved by mathematical methods;
- the results of a statistical analysis of significant data volumes.
The ideal option is if both tools are used to identify objectivity. But in practice, this situation is quite rare. As a rule, economic risks and uncertainty are calculated when there is access to a relatively small volume of data. This is quite logical: if all enterprises had equal access to relevant information, then there would be no competition between them, and this would also affect the pace of economic development.
Therefore, the emphasis in the analysis of economic risks and uncertainty enterprises most often have to do on the mathematical aspect of calculating probability. The more perfect the appropriate methods of the company are, the more competitive the company will become in the market. Let us consider by means of which methods the probability of forming conditions for triggering factors of behavior of objects, for which a situation of uncertainty can be observed (risk, as a special case of it) can be determined.
Probability Methods
Probability calculation can be carried out:
- by analyzing typical situations (for example, when only 1 out of 2 events is most likely to occur, as an option: when tossing a coin an eagle or tails falls);
- through probability distribution (based on historical data or sample analysis);
- through expert analysis of scenarios - with the involvement of experienced specialists who are able to investigate the factors affecting the behavior of the object.
Having decided on methods for calculating probability in the framework of calculating uncertainty and risks, we can begin to practically determine it. We study how this problem can be solved.
How to determine the probability of an uncertain event in practice?
The practical determination of the probability of a factor affecting an object that is characterized by uncertainty and risks begins with the formulation of specific expectations from the corresponding object. If this is the purchasing power of capital, then growth, retention or reduction may be expected in relation to it.
The goals of the financier in this case may be, for example:
- capital investment with decreasing purchasing power in the modernization of fixed assets;
- the formation on the basis of cash with a stable or growing purchasing power of additional retained earnings.
Suppose that a financier expects that capital, due to inflationary reasons, will nevertheless reduce its purchasing power, as a result of which it will need to be invested in the modernization of fixed assets. Thus, the risk (the degree of uncertainty) in this case is that a significant amount of capital will be invested in a liquid asset, while its purchasing power may, contrary to expectations, grow. As a result, the company will not receive retained earnings. Its competitors, in turn, can use their capital more efficiently.
Having defined expectations regarding an object characterized by uncertainty and risks, it is necessary to study the totality of factors affecting the behavior of the corresponding object. These may be:
- economic indicators of the state (including inflation, the exchange rate of the national currency, which we have already mentioned above);
- the situation on the market for raw materials, materials and funds demanded by the company (relative to the value of which the purchasing power of corporate capital is calculated);
- the dynamics of capital productivity (determining the prospects for the modernization of fixed assets of the company).
Further, using mathematical methods, the company calculates the greatest degree of impact on the object of certain factors, after which it determines the probability of each of them working.
So, it may turn out that the bulk of the company’s capital is spent on the purchase of raw materials, materials and funds, while they are mainly imported from abroad. Consequently, an increase or decrease in the purchasing power of an organization’s cash will depend primarily on the dynamics of the national currency and, to a lesser extent, on official inflation.
Sources of uncertainty (risks) in this case will have a macroeconomic nature. So, the national currency rate is affected, first of all, by the balance of payments of the state, the ratio of assets and liabilities, the level of public debt, the total volume of transactions using the currency in settlements with foreign suppliers.
Thus, the probability of an uncertain event - an increase, maintaining a stable value or a decrease in the purchasing power of capital will be calculated by identifying the main factors affecting the respective object, determining the conditions for the triggering of these factors, as well as the probability of their occurrence (which, in turn, may depend from factors of a different level - in this case, macroeconomic).
Risk-based decision making
So, we studied how the probability of occurrence of conditions for triggering factors that affect the behavior of an object characterized by uncertainty and risks can be calculated. It will also be useful to study in more detail how decisions can be made in conditions of uncertainty and risk.
Modern experts identify the following list of criteria that can be guided by within the framework of such tasks:
- the probability of observing expected indicators;
- prospects for achieving extremely low and high values ​​for the considered indicators;
- the degree of dispersion between the expected, minimum and limit indicators.
The first criterion involves the choice of a solution, the implementation of which can lead to the achievement of an optimal result, for example, in the matter of investing capital in opening a TV factory in China.
The expected indicators in this case can be based on historical statistics or calculated (but relying, again, on some practical experience of the specialists who make the decision). For example, managers may have information that the average return on television production at a factory in China is about 20%. Therefore, opening their own factory, they are entitled to expect a similar indicator of the efficiency of capital investment.
In turn, they may be aware of cases in which certain firms did not reach these figures and, moreover, became unprofitable. In this regard, managers will have to consider such a scenario as zero or negative profitability.
However, financiers may also have information that some firms were able to achieve an investment efficiency in Chinese factories of 70%. The achievement of the corresponding indicator is also taken into account when making a decision.
The risk (the result of uncertainty in this case) when considering the possibility of investing in the opening of a factory in the PRC may lie in the emergence of conditions for the triggering of factors that adversely affect the facility - the level of profitability. Those factors that can lead to the fact that the corresponding indicator will be negative. At the same time, the achievement of profitability of 70%, that is, the figures that had already been achieved by another business, may be a different result of uncertainty.
If negative profitability was shown, relatively speaking, 10% of the factories opened in China, the figure of 70% was reached 5%, and the expected - 20% - was fixed by the results of 85% of the factories, then managers can rightly accept the positive decision regarding investing in the opening of a television factory in China.
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Summary
So, we decided on the essence of such phenomena as uncertainty and risk in business. They can characterize a variety of objects. In the entrepreneurial sphere, this is most often the purchasing power of capital, profitability, and the price value of certain assets.
The risk is most often considered by researchers as a special case of uncertainty. It reflects the likelihood of an unwanted or negative result from any activity.
Risk and uncertainty are concepts that are closely related to the term “probability”, which refers to mathematics. It corresponds to a set of methods that allow you to calculate whether the expectations of the manager, when it comes to business, or other interested parties, are justified, regarding factors that can affect the uncertainty and risk in managing a business.