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Risk Response Planning

5 minutes 5 Questions

Risk Response Planning is the process of developing strategic actions to enhance opportunities and reduce threats to projects. It involves four basic responses: mitigating, transferring, avoiding for threats, and accepting; and exploiting, enhancing, sharing for opportunities. The chosen strategy should be cost-effective, realistic within the project context, agreed upon by all parties involved, and owned by a responsible person. It's important to remember that the goal isn't to eliminate all risk, but instead to decrease the potential negative risk impacts to an acceptable level.

Risk Response Planning: A Comprehensive Guide

Risk response planning is an essential part of the Capital Asset Pricing Model (CAPM), specifically in the area of risk identification and assessment. It basically involves developing options and actions to enhance opportunities and reduce threats to the project's objectives.

Why it's important:
The underlying reason why risk response planning is significant lies in its potential to minimize negative impacts (risks) on the project, reinforcing its chances of successful completion within the given constraints.

How it works:
In risk response planning, a number of actions are taken, including acceptance, avoidance, mitigation, or transfer of risks, depending on their nature. A proper balance of these risk responses can significantly improve project outcomes.

Exam Tips: Answering Questions on Risk Response Planning
When tackling questions on this topic in an exam, keep the following points in mind:
1. Make sure to focus on the firm's overall risk tolerance while suggesting actions.
2. Understand the types of risk responses and when each is applicable.
3. Leverage the idea of risk/reward trade-off.
4. Remember that the goal is to positively impact the project's expected outcome by managing risks properly.
5. Use real-life examples when possible to illustrate your understanding of risk response strategies.

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CAPM - Risk Identification and Assessment Example Questions

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Question 1

During a logistics project for a retail company, you anticipate a risk of variable transit times causing a lean inventory. To reduce the impact of this risk, you decide to make arrangements to borrow inventory from another branch if required. This represents which type of risk response?

Correct Answer: Mitigation

Making arrangements to borrow inventory from another branch if required is an action taken to reduce the impact of the risk of variable transit times causing lean inventory. This proactive measure is an example of risk mitigation, as it seeks to lessen the potential effects of the risk on the project.

Question 2

In a data-center setup project, there's a risk that a major system could fail due to power issues. You come up with a plan to install a secondary power generator to ensure continued operation. This risk response strategy is best described as?

Correct Answer: Mitigation

The correct answer is Mitigation. In the context of risk management, mitigation, or risk reduction, involves taking steps to reduce the impact or likelihood of the risk. By planning to install a secondary power generator, you are reducing the likelihood of system failure due to power issues, therefore this is a mitigation strategy. The other strategies do not apply: Transfer is when the risk is shifted to a third party, which is not the case here; Acceptance would mean you do nothing to address the risk and simply accept the possible consequences; Avoidance involves actions to entirely avoid the risk, but in this case you're not avoiding the risk but preparing to deal with it if it arises.

Question 3

You are managing a project to develop a new urban transportation system. During risk assessment, your team identifies a potential risk of public resistance due to concerns about noise pollution. To address this, you decide to modify the project plan to include the development of noise-reducing technologies and implement a community outreach program to educate residents about the benefits of the new system. What type of risk response strategy does this scenario represent?

Correct Answer: Mitigate - Reducing the probability and/or impact of the risk

The correct answer is 'Mitigate - Reducing the probability and/or impact of the risk'.

In this scenario, the project team is actively taking steps to reduce both the probability and impact of the identified risk (public resistance due to noise pollution concerns). By modifying the project plan to include noise-reducing technologies and implementing a community outreach program, they are:

1. Reducing the probability of public resistance by addressing the root cause (noise pollution).
2. Reducing the potential impact of public resistance by educating residents about the benefits of the new system.

These actions align perfectly with the definition of risk mitigation, which involves taking proactive steps to reduce the likelihood and/or consequences of a potential risk.

The other options are incorrect for the following reasons:

'Enhance' is not applicable here as the scenario is dealing with a negative risk, not a positive opportunity.

'Accept' is incorrect because the team is not simply acknowledging the risk and preparing for its consequences. Instead, they are actively working to reduce its probability and impact.

'Transfer' does not apply in this case as the project team is not shifting the risk ownership to a third party. They are managing the risk themselves through direct actions and modifications to the project plan.

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