Free Case Study On Risk Culture And Appetite
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Risk Culture and Risk Appetite
One definitive characteristic of entrepreneurs is that they have the uncanny ability to sniff out and ultimately recognize a new business opportunity even if this means taking up old and used up concepts and rejuvenating them (Gibb & Ritchie, 1987). An entrepreneur or even a group of entrepreneurs can identify an opportunity that has the ability to grow into a profitable business even when at the moment it seems deplorable and unsalvageable. Such is the story of Little Fat Duck. When the founder of the company Adel Ishak found out that a certain group of food sellers in his neighborhood were thinking of disposing their old food truck, Ishak hypothesized that that he could purchase the truck and plunge into the food vending business, albeit with a fresh and new concept. Together with a close friend, Ishak went ahead and bought the truck and immediately renovated it. The truck became a moving restaurant serving French and Italian dishes including omelets and pasta and relatively affordable rates. The name of the restaurant was “Little Fat Duck”. The company continues to grow and has already purchased another truck in addition to setting up a stationary food kiosk at a one of the local city malls. The company was also one of the few business finalists that were vying for the ultimate prize in the Alliance Bank SME Innovation Challenge.
There is no doubt that the food vending industry is one that is laden with a lot of risks (Griffith et al., 2010). Even in starting this business, the owners definitely had to incur a lot of risk with the primary risk being the buying of an old truck whose potential for renovation and serving as a full-blown moving restaurant was still unknown. The following is a proposal for risk culture and risk appetite of the company that it will ensure that it is able to navigate the initial stages of growth and eventually grow into hugely profitable company with possibly many outlets not only in Malaysia but also throughout Asia.
An effective and efficient risk culture is one that rewards an organization together with its employees for adopting correct risks in a manner that is informed. For Little Fat Duck to succeed, it must have a definitive risk culture represented in a credible framework (PricewaterhouseCoopers, 2004). First of all, all risks taken must be in line with the overall goals of the organization (Clarke & Varma, 1999). The organization should not tolerate individual actions of risk that might put the company in jeopardy.
In addition, it is only the management of the organization that will set the risk appetite for various components or segments of the business, and all employees are expected to abide by these appetites. If the management has outlined that a particular segment will incur very little appetite for risk, all employees are expected to ensure that this is achieved, and no risk is incurred. It is recommended that all employees of the organization are made to believe and share the notion that this is business that is still in its initial stages, and any sort of risk should not be taken without consulting the relevant authorities.
This risk culture will be embedded in the organization’s culture and will, in fact, be one of the most distinguishable aspects of this culture in the future. The risk that is tolerable in this organization is only the one that promises an increase in profitability of the business such as experimenting with new menus and servings and increasing the number of outlets. Intolerable risks are those that threatens to put the company in conflict with either part of the stakeholders such as the employees, the customers as well as the government.
This organization will operate within a medium risk range overall. However, the level of risk appetite for various business components will vary. This is because there are some components of the business that the organization cannot at the moment cannot afford to risk while there are others that the organization has no choice but to risk highly if it is to remain profitable or even grow (Barfield, 2007).
One area of low-risk appetite for the business will be on legal compliance and safety objectives. The food industry is very sensitive (Lues et al., 2006), and consequently, the government has put forth several legal guidelines including those guiding food preparation environments. In regard to this, the company will operate in a very low-risk appetite and will aspire to comply with all legal guidelines.
The organization will also operate on a low-risk appetite when it comes to employee safety. Little compromise will be made when it comes to employee safety, and this is one of the primary things that will be emphasized on by the company right from the beginning. This is relation to the arrangement of the cooking equipment as well as the type of these cooking equipment and fire emergency response plans.
Simply put, the risks in the business that emanate from the cooking environment, the cooking equipment and materials, as well as the legal environment, will be reduced to reasonably practical levels. The organization’s legal obligations will take priority and precedence over other business objectives and, therefore, the risk appetite for this aspect of the business will be significantly low.
On the other hand, there are levels of the business where the company will be willing to incur a high-risk appetite in its attempt to remain profitable and grow as a business entity. High-risk appetite for the business will be incurred in areas such as strategy, reporting and finally operation objectives.
In regards to strategy, one of the goals encompassed in the business strategy is the purchase of several other trucks as well as the establishment of several stationary outlets at various places across Kuala Lumpur and soon across the whole of Malaysia. The company will incur a high-risk appetite in this area. By the second year of operation, the company will be willing to purchase as much as five more trucks that will be distributed across Kuala Lumpur. This also indicates that the company will, therefore, have a high-risk appetite for new investments. The company will not shy away from removing money from the official business savings for the purpose of starting new outlets even if the potential of profitability for other outlets has not been fully established or authenticated.
The organization will also exhibit a high appetite for the size of the workforce. The number of the employees serving as cooks, waiters and supervisors across the outlets of the company will continue to increase as the management deems it necessary. This will commence with an increase of the workforce at the current outlets followed by the hiring and subsequent increase of employees at the projected future outlets of the company.
The company will also have a high risk for employee autonomy. The organization expects all employees, specifically cooks to prepare high-quality foods, but they are not monitored and are thus given great autonomy when it comes to their work. This is a risk that the company is willing to take as it aims to attract customers
The rationale for the risk culture and risk appetite proposed for Little Fat Duck is premised on several aspects. The most important of these are the type of industry than this organization is operating in as well as the current stage of the company in terms of size and growth.
As shown, the company’s risk culture is very clear on the aspects that can be exposed to risk and is also clear that risk decision must be left to the management at the present. This culture is expected to be adjusted as the company grows and increases in size but at the moment, such a risk culture should be adopted as a way of shielding the company from potentially dangerous risky behavior from employees who may be given too much autonomy in terms of risk taking and who may commit actions that will lead to the destruction of the company in its current infant stages (Pritchard, 2014).
The risk appetite proposed for the company is also based on the industry and the current size of the organization. The company cannot afford to have a high risk appetite when it comes to things such as employee safety and legal compliance as it may be shut down before it as even left the ground in terms of growth (Gai & Vause, 2004).
The company can however afford to incur high risk when it comes to strategy because the ultimate goal is to grow and gain a wider market share, and this can only be done by risking both money and resources and this is why the risk appetite for strategy is high in the organization.
The importance of formulating an appropriate risk culture and risk appetite for Little Fat Duck and indeed for every company for that matter cannot be underestimated. The formulation of an appropriate risk culture and risk appetite can be the determinant of whether company, especially one that is still in its startup stage will be able to navigate this stage and grow to become a profitable organization (Bozeman & Kingsley, 1998).
In the case of Little Fat Duck, the company has not been in operation for a long time, and it must, therefore, tread very carefully when it comes to matters of risk. Taking unwarranted risks could lead to its demise.
At the same time, if the company has any hopes of growing and becoming renowned, it must be willing to take risks especially when it comes to new strategic investments as well as operations. The company must be willing to take the risk of taking up new resources such as new food trucks or even business premises in which to establish new outlets. It must also be willing to take on the risk of increasing its workforce even though it is not entirely sure if this workforce will be sustainable.
In addition, the organization operates in a very sensitive industry; the food industry. As such, there are some areas where it cannot afford to incur high-risk appetite such as the quality of equipment or compliance with legal obligations. These are all aspects that will be comprehensively covered in an appropriate risk culture and risk appetite statement of an organization, and thus, the importance of these two vices cannot be underestimated.
Clarke, C. J., & Varma, S.1999. Strategic risk management: the new competitive edge. Long Range Planning, 32(4), pp. 414-424.
Pritchard, C. L., & PMP, P. R 2014. Risk management: concepts and guidance, CRC Press.
Barfield, R., 2007. Risk appetite—How Hungry are You?. The Journal: Special Risk Management Edition.
PricewaterhouseCoopers, L. L. P., 2004. Enterprise Risk Management: Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission.
Gai, P., & Vause, N., 2004. Risk appetite: concept and measurement. Financial Stability Review, 17, pp. 127-36.
Lues, J. F., Rasephei, M. R., Venter, P., & Theron, M. M. 2006. Assessing food safety and associated food handling practices in street food vending. International Journal of Environmental Health Research, 16(5), pp. 319-328.
Bozeman, B., & Kingsley, G., 1998. Risk culture in public and private organizations. Public Administration Review, pp. 109-118.
Gibb, A., & Ritchie, J, 1982. Understanding the process of starting small businesses.
Singleton, W. T., 1987. Risk and decisions. John Wiley & Sons.
Griffith, C. J., Livesey, K. M., & Clayton, D., 2010. The assessment of food safety culture. British Food Journal, 112(4), pp. 439-456.
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