Risk Management in the Digital Economy

Risk Management in the Digital Economy

Bob Ritchie (University of Central Lancashire, UK) and Clare Brindley (Nottingham Trent University, UK)
DOI: 10.4018/978-1-60566-026-4.ch525
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Abstract

Business processes have been transformed by radical changes predicated on the digital economy. Every business sector has witnessed changes in the competitive structure of the marketplace, consumer preferences, buying habits, marketing and promotional strategies, production operations, internal administration systems, supply chain arrangements, and the opening up of the global economy. These changes provide an array of risks for managers. A study of 500 financial executives in Europe and America (FM Global, 2007) concluded that they expected an increase in overall business risks in the foreseeable future. Similarly, Harland, Brenchley, and Walker (2003) concluded that the risk exposure of organizations will heighten due to increased complexity, turbulence, and the dynamic and changing supply chain context. However, the digital economy is a two-edged sword in the sense that the information and communication technologies (ICTs) generating the additional uncertainties and risks also provide the means to enable decision makers to manage them more effectively. The key to survival in the digital economy depends on the abilities of managers to utilize ICTs effectively to manage uncertainties and risks. ICTs have largely been seen as helping to enhance database access, analytical powers, and the communications capacity of managers. The justification for these efforts has been based on the premise that more and better quality information will result in reduced uncertainty and improved risk perceptions in decision situations. In short, the outcome would be reflected in “better quality” decisions in terms of risk assessment and resolution. Key topic areas presented in this article include: • primary elements of the digital economy • overview of risk and risk management, • risk and uncertainty, • individual/organizational response to resolving risk, • role of information search and corporate intelligence, • contribution of the digital economy to risk resolution, • individual characteristics and risk perceptiveness, • management of risks, • risk perception, • information processing and risk resolution, and • risk management within the digital economy.
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Introduction

Digital Economy and Risk: A Two-Edged Sword

Business processes have been transformed by radical changes predicated on the digital economy. Every business sector has witnessed changes in the competitive structure of the marketplace, consumer preferences, buying habits, marketing and promotional strategies, production operations, internal administration systems, supply chain arrangements, and the opening up of the global economy. These changes provide an array of risks for managers. A study of 500 financial executives in Europe and America (FM Global, 2007) concluded that they expected an increase in overall business risks in the foreseeable future. Similarly, Harland, Brenchley, and Walker (2003) concluded that the risk exposure of organizations will heighten due to increased complexity, turbulence, and the dynamic and changing supply chain context. However, the digital economy is a two-edged sword in the sense that the information and communication technologies (ICTs) generating the additional uncertainties and risks also provide the means to enable decision makers to manage them more effectively. The key to survival in the digital economy depends on the abilities of managers to utilize ICTs effectively to manage uncertainties and risks.

ICTs have largely been seen as helping to enhance database access, analytical powers, and the communications capacity of managers. The justification for these efforts has been based on the premise that more and better quality information will result in reduced uncertainty and improved risk perceptions in decision situations. In short, the outcome would be reflected in “better quality” decisions in terms of risk assessment and resolution.

Key topic areas presented in this article include:

  • primary elements of the digital economy

  • overview of risk and risk management,

  • risk and uncertainty,

  • individual/organizational response to resolving risk,

  • role of information search and corporate intelligence,

  • contribution of the digital economy to risk resolution,

  • individual characteristics and risk perceptiveness,

  • management of risks,

  • risk perception,

  • information processing and risk resolution, and

  • risk management within the digital economy.

Key Terms in this Chapter

Risk Management: The range of activities that may be taken to avoid the occurrence of an undesirable event or to modify, minimize, or eliminate the consequences should the event occur (e.g., an insurance policy against particular risks would not prevent the occurrence, but would compensate for the financial and other consequences of the outcome).

Decision Support: The tools, techniques, and information resources that can provide support to the decision maker in improving the efficiency and effectiveness of his or her decisions. Many of these decision support tools may employ ICTs and be part of the management information system itself.

Uncertainty: The situation where less-than-perfect knowledge exists about a particular problem or decision requirement. There exists a wide variation in terms of degrees of uncertainty from extreme uncertainty (i.e., very limited knowledge of outcomes or likelihood of their occurrence) to near certainty (i.e., almost complete knowledge of the outcomes and the likelihood of occurrence). Generally, an uncertain decision situation refers to one containing ambiguity about part or all of the decision parameters.

Digital Economy: Accepts as its foundation the ICT developments and represents the impact that these have had on the conduct of business and commercial activities. Changes in markets and supply chains as well as increasing global competition all represent what is encapsulated within the term ‘digital economy’.

Risk: In a limited manner, the decision situation in which the full range of possible outcomes are known with certainty and the probability of their occurrence can be assessed accurately, usually by some objective means (e.g., rolling the dice is a classic risk decision situation). More usually, the probabilities must be assessed subjectively, often based on previous experiences or intuition, and the outcomes themselves may not be fully identifiable. The term “risk” is used commonly to generally define decision situations that are really a combination of classical risk and uncertainty that is, the more normal decision situation in organizations.

Information and Communication Technologies (ICTs): A generic term used to encapsulate the diverse range of technological developments (e.g., computer storage and retrieval, computing capacity, wired communications, wireless communications, portable technologies) that have enhanced the internal and external activities of organizations. Especially important is the manner in which these strands of technological development have been integrated to provide greater synergy.

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