Jerzy Zemke Unwersytet Gdańsk MANAGEMENT UNDER RISK /THE CONCEPT OF SYSTEM ARCHITECTURE/ Introducton The practce of management knows and uses rsk management systems. As early as n the 1970 s, management procedures were appled by the bankng sector the Basel Commttee for Bankng Supervson, 1974. In 2004, the New Captal Accord Basel II was sgned the frst set of rules was ssued n 1996). In the frst half of the 1990-es, JP Morgan nvestment bank publshed the RskMetrcs concepton a model for measurng the marketplace rsk n banks. Concurrently, rsk management systems were developed by the nsurance sector. A complete system named Solvency I, settng requrements as regards mnmum captal levels was ntroduced n 2002. A wder scope of ssues s covered by Solvency II a system due to be mplemented n 2012. Non-fnance organzatons are operatng CorporateMetrcs market place rsk) and a system of the Internatonal Fnancal Reportng Standards a requrement to dentfy rsk related to fnancal nstruments). Besdes, snce 2004, COSO the Commttee of Sponsorng Organzatons of the Treadway Commsson and IRM the Assocaton of Insurance and Rsk Managers have been operatng. Despte the fact that management systems dedcated to rsk condtons have been verfed n practce, there s stll enough space for new solutons there. What makes ths suggeston even more noteworthy, s that the problem of managng n rsk condtons occurs n many varous decson-makng areas that need to be operated wthn one coherent system. Moreover, the nature of rsk, as well as methods to dentfy and measure rsk stll requre further studes.
Management under rsk... 209 1. The essence of busness management To manage a busness organzaton, no matter the sze, whether measured by the equty, the employment, the market share, etc. s, n practcal terms, to perform the decson makng processes defned n the development plans. The decson makng processes are performer wthn the areas delneated by the organzatonal structure. Accordng to the concepton outlned by Porter [1980] these are such basc areas as: nbound logstcs, producton, storng fnshed products, outbound logstcs, marketng and pre-sales and after-sales servcng. Besdes these Basc areas, Porter refers to auxlary areas: the nternal logstcs areas guaranteeng contnuty of producton processes, the R&D area, the area of personnel decsons HR management and the area of functons related to development of a busness organzaton s nfrastructure plannng, fnance, legal support, IT, qualty control, nformaton management). Any busness organzaton operates n an envronment determnng ts decson makng processes. The theory dstngushes the mcroeconomc envronment coverng the market the busness organzaton operates on, wth all ts elements defnng the competton, the regonal envronment, the labour market, the culture. The macro envronment, wth ts global coverage, ncludes poltcal, economc, legal, fnancal, cultural and envronmental determnants. The organzaton s most mmedate envronment ncludes the organzaton tself wth ts strategc resources, such as: knowledge, organzatonal factors, polces, human resources, assets, fnance and perceptual resources. The decson makng processes are of a condtonal nature, as they need to address the determnants exstng wthn the organzaton s envronment. These determnants, at least some of them, are characterzed by varablty, eg. purchasng prces, f these are constructed based on currency exchange rates. Ths varablty of external determnants, as well as of strategc resources mples changes n qualty of decson makng processes, thus leadng to dscrepances between the targets set n the development plans and the actual performance. The state accompanyng decson makng processes and caused by varablty of determnants s defned by scence as rsk. Rsk can have an adverse effect on the objectves and ths means loss or the effect can be postve, meanng proft. Nevertheless, regardless the mpact of determnants on the objectves, the problem of rsk s an element central to managng a busness organzaton. In partcular, t s mportant for the management to be able to measure rsk at the hghest frequency possble. Rsk measures and nformaton about tendences and dynamcs of rsk measures changes wthn the perod of process realzaton, f nterpreted properly, may and should consttute a foundaton for adjustment of decson makng processes and n extreme cases they the organzaton may gve up the objectve.
210 Jerzy Zemke Another mportant problem of busness management s controllng decson makng processes mplementaton. The basc functons of ths control nclude: 1. Comparng performance aganst standards. 2. Identfyng and analysng varances from the expected states standards) together wth takng correctve actons amed at achevement of the objectves planned [Gołębewsk, 2001]. The essence of both control functons s perfectly descrbed n the followng statement:...) strategc control s a process of managng change through response to and exercsng mpact on factors determnng nstablty [Lorange, Morton Scott, Ghoshal, 1986]. The core of strategc control s contnual control of strategc plannng processes, exercsed n the context of feasblty. The concluson s that ths s not about controllng performance, and another one that strategc control s expressed through analyss and assessment of nternal and external determnants of strategy mplementaton [Krupsk, 1998]. The strategc control system s a set of decsons and actons ntended to ensure contnual montorng of external and nternal determnants of the strategy and to keep track of the strategy mplementaton progress. It covers the organzaton s functonal areas, but also closer and more dstant envronment of decson makng processes the strategy conssts of. The contents of the control system reflects the set of controlled varables that have been selected. Its elements nclude strategc goals, crtera for ther selecton, determnants of the organzaton s envronment and characterstcs of the organzaton s resources. Controlled varables can be descrbed n terms of quanttes strategc fnancal or market goals) or qualty. The latter category of descrpton s dffcult to evaluate, what statement can be made n a case lke ths therefore? Relable nformaton can be provded through dentfcaton of controlled varables tendences whether they follow the plan, or on the contrary and ths s a sgnfcant complcaton ndeed. In theory, the organzaton s management controls changes n nternal and external determnants [Gołębewsk, 2001]. The problem s that these changes have some features pof random processes. Ths s where one can construct a thess that the rsk nvolved n decson makng processes s a state defned by random varables, therefore the problem of measurng rsk s ndrectly lnked to the task of measurng random varables. A remedy phase s the last phase of decson makng processes. Ths s when measurements, nterpreted and analysed, are used for evaluaton of the decson makng processes qualty. In ths phase, the management may f necessary renforce the decson makng processes wth nstruments protectng them aganst negatve effects of changes n the envronment, whle contnung these processes wthout any changes, or they may make adjustments to decson makng proc-
Management under rsk... 211 esses, or even, facng radcal, unplanned changes n the envronment, they may decde the decson makng processes to be dscontnued. 2. Rsk n management processes Management processes nclude plannng. Plans defne the organzaton s development strategy for a specfc tme perod, settng strategc goals for ths perod, ntended to strengthen the organzaton s compettve poston on ts market [Gołębewsk, 2001, p. 211-218]. The plan, approved by the organzaton s owners, sets forth the broad potental to be used n the processes of plan executon. Plans specfy detals of decson makng processes as regards nvolvement of the ntellectual, techncal, technologcal and organzatonal potental, as well as resources needed n the processes of achevng the goals. Besdes the elements lsted above, development plans set forth mcro- and macro-envronmental determnants. Ther mpact cannot be gnored. Besdes changes n the envronment, the level of rsk taken by the organzaton s management s determned by changes n the organzaton s own resources [Zemke, 2009, p. 43]. Decson makng processes take place n busness organzaton s all structural areas. Added value generated n these areas defnes the so-called value chan, the value of whch ndcates organzaton s compettve poston on the market [Rokta, 2005, p. 140]. Executon of plans, especally those of a long-term nature, requres control enablng one to answer the queston whether the performance follows the plan. Controlled varables are carrers of relable nformaton [Kroll, Wrght, Toombs, Leavel, 1997, p. 85-96]. These varables are dentfed and defned and at the same tme they are recorded n the busness organzaton s strategc development plans. These are symptomatc varables of the rsk effects 1. 2.1. Decson areas We are not makng a mstake statng that decson makng areas are the same as the organzaton s structural areas. In the concepton constructed by Porter, where the crteron of maxmzng the organzaton s compettve poston on ts market s accepted, decson makng areas form a value chan [Porter, 1994, p. 22]. Porter dstngushes a chan of prmary actvtes and support actvtes. The chan of prmary actvtes covers the areas drectly related to producton or provson of servces. Thus, ts lnks nclude decson makng areas of purchasng materals, components, sub-assembles, etc., the area of decsons concernng drect- 1 In practce, they often do not represent any drect effect of the process, but nclude relevant and relable process performance nformaton.
212 Jerzy Zemke ly resources processng, the area of decsons as regards storage of fnshed products and dstrbuton of products to sales networks, the area of marketng decsons coverng market research, market segmentaton, demand estmaton, dentfcaton of Jan Acedańsk 309 the lfecycle phase of organzaton s own products and of compettors products. The last proper lnk of and the after-sales value support chan dstngushed and mantenance, by ncludng Porter warranty s the area and guarantee terms of decsons relatng to sellng actvtes and procedures. and n partcular operatons performed to prepare the product for sale pre-sales servcng), sellng proper and after-sales support and mantenance, The areas of decsons defned by Porter as support decsons nclude: ncludng warranty and guarantee terms and procedures. the area of support functons related to procurement departments nternal logstcs, the area of decsons concernng research and development The areas of decsons defned by Porter as support decsons nclude: the area of support functons related to procurement departments nternal logstcs, of the new area producton of decsons technologes concernng and mplementaton research and of nnovatve development solutons, technologes the area of decsons and mplementaton regardng personnel of nnovatve polcy, ncludng solutons, recrut- the area of dec- of new productosonment, regardng tranng and personnel promoton polcy, procedures, ncludng as well recrutment, as motvaton tranng mechansms. Dependng as well as on motvaton the organzatonal mechansms. structure, Dependng the area on of the organzatonal and promoton procedures, structure, nfrastructure the area development of nfrastructure ncludes: plannng development functons, ncludes: fnance, legal plannng functons, fnance, legal department, qualty control functons, nformaton flow management. department, qualty control functons, nformaton flow management. Inbound logstcs Producton Outbound logstcs Marketng & Sales After-sale support & Mantenance Purchases: - resources - materals - parts - machnes, equpment - technologes Transformng of resources: - processng - assembly - testng - assemblng - packng Dstrbuton: - storage - shppng to the sales network Identfcaton: - buyers - needs Determnaton: - product characterstcs - prces - the condtons of supply - sales network Management - promoton - attractng buyers Servces: - servce before/after sale support - nstallaton - coachng, tranng, courses Fg. 1. Prmary value chan Source: Author s own analyss based on [Zemke, 2009, p. 203]. Dvson nto the prmary and support value chan does not affect the outcomes of ts overall value estmaton. Referrng to Porter s concepton solves the 309
outcomes of ts overall value estmaton. Referrng to Porter s concepton solves the problem of dentfyng decson makng processes n organzaton s all structural areas and s relevant to dentfcaton of rsk nvolved Management under rsk... 213 problem n decson of dentfyng processes, decson as well makng as to dentfcaton processes n organzaton s of the rsk s all controlled structural areas and s relevant to dentfcaton of rsk nvolved n decson processes, as varables. well as to dentfcaton of the rsk s controlled varables. Internal procurement functon Techncal and technologcal development Human resources Organzaton s nfrastructure development functons Procurement: - prmary actvy functonss - support actvty functons R&D supportng: - techncal development - technologcal development Acqurng nnovatve solutons Decsons concernng: - employment - promoton - tranng Motywowane Improvng management methods n: - planng - control - fnance - legal system - qualty - nformacją Fg. 2. Support value chan Source: Ibd, s. 204. Fg. 2. Support value chan 2.2. The rsk of decson-makng processes The essence of decson makng processes s closed wthn the relaton between the performance and the assumptons provded for n the plan. Thus, rsk s the state accompanyng decson makng processes and concerns the actvtes taken as a result of ths process [Jajuga, 2009, p. 13]. Changes n determnants of the busness organzaton s envronment are the man source of rsk. The strategc plan and also the operatonal plan) specfes lmts for macro-envronmental and mcro-envronmental determnants and the 310 organzaton s own resources changes wthn them mply dfferences between the plan and the performance 2. 2 Macroenvronmental determnants: poltcal, economc, legal, fnancal, cultural, envronmental. Mcroenvronmental determnants relatng to the market, the organzaton operates on: compettors, supplers, buyers. Own resources: knowledge, organzatonal crcumstances, employees, assets, fnance, perceptual determnants, see: Davd [1997, p. 102 and followng pages].
214 Jerzy Zemke 2.3. Montorng control varables n decson-makng processes The process control system ncludes gatherng of decson makng processes control varables data. These varables consttute symptomatc assessments of the decson makng processes rsk. The varables can be quanttatve or qualtatve and are collected at a pre-defned frequency. Ther evoluton enables one to estmate, how rsk nvolved n the processes changes. 3. System foundatons For management to be conscous and effectve, t requres one to accept a defnton of rsk and a defnton of rsk measures. The rsk measurng system s nsuffcent for the effcent busness management, t t s not supported by a set of nstruments protectng the objectves aganst the negatve mpacts of rsk. It s a sgnfcant assumpton for the rsk management system archtecture to defne a reference bass whch makes t possble to evaluate changes n the state of rsk wthn the horzon of decson makng processes. 3.1. Measurement of rsk n decson-makng 1. Acceptng an axom of rsk nvolved n the decson makng processes. 2. Constructng the man thess of the study,.e. the source of rsk s n changes of the busness organzaton s envronment determnants. 3. Changes of determnants are montored through measurng the dentfed control varables of the decson makng processes. 3.2. Instruments of management under rsk Acceptance of the rsk axom solves the problem of defnng rsk, as there are many defntons of the concept n the lterature of the subject. Many of them have the dsadvantage of beng ambguous and fnd t problematc to defne rsk measures, whle ths defnton should follow from the defnton of rsk. The soluton s n usng controlled varables of actvtes taken under decson makng processes. Control varables depct the effects of rsk that has been taken, therefore they consttute a sgnfcant element of the rsk model structure 3. 3 Let us assume that components {x 1, x 2,..., x k }are control varables of decson ma kng processes. The set of all control varables defnes a certan space Ω. The set of all subsets of ths space F = 2 Ω s relevant to the rsk model beng constructed, as ts elements {x α1, x α2,..., x αk } can be dentfed wth sets of control varables of explctly defned decson ma kng processes, therefore they represent a pcture of rsk effects. Let us defne a certan mappng P, where real values from the closed nterval set [0, 1] are assgned to elements of set F, then set Ω, F, P)defnes a probablstc space, where random vectors {x α1, x α2,..., x αk } are ths space elements, therefore the vector s a rsk model. Mappng P has the followng propertes: 1. PΘ) = 0 zbór pusty, Θ empty set
Management under rsk... 215 Wth some assumptons concernng the random vector probablty densty functon, we are defnng the random vector statstc measures: 1. The probablty that vector components take values from certan varablty ntervals. 2. The vector of random vector components expected values. 3. The vector of random vector component varances. 4. The random vector component covarances matrx. Defnton: The set of vector s four defned measures s the measure of rsk state at the gven moment of the decson makng process. Decson makng processes based on nstruments of protecton aganst the effects of rsk play a preventve role, but also mtgate the effects of rsk. Instruments supportng management processes consttute two sets: one of them conssts of the busness organzaton s own nstruments and the other one of external nstruments 4. Internal nstruments are defned by the busness organzaton and n practce they are of a temporary nature, as they are avalable almost mmedately, except for those that are defned together wth nsttutons whose statutory actvtes nclude defnng rsk and sellng rsk transfer nstruments. External nstruments are avalable on the rsk carrers market. It take tme to acqure them, as they are sold accordng to strct procedures requrng verfcaton of the organzaton s standng. In the perod when the entty s legal and fnancal status s beng verfed, ts management processes are supported by means of nternal nstruments 5. 4. System archtecture The system concepton s based on a fundamental assumpton of montorng the rsk state changes aganst the rsk state standard. The montorng system gathers and analyses nformaton about changes n rsk sources states n effect of changes of determnants occurrng at the tme of decson makng processes. Ths assumpton gves to the system desgn a feature, whch dstngushes the concepton from among other solutons, namely normatvty of the system. Ths feature of the concepton refers to classcal defntons of rsk, percevng t as a gap between the expectaton the plan and the performance. 4 5 2. PΩ) = 1, Ω przestrzeń zdarzeń elementarnych, Ω space of elementary events 3. P measure s addtve. The dstncton s a matter of conventon here and ts crteron results from mutual relatons between decson makng areas; procurement, producton and sales, support areas. An overvew of nstruments s presented n Zemke [2009 p.115 and followng pages].
216 Jerzy Zemke Another mportant assumpton nvolves specfyng the type of system s data bases and the rules for gatherng and updatng the base resources. The database type determnes normatvty ths means that along wth a control varables database updated at a pre-defned frequency, a database of controlled varables standards should be operated. 4.1. The base of control varables A database of control varables s constructed based on macro- and mcro-envronmental determnants and based on a set of determnants defnng the organzaton s resources. The database elements nclude factors that have been found to be relevant to evaluaton of the decson makng processes qualty that enable one to specfy the state of rsk that has been taken. Ths element of system archtecture admts openness to the possblty for the set of control varables to be supplemented whenever relevant nformaton about the rsk state changes s contrbuted. 4.2. The base of rsk measures The module resources consttute a mappng of the control varables module resources. Varables measures are defned based on assumptons for the busness organzaton development plan 6. The module resources can be changed only n case f development plans are adjusted or the control varables module s supplemented wth new elements. Ths requres also defnton of standards for ther equvalents. 4.3. The base of the decson-makng montorng results The module contans two subsets: a set of rsk standards states Zs rw) and a set of rsk states Zs rq) w n the phase of decson makng processes mplementaton q, updated at the pre-defned frequency. Accordng to the rsk state defnton accepted for the present study: Zs r w) r ) Zs r q) r ) k w k = P [ a, b ]), E = 1 k q k = P [ a, b ]), E = 1 w q ), ), Var ), ), Var w q ), ), Cov ), ), Cov q w,, 4.4. The base of management nstruments mplemented under rsk j j j j ) ) Operaton of the verfcaton module s of hgh sgnfcance n the system concepton, as t enables one to assess ts practcal utlty. Ths s where dfferences between rsk standard states and the current rsk state are dentfed. The assessment outcome enables one to dagnose the decson makng processes m- 6 Along wth quanttatve descrpton of control varables, qualtatve descrpton s also possble.
Management under rsk... 217 plementaton, to answer the mportant queston about dfferences between the performance and the actual state. It depends on the fndngs of the assessment, whether the assumptons wll have to be adjusted or nstrument protectng aganst the effects of rsk wll have to be launched. The dea of ths module operaton ncludes the opton of multple re-verfcaton. Ths requrement results from the need to verfy remedy procedures. The protecton nstruments effectveness should be known, but managng an organzaton under rsk condtons has the nature of random processes and as such, t s not entrely predctable. The module of protecton nstruments base s a set of products, the organzaton s management selects ndvdually, based on verfcaton of the decson makng processes qualty. Protecton nstruments should be selected based on assessment of the gap between the plan and the performance, wth the effectveness crteron used. Instruments strength s a functon of ther purchasng cost and ths means that there can be no doubt as regards the selecton: effectveness of protecton s a matter of mportance here, whle the fnancal aspect emerges n the background. 4.5. Management under rsk condton the system concepton archtecture Management under rsk condtons Busness organzaton s envronment Mcro-envronmental determnants Macro-envronmental determnants Organzaton s strategc resources Decson areas Base of decson processes controlled varables Models, measures: -of decson processes rsks -of decson processes rsk standards Base of decson processes controlled varables standard Verfcaton of decson processes qualty Follows the plan Decson process assessment YES, when process does not follow the plan Instruments of protecton aganst rsk mpacts Any sgnfcant dfferences between performance and plan? NO YES Fg. 3. System concepton chart Decson process contnued Concluson The structure of the system presented here s based drectly on the assumptons resultng from the contemporary busness management concepton. Foundatons of the concepton consst of the assumptons made n development plans
218 Jerzy Zemke and verfed as a result of decson makng processes. The decson makng processes are of a condtonal nature, as they need to address the determnants exstng wthn the organzaton s envronment. Changes n determnants n the perod of decson makng processes executon cause that they are accompaned by a certan specal state, referred to as the rsk state. As a result of ths state, dfferences between planned expectatons and the actual performance are emergng. These dfferences have gven drecton to the management system for the rsk condtons, where dfference the so-called gap between the expectaton recorded n the plan and the realty has been used for constructng a normatve system of managng under rsk condtons. Lterature Davd F.R., 1997: Concepts of Strategc Management. Prentce Hall, Upper Sadle Rver. Gołębewsk T., 2001, Zarządzane strategczne. Planowane kontrola. Dfn, Warszawa. Jajuga K., red., 2009: Zarządzane ryzykem. Wydawnctwo Naukowe PWN, Warszawa. Kroll M., Wrght P., Toombs L., Leavel H., 1997: Form of Control: Crtcal Determnant of Acquston Performance and CEO Rewards. Strategc Management Journal, Vol. 18, No. 2. Krupsk R., 1998: Zarządzane strategczne. Koncepcja, metody. Wydawnctwo Akadem Ekonomcznej, Wrocław. Lorange P., Morton Scott M.F., Ghoshal S., 1986: Strategc Control Systems. West Publshng, St Paul. Porter M.E., 1980: Compettve Strategy. Free Press, New York. Rokta J., 2005, Zarządzane strategczne. Tworzene utrzymane przewag strategcznej. PWE, Warszawa. Zemke J., 2009: Ryzyka zarządzana organzacją gospodarczą, Wydawnctwo Unwersytetu Gdańskego, Gdańsk. Summary Despte the fact that management systems dedcated to rsk condtons have been verfed n practce, there s stll enough space for new solutons there. What makes ths suggeston even more noteworthy, s that the problem of managng n rsk condtons occurs n many varous decson-makng areas that need to be operated wthn one coherent system. Moreover, the nature of rsk, as well as methods to dentfy and measure rsk stll requre further studes.