Friday, April 9, 2010

Analyzing risk

Analyzing risk
It involves probability estimates about robustness of a strategic option.The level of risk is important for acceptability of a strategic option.New product development carries high level of risk.
The approaches for analyzing risk are :
  • Projection of financial ratios :It project s changes n key financial ratio resulting from a strategic option.Such changes indicate level of risk.The ratios can be related to capital structure and liquidity.
  • Sensitivity analysis :It is "what if ?" analysis.It questions and challenges the underlying assumptions of a particular strategic option.It tests sensitivity of performance outcomes to each of these assumptions.For example,key assumption may be 10% growth in market demand.
  • Simulation modeling :Simulation is abstraction of reality.It is used to analyze a strategic option when several uncertain variables affect its outcomes.Computers are used to simulated outcomes over time by changing certain variable for a strategic option.
  • Heuristic models :Heuristic are rules of thumbs.They are based on managerial memory and judgement.Risk assessment of strategic options is based on past experience,memory,institution,hunch,and abstracter reasoning.These models do not considered logical facts.They are judgemental shortcuts.
  • Representativeness :The likelihood of future occurrence is assessed by matching it with a preexisting category.
  • Decision matrices :They are rectangular array of numbers arranged in rows and columns.They are to assess the level of risk of different strategic option.Low risk strategic options are identified.

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