GARP SCR: Chapter 6: Examples of Risk responses

 Hello,

Please see below are the examples of different Risk Responses. I have also added few sample examples at the bottom of this post

1. Accept (Risk Acceptance)

1. IT System Downtime: An IT company decides to accept the risk of minor system downtime during off-peak hours because the cost of achieving 100% uptime would be prohibitively expensive.
2. Currency Fluctuation: A multinational corporation accepts the risk of exchange rate fluctuations for its overseas sales, deeming the potential losses manageable.
3. Employee Turnover: A small business accepts the risk of employee turnover as the cost of implementing extensive retention programs is not justified by the size and financial position of the company.
4. Product Liability: A manufacturer accepts the minimal risk of liability claims due to the established quality of its products and low incident history.
5. Economic Recession: A retail company accepts the potential risk of reduced sales during an economic downturn, deciding that the costs of extensive marketing and promotions would not provide a sufficient return on investment.

 2. Avoid (Risk Avoidance)

1. Entering Unstable Markets: A company avoids expanding into a politically unstable country to prevent potential losses from regulatory changes and market volatility.
2. Discontinuing Hazardous Products: A consumer goods manufacturer decides to discontinue a product line due to potential health risks and liability issues.
3. Rejecting High-Risk Clients: A financial institution avoids extending credit to clients with poor credit histories to minimize the risk of default.
4. Avoiding Untested Technology: A tech firm decides not to invest in unproven technology to avoid the risks associated with technological obsolescence or failure.
5. Not Signing Contracts with Unreliable Suppliers: A construction company avoids signing contracts with suppliers that have a history of delivery delays and quality issues to prevent project overruns.

 3. Pursuit

1. Entering Emerging Markets: A tech startup pursues entry into an emerging market with high growth potential despite political and economic risks, seeking to establish a first-mover advantage.
2. Innovative Product Development: A pharmaceutical company invests in developing a novel drug, accepting the high risk for the chance of significant market success and healthcare impact.
3. Acquiring a Competitor: A company acquires a smaller competitor to gain market share, despite the potential risks of integration challenges and culture clashes.
4. Launching a High-Risk Marketing Campaign: A fashion brand launches a bold marketing campaign targeting a new demographic, aiming for a major boost in brand recognition and sales.
5. Investing in Renewable Energy Projects: An energy company invests in renewable energy projects in developing countries, embracing the financial and operational risks for the opportunity to contribute to sustainability and diversify its portfolio.

 4. Reduce (Risk Mitigation)

1. Implementing Cybersecurity Measures: A financial services firm implements advanced cybersecurity measures, including encryption and multi-factor authentication, to reduce the risk of data breaches.
2. Employee Training Programs: A manufacturing company introduces comprehensive safety training programs to reduce workplace accidents and improve compliance with safety regulations.
3. Diversifying Investment Portfolios: An investment firm diversifies its portfolio across different asset classes and geographic regions to reduce exposure to market volatility.
4. Quality Control Systems: A food processing company installs rigorous quality control systems to reduce the risk of product contamination and recalls.
5. Supplier Audits: A retail chain conducts regular audits of its suppliers to ensure compliance with ethical standards and reduce the risk of supply chain disruptions.

 5. Share (Risk Sharing or Transfer)

1. Insurance Policies: A construction company purchases comprehensive insurance to cover potential losses from natural disasters, accidents, and liability claims, sharing the risk with the insurance provider.
2. Joint Ventures: A tech company enters into a joint venture with another firm to develop a new product, sharing both the risks and potential rewards.
3. Outsourcing: A company outsources its IT services to a specialized provider, transferring the risks associated with IT infrastructure management and security.
4. Hedging Financial Risks: A multinational company uses financial derivatives like futures and options to hedge against currency and commodity price fluctuations, sharing the risk with the counterparty.
5. Leasing Equipment: A logistics company leases its fleet of vehicles instead of purchasing them, transferring the risks associated with maintenance and obsolescence to the leasing company.

Sample questions on the above types of risk responses:

Question#:

GlobalSoftware Inc., known for its innovative cloud solutions, has identified a risk of occasional minor downtimes during system maintenance. Despite potential customer dissatisfaction, the company decides against upgrading to a more robust infrastructure, citing high costs and minimal impact on customer churn.Which risk management strategy is GlobalSoftware Inc. applying, and why might this be a justified approach?

A) Avoid - They are avoiding the costs associated with downtime by not upgrading the infrastructure.  

B) Reduce - They have decided to reduce the impact of the downtimes by scheduling maintenance during off-peak hours.  

C) Accept - They are accepting the minor risk of downtime, as the costs of prevention outweigh the benefits.  

D) Share - They are sharing the risk with their cloud service provider, who handles the maintenance.

Correct Answer:

C) Accept - They are accepting the minor risk of downtime, as the costs of prevention outweigh the benefits.

Explanation:

GlobalSoftware Inc. has chosen to accept the risk of downtime, viewing it as an acceptable consequence given the high costs of infrastructure upgrades and minimal customer impact.

Question:

TechCraft, a consumer electronics company, faced several incidents of product defects leading to recalls. To mitigate future risks, they implemented strict quality control processes, including real-time monitoring and automated testing during manufacturing. Which risk management approach does TechCraft exemplify, and why is it significant?

A) Avoid - They have stopped producing certain high-risk products.  

B) Reduce - They are reducing the likelihood and impact of defects through enhanced quality controls.  

C) Accept - They accept minor defects as an industry norm.  

D) Share - They are shifting the risk to suppliers by demanding higher quality materials.

Correct Answer:

B) Reduce - They are reducing the likelihood and impact of defects through enhanced quality controls.

Explanation:

TechCraft has taken steps to reduce the risk of product defects by enhancing their quality control processes, thus minimizing the chances of future recalls and protecting their brand reputation.

Question:

A pharmaceutical company, HealthGen, identifies an opportunity to develop a groundbreaking drug. The drug development process is risky and expensive, with no guarantee of approval or market success. However, the potential benefits, including establishing a market monopoly, outweigh the substantial risks.What risk response is HealthGen demonstrating, and what are the critical considerations in this decision?

A) Avoid - They are avoiding low-margin products to focus on this high-potential drug.  

B) Pursuit - They are pursuing the high-risk, high-reward opportunity to potentially dominate the market.  

C) Reduce - They are mitigating risks by investing in comprehensive trials and research.  

D) Share - They are sharing the risk with research partners to distribute the development costs.

Correct Answer:

B) Pursuit - They are pursuing the high-risk, high-reward opportunity to potentially dominate the market.

Explanation:

HealthGen is actively pursuing the development of a new drug, accepting the inherent risks due to the potential for significant market gains and a competitive edge.

Question:

EcoLogistics, a company specializing in green supply chain solutions, leases its fleet of delivery vehicles rather than purchasing them. This decision is influenced by the desire to avoid the financial risk of maintaining and updating a fleet as emissions regulations tighten.

What is EcoLogistics' risk response strategy, and what are the benefits?

A) Avoid - They avoid the responsibility of owning vehicles altogether.  

B) Accept - They accept the operational risks associated with outsourced vehicle management.  

C) Share - They share the financial and operational risks with the leasing company.  

D) Pursuit - They pursue a strategy of flexibility and adaptation to regulatory changes.

Correct Answer:

C) Share - They share the financial and operational risks with the leasing company.

Explanation:

EcoLogistics is sharing the risk by leasing vehicles, thus transferring the risks of maintenance, compliance with emissions standards, and technological updates to the leasing provider. This allows the company to focus on its core competencies without bearing the full burden of vehicle management.

Question:

VisionTech, a leading VR hardware developer, planned to enter a new market where the legal framework around intellectual property (IP) protection is weak. After assessing the risk of potential IP theft and the significant investment required to safeguard their technology, they decided not to enter the market.What risk response strategy did VisionTech employ, and what could be a key factor in their decision?

A) Pursuit - They pursued the opportunity despite the risk, focusing on first-mover advantage.  

B) Share - They transferred the risk by partnering with a local firm familiar with the market.  

C) Avoid - They avoided the market to prevent potential losses from IP theft.  

D) Accept - They accepted the risk of IP theft and proceeded with minimal protective measures.

Correct Answer:

C) Avoid - They avoided the market to prevent potential losses from IP theft.

Explanation:

VisionTech avoided entering the market due to the high risk of IP theft and insufficient legal protections, thus preventing potential financial and reputational losses.