Risk Appetite

An enterprise need to establish its risk appetite. The risk appetite of an organization refers to the amount of risk and potential financial loss that enterprise is prepared to accept within a certain time period.

Determining risk appetite

In determining risk appetite, organizations need to consider internal constraints such as funding, investment requirements, potential risks, liability, various types of risks, strategy, competitive advantage and the external environment of the organization. Moreover, it needs to consider the preferences of shareholders towards risk taking.

In determining the risk appetite, as in any other business activity, an organization needs to be guided by the ultimate objective of the enterprise which is the maximization of the shareholders’ value.

An enterprise’s risk appetite should be aligned to the amount of risk necessary for a business to take to achieve its objectives.

Risk appetite is determined by aligning the risk management and the value proposition to business strategy. Risk appetite will determine the level and nature of risks that the organization can tolerate. There are more technical ways to determine the risk appetite.

The risk appetite should be clearly stated and measurable. The risk appetite should be incorporated into organizational policies and procedures. In this way employees of the organization are able to get a clear indication of the enterprise’s risk appetite by examining its policies and procedures. With the risk appetite effectively linked to business strategy, it allows to more effectively assess performance of the business units with the help of risk/return analysis and risk limit monitoring.

Risk appetite is largely based on competitive advantages that organizations possess. When organizations have competitive advantage in a certain area of business, then for this particular organization certain risk taking in this area may entail much larger expected returns than what another organization could expect. Consequently, the risk appetite of such an organization should reflect it.

For example, imagine that company X, which is a leading direct insurance services provider in country 1 (one of the emerging markets), has competitive advantages in know-how of direct marketing in the insurance industry as well as in other aspects relevant to running a leading direct insurance services provider. Company X will have much higher expected return with regards to taking certain risks compared to company Y which does not have competitive advantages of company X, but is trying to set up a direct insurance company in an emerging market.

For example, company X will have much higher expected return in undertaking a project of establishing direct insurance services provider in country 2 (another emerging market), compared to company Y which does not have competitive advantages of company X. Therefore, such risk taking for company X will make more sense vs for company Y.

Risk appetite should also be set below the limit that organization can actually handle. This will allow for a margin for error and prevents negative consequences from overestimation of the organization’s capacity to tolerate risk and serves as an allowance for unexpected catastrophic events. The limit of risk an organisation can handle is called the risk tolerance.

Once the risk appetite is established, a new risk culture should be created to reflect the risk appetite of organization. The structures, managerial and employees’ level of knowledge, and resources should be aligned with the type and extent of risks the organization is undertaking.



Earnings at Risk (EaR)

Earnings at risk (EaR) is a risk measurement of the amount by which net income may adversely change due to interest rates fluctuations. In other words, Earnings at risk (EAR) helps organizations to evaluate how changes in interest rates may affect the organization’s earnings.

The difference between Value at Risk (VaR) and Earnings at risk (EAR) is that EaR measure only changes in the cash inflows from earnings whereas VaR measures total loss on a certain portfolio of financial instruments.


Impact of the Internet on Public Relations

Due to the rise of the internet, organizations no longer just function only in the market place (off-line environment). Now they also function in the market space (on-line environment).

The internet opened many new opportunities for organizations to engage in communication, including two way communication, with stakeholders. Corporate websites, e-newsletters and email are some of the ways that allow new and exciting opportunities for organizations to build relationships with stakeholders.

The Internet enhances communication with media. The media relations section of the website may include news and press releases, photographs and any other information and resources that may be useful to media and which may result in positive publicity for the organization. If crises occur, the PR practitioners may use the media relations section of the website as well as emails to keep media informed about the situation and any new information available regarding the crises. The PR department may also offer to media a subscription to weekly email with updates on any happenings connected to the organization.

Websites of organizations may also be used to acquire new customers, build business partnerships and promote the organization’s brand. A well optimized website may contribute greatly to visibility of the brand without any significant investments other than on site optimization and maintenance.

Corporate blogging may be used by the organization to enhance relationships with stakeholders. The concept of blogging originated from the word “weblog” (weblog), as coined by Jorn Barger in 1997.

Corporate blogs are a communication and public relations tool that organizations can use. It is presented in the form of an online diary which is presented in the reverse chronological order. Corporate blogs can be internal, where the target audience is internal stakeholders such as employees and shareholders of the organization. It can also be external, where the target audience is external stakeholders of the organization such as customers and suppliers. 

Mass Media

Mass media is generally considered to be an uncontrolled type of media. Mass media refers to media which targets a broad audience of various stakeholders and include, but not limited to, the broadcast media, which is television, radio and press, which is the newspapers and magazines.

The advantages of press over broadcast media include information being presented in greater depth. Further, when information is presented in the press, it is portable. Individuals can take newspapers or magazines with them and read it anywhere.

The press is also often passed from one individual to another. For example, if one likes certain article in the magazine, he or she may bring this magazine to his or her friends and family to share it with them. Friends and family will likely take a look at the entire magazine and not only at the recommended article. Some individuals even cut out and keep articles or information that they find particularly interesting or useful.

However, press also has certain disadvantages. The disadvantages include the fact that the management of the press usually prints what will sell and the information in the press may not be objective or may even be distorted.

Moreover, the readership of the press may not be as big as claimed by the newspapers and magazines. Many individuals only read newspapers over morning coffee or on the way to work.

Moreover, with newspapers now available online, many office workers read the headlines only online and read specific articles only if it is particularly relevant or interesting. Therefore, a lot of information in the newspapers and magazines gets ignored by a large proportion of the readership.

Broadcast media offers certain advantages over press. It may reach a larger audience than press. This is especially true as more and more people around the world gain access to this media. This media offers various sounds or combination of sounds and colors which enhances the message. It is also watched or listened to mostly at the leisure time. Therefore, on average, the messages communicated may enjoy higher attention of the target stakeholders. Moreover, if an organization targets illiterate stakeholders, than broadcast media is more relevant when compared to press. When it comes to advertisements, with broadcast media, individuals are almost forced to listen to or to watch the advertisements. With press, individuals have more control over which advertisements to take notice of and which to ignore.

Disadvantages of the broadcast media include that it is expensive and may be time consuming to arrange. Further, for messages to be absorbed by the stakeholders, it needs to be absorbed immediately as it is being broadcast.

Various exhibitions and shows are also a type of mass media. Their advantages over broadcast and press media include the ability to engage in two way communications with the targeted stakeholders and therefore have better control over media and have better chance for creating a long-term relationship with the stakeholders.

Other types of media include folk media which refers to such media channels as puppet shows, gossip, music, community theatre, city or village celebrations such as festivals and family or community celebrations and events such as weddings or funerals.

There is also private media, which refers to media which an organization creates for its own consumption. An example of private media includes videos, literature and private exhibitions, such as factory tours, produced by an organization.

Lastly, there is of course a digital media, which can also be called a new media or technology driven media. New media channels include websites, blogs, video and audio podcasts, online forums and social networking websites.


Internal Communication

Internal communication is directed at internal stakeholders. Internal stakeholders include employees, management and shareholders. Many firms consider employees and customers to be the two most important assets of the business.

The profit and growth of organization are mainly the result of customer loyalty. Customer loyalty is the result of customer satisfaction. Customer satisfaction is mainly a result of value provided to customers by the business. Satisfied employees and organizational alignment, which refers to situation when employees are aligned with and internalized the values and beliefs of organization, will deliver better value to customers. This will result in enhanced customer satisfaction and customer loyalty and greater growth and profit for the business.

Since internal communication is one of the important ways to ensure organizational alignment and employee satisfaction, internal communication is of crucial importance.

Philip Kotler, a well-known marketing expert, advises that in any organization with a service component, there are three types of marketing that occurs in the organization.

Internal marketing occurs between the organization and employees.

External marketing occurs between the organization and customers. It concerns design and implementation of the marketing mix.

Interactive marketing occurs between employees and customers. Its effectiveness depends on how well employees can meet customers’ needs.

External marketing cannot occur without internal marketing which refers to motivating and educating employees to be able to meet the needs of customers through interactive marketing. Therefore, for effective marketing, all three types of marketing should be undertaken efficiently.

Print publications can be used for internal communication and include newsletters, magazines, annual reports and bulletin boards. Internal communication media can also include audiovisual media such as power point presentations, videos and audio recordings of the messages.

The combination of different audiovisual media is often used. For example, a power point presentation made by the CEO of the organization may also include a number of video or audio messages. Along with a number of audiovisual media, such presentations are amongst the most used media for interpersonal communication. It is a form of interpersonal communication media.

Interpersonal communication media refers to communication which occurs face to face. Examples of interpersonal communication media are staff meetings, interviews and training sessions.

Another example of interpersonal communication media is informal communication which is also called an organizational grapevine. An organizational grapevine refers to informal and unsupervised communication within the organization. It allows to rapidly disseminate information throughout the organization. Organizations need to use informal communication media to its advantage.


Marketing and Public Relations

Marketing is a functional area of management and refers to everything that is undertaken by an organization to market products and services.

Marketing and public relations functions are often confused. However, the two functions have different main objectives. Public relations function focuses on establishing good long-term relationships between organization and all internal and external stakeholders. It focuses on establishing a proper image and enhancing the company’s reputation. Marketing, on the other hand, focuses on acquiring customers and keeping them content. Therefore, public relations focus on all internal and external stakeholders of an organization and marketing focuses exclusively on customers of an organization.

Marketing and public relations functions often work very closely, especially in large organizations. Close collaboration of the two functions results in synergy benefits. For example, if the goal of the marketing department is the introduction of the new product to the market, the public relations department can work collaboratively with the marketing department by taking steps to obtain publicity with the help of press conferences and news releases. This way, the public relations department can arrange for a product to be announced by the media in a way other than advertisement. Publicity is usually perceived by stakeholders as more credible than advertisements.

Marketing is a line function and public relations is a staff function. Line functions refer to functions that perform primary activities which are necessary to achieve an organization’s objectives and which directly contribute to the bottom line, such as marketing and operations. Staff functions are those functions that support functions that perform primary activities. Examples of staff functions are public relations and human resources.

Overall, marketing focuses on selling organization’s products and services to customers and public relations focuses on selling the company itself to all internal and external stakeholders.



The Role of Public Relations in an Organization

Public Relations is a supporting function of the organization that purposely channels the ongoing effort of building, maintaining and enhancing acceptance and support of an organization by relevant internal and external stakeholders. The objective is to establish, maintain and enhance a positive image of the organization. It seeks continuous feedback from stakeholders and responds to such feedback.

Public Relations is both a proactive and a reactive function. It is proactive when function attempts to create and enhance organization’s reputation with the external stakeholders. It is reactive when function attempts to rectify any damage done to the image of the organization by an event or issue.

There were four major drivers which resulted in the increasing importance of public relations as a profession and as a function within organizations. One of the drivers was democratization throughout the world and the importance of communication in a democratic society. An evidence for democratization was the fall of the Berlin Wall and demolition of the USSR.

Another driver that led to the increasing importance of public relations as a profession and function within an organization is developments in communication technology which led to increasing transparency in the business world and increasing awareness of consumers and other stakeholders as well as level of their knowledge and power.

Other drivers were increasingly larger organizations and growing conflicts and changes among various groups within society such as women’s rights movements and animal rights movements.

The role that the public relations function plays in organizations is not consistent. In some organizations public relations practitioners play a minor role and have no input into management decision making. In other organizations public relations practitioners play a more important role, have an input into management decision making and the head of the public relations function reports directly to the CEO of the organization. Public relations also often are sub functions of another function of the organization, such as marketing.

It is suggested in the literature on public relations that for public relations to play an important role in the organization, the organizational structure has to be established in a way where there is a strong fit between public relations and the organizational structure. In other words, the organizational structure needs to allocate an important role for public relations.


Types of Media and Public Relations

A public relations practitioner uses various types of media to achieve its goals. Such types of media include the following:

Internal media

Internal media is used to enhance communication with internal stakeholders. Internal media includes online media, printed periodicals, interpersonal media and audiovisual media.

Online media includes such tools as emails, intranets, websites, electronic bulletin boards, internet chats, sms (cellular short messaging services), e-newsletters, social network sites and discussion forums. Online media is attractive due to its significantly lower cost (compared to printed materials, for example), flexibility (changes can be done in minutes) and speed (e.g. messages via email can be received almost instantly). With the increasing role that online media plays in internal communication, there is no reason to doubt that this media will be increasingly used by organizations.

Despite the availability and advantages of online media, many organizations still use printed periodicals to communicate with internal stakeholders. Many large organizations such as Deloitte and Toyota use magazines to communicate with employees. Bulletin boards with motivational messages, special announcements and pictures are common news boards in organizations. Some trade unions have their own printed publications. Printed newsletters are still common and convey information about current and future happenings associated with the organization and its employees. Annual reports, although often available in electronic format, are still available in print. Some employees have their own “underground periodicals” which are unauthorized publications prepared by employees themselves. In a sense, it is a grapevine in the printed format.

Interpersonal media refers to face to face communication. It is still the most important type of media that organizations can utilize to enhance communication with internal stakeholders. Any face to face interactions such as meetings, interviews and conversations are examples of interpersonal media. The grapevine is also an example of interpersonal informal communication media. It refers to interpersonal communication between employees through which news, information and rumors are spread throughout organization. Because employees usually believe information which is spread via grapevine and because information via the grapevine is spread extraordinarily fast, public relations practitioners should take grapevine communication into account during internal communication planning and should take advantage of this type of communication.

Audiovisual media refers to media which uses audio and visual elements such as videos, power point presentations and flip charts. With the advance of technology, organizations should utilize this type of media to enhance its’ internal communication.

Mass media

Mass media can be used by public relations practitioners for communication with external stakeholders. Mass media is further divided into press, broadcast and digital media.

Press includes magazines and newspapers. The advantages of press is that it allows to publish a more in-depth message as apposed to more limited messages that can be used in television or radio advertising. People often keep the articles from newspapers and magazines and pass it to their friends and family. Magazines and newspapers allow more time for the reader to comprehend the message as well as the added advantage that it can be read anywhere. Comparatively, messages provided via television or radios have to be comprehended instantaneously or it will be lost. Disadvantages of using the press include often less than objective reporting, the fact that people do not read every section of the newspaper or the magazine and the fact that total readership claimed by publishers is often overestimated as many copies will be discarded after a brief view over coffee or during a train ride to work.

Broadcast media includes radio and television. Television is usually a costly media. It is also more time consuming than many other alternatives due to the time it takes to negotiate and than produce the message. Messages that can be communicated via television are usually very limited due to the high cost and other factors. Moreover, the viewer cannot refer back to the message at their convenience, as is possible with press options. However, television provides for visual and audio elements which enhance the strength and comprehension of the message, along with other advantages.

Radio is less costly than television but does not provide visual elements and is limited to audio elements to enhance the strength of the message. Radio, as well as TV, can be used by illiterate people, which is an advantage if compared to press options discussed above. Radio also provides companionship and can be taken anywhere. It can be listened to while doing other things and many people listen to radio more in terms of time per week when compared to the viewing of television. Radio has similar disadvantages as television. Listeners do not have ability to refer to a message at their convenience or to have more time to comprehend the message, if necessary. Moreover, messages are usually limited due to cost and other factors.

Digital media can also be used by the public relations practitioner. It includes new media (not available previously) that the public relations practitioner can utilize. Digital media includes podcasts (audio messages distributed to interested individuals), online forums, blogs, video blogs, social networking sites and others. Digital media can be used for communication with internal and external stakeholders.

Private media is another media that the public relations practitioner can utilize when communicating with external stakeholders. Private media is media over which an organization has complete control and includes videos, seminars and presentations conducted by the organization, printed publications to be used with external stakeholders such as educational publications for selected external stakeholders.

Lastly, organizations can also utilize folk media for public relations purposes. Folk media refers to traditional media. It is very culturally oriented and includes gossip, puppet shows, festivals and theatre productions in villages and rural areas. Folk media are associated with communication with few individuals at a time, usually with the use of symbols and in their own language. It can be very effective in communicating with rural areas of countries.

Internal Stakeholders and External Stakeholders

Organizations have various stakeholders which must be taken into account to ensure the success and sustainability of the business.

Internal stakeholders are stakeholders who are within the organization such as employees, management and shareholders.

External stakeholders are stakeholders who are affected by organization or affect organization but are not part of the organizations. Examples of external stakeholders are customers, labor unions, suppliers, the community, media, potential customers and the federal, state/provincial or local government.

Stakeholders can also be primary, secondary and marginal. Primary stakeholders significantly affect the organization or are severely affected by the organization. Examples of primary stakeholders are employees and customers. Secondary stakeholders are generally less affected or have a smaller affect on the organization. Examples of secondary stakeholders can be media and government. Marginal stakeholders have the least affect or are least affected by the organization. Examples of marginal stakeholders can be the community which is almost not affected by organization at all.

Categorization of primary, secondary and marginal stakeholders can alter based on a specific situation. For example, if environmentally irresponsible actions of organizations lead to significant pollution of the environment and nearby communities experience negative externalities as a result than we can say that the community is no longer a marginal stakeholder but a primary stakeholder. This is especially true should the community choose to react.

Stakeholders can also be categorized into current (traditional) and future. Current stakeholders include all stakeholders which currently affect or are affected by the organization. Examples are employees and customers. Future stakeholders are stakeholders whom are likely to be affected or affect the organization in the future. Examples of future stakeholders are students and potential customers.

Further, the attitudes of stakeholders can be the basis for further categorization. Some stakeholders agree with actions of the organization and can be labeled proponents. Some stakeholders disagree with actions of the organization and can be labeled opponents. And some stakeholders are unconcerned with actions of the organization and can be labeled indifferent.

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Integrated Communication

Integrated communication is a strategic management system which is concerned with overseeing all messages sent by the organization and which have a purpose to develop a long-term and profitable relationship with all the organization’s stakeholders (internal and external).

Therefore, integrated communication is a broader concept and public relations is just one of the elements which is required for the success of integrated communication as a strategic management process of the organization.

Integrated communication concept evolved over time and developed into a full-blown strategic management process which focuses on two-way communication (dialogue with stakeholders) as apposed to one way communication (monologue).

Contemporary integrated communication processes within an organization focuses on all stakeholders. This is in comparison to earlier efforts when focus was only on customers.

Further, whereas before focus was on transactions, now the focus is on the relationship with stakeholders. A successful integrated communication process requires integration and collaboration of all functions. It is across-functions rather than a functional process. Contemporary integrated communication process is also very data driven since data enhances the performance of the process.