Strategic Risk Management: Application to Manufacturing
Existing risk management methods have a tendency to be focussed on the threats (rather than the opportunities) and the technology risk (rather than the organisational features of the problem). Also, they are better developed for quantitative variables and where mathematically precise problem-representation exists than qualitative variables and where knowledge of the system behaviour is only subjective. They thus have limited applicability to the management of strategic risks at the organisational or sector level. This paper describes how risk management may be extended into risks other than technical, include the opportunities alongside the threats, and accommodate strategic issues. A system modelling method was used to develop a conceptual model for prophylactic risk management under these situations. The resulting model is of a conjectural nature but is a starting point towards a theory for strategic risk management. It also has implications for practitioners, demonstrated by application of the methodology to a case study. The specific case under examination is the manufacturing industry in New Zealand, and the methodology was applied to a representative manufacturing firm. The paper makes a methodological contribution in several ways. First, rather than concentrate on just the threats it identifies the opportunities and specific mechanisms by which they might be captured. The paper makes another contribution by developing a theoretical model for intersecting risk management with strategy formulation, in ‘strategic risk management’. A third contribution is in the way the paper specifically addresses the risks faced by a manufacturing organisation. Within the limitations of the data available for this analysis, the results suggest that a strategy of outsourcing production to a lower wage country is not the only possible solution for a product-manufacturing firm. The fourth contribution is the provision not only of a theory, but also an integrated set of methods for use by practitioners. These methods are not prescriptive, but instead offer suggestions that can be adapted to various situations. A suggested project plan for deployment is also provided. Strategic management of manufacturing is otherwise somewhat ad-hoc and poorly integrated with risk management, and the model provides a method that could help organisations navigate the turbulence of the global economic manufacturing sector. While the methodology has been illustrated by application to the strategic risk in manufacturing organisations, it has the potential to be used in other situations in response to threats and opportunities that affect the long-term financial viability of the organisation.