RISK MANAGEMENT STRATEGY

Risk Management Strategy



Risk Management Strategy

Business planning tools in general have been criticized because of the lack of analytical techniques employed and the failure to keep up with the dynamism of business markets. For example, tools that were designed for production industries in some cases have little relevance to new service business models both in statistical pedigree and in language relevance. Authors have added to these criticisms by critiquing the tools' detachment from practical experience and their short-term, cost-reduction approach. The inference being that to ensure business sustainability one cannot rely on myopic decision making. Later debate on the subject has been concerned with the problem of “framing,” where the tool itself incorrectly generates a focus on some elements of a company's strategic environment at the expense of others.

Later contributors to the field appeared to address some of these issues with a different approach. Porter's (1998) value chain, and the concept of relating specific activities to competitive position remains a useful tool for addressing the vertical axis and infrastructure boundary of the firm, but cannot address fully the company position on product range. Likewise, it can be used to identify potential sources of differentiation on the downstream vertical boundary, but cannot by virtue of its scope inform where the boundary should be, that is, how far a company should go in taking on activities previously undertaken by its customers.

The Porter approach of trading cost with differentiation does not directly help practitioners with risk decisions associated with boundary changes, nor does it help the user in comparing radically different business models including Web-based models such as virtual supplier networks and technology-based services.

Where competitors are moving downstream, a comparison of the traditional forms of activity is insufficient. A comparison of resources becomes necessary because companies are increasingly selling a combination of products and services.

Porter's value chain cannot take account of the change in the range of relationship types possible with suppliers— technology licensing, cross-licensing, factory-in-factory arrangements—where a support activity is abdicated to a supplier. In these instances, the boundary of the firm, and who obtains value from it, is in effect blurred.

Existing tools also do not appear to recognize at a strategic level the risk-sharing approaches advocated in collaborative forms of working, despite theory on the importance of this aspect having been available for 20 years. Those interested in this area should consult Butler and Carney's (1983) work that introduced “managed market theory.” Butler and Carney's work in effect incorporated trust and interaction complexity into “transaction theory” first outlined by Williamson (1981).

There is, then, still a lack of practical tools that marry the soft issues of trust—made manifest in the relationships at boundaries—and the relationship diversity, with the hard performance-related issues of strategy formulation. Further, conventional tools addressing the vertical-integration axis, appear to address, “invest and make,” “make,” “divest and buy,” but generally omit the “invest and rent” option, where a company chooses to rent external capacity while developing capability of its ...