Management of Risk and decision making in Saudi Arabia

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The modern hospitality and tourism sector, like many other economies today, is prone to volatility and complexity. Therefore, no firm can brag of having complete understanding and accurate prediction of the background processes, in addition to anticipating the expected circumstances for its operations and the outcomes attributed to its decisions (Clyde-Smith, 2014). Since economic uncertainty is a recurring feature, commercial ventures are burdened with risks. Thus, the objective and inescapable dangers in the markets continue. Additionally, risks frequently continue to be fundamental elements of all economic activities.

It is also important to keep in mind that failing to consider operational planning and failure to account for operational planning tends to result in significant failure of the business. On the other hand, there is the necessity for the avoidance of the excessively prudent approaches to the markets besides the complete avoidance of risks because they may result in the loss of the waste of resources and thus loss of the potential benefits. Risk taking in certain situations plays a crucial role in the creation of opportunities for gaining benefits by the firm hence its general observation as a stimulant of both entrepreneurship and innovation hence a factor of economic progress (Hallowell, Molenaar & Fortunato, 2013).

Moreover, it is necessary to consider risk management due to its fundamental nature. The development in globalization coupled with the intense competition in the tourism market necessitates the professional diagnostic and active control of the risks evident in the hospitality sector. The aim of the paper is thus to discuss whether it is prudent for the hotel companies to adopt the risk management approaches in their decisions on opening offices in Saudi Arabia.

Risk Management

Risk control entails the process of identification, assessment, and managing of the imminent threats to the earnings and capital of a company. The risks or threats tend to arise from the range of sources that includes the financial uncertainties, accidents, natural disasters, strategic management errors, and legal liabilities (Ali & Shukran, 2016). There is an increase in the development of the risk management standards by the various organizations to ensure ease in overcoming some of the precarious situations that are typical of any business. The designed standards play a crucial role in assisting the institutions in the identification of specific threats, assessment of the unique vulnerabilities towards determining their risks and identification of the ways of reducing the impacts of the risks. Furthermore, these standards are crucial in the provision of guidelines on the means of implementing the risk reduction efforts in agreement with the organizational strategy.

For instance, the ISO 31000 principles play a crucial role in the provision of some of the basic frameworks for the risk management processes applicable to organizations irrespective of their sector or sizes. The ISO 31000 thus plays a crucial role in facilitating the likelihood of achieving the set objectives besides ensuring the improvement of the capability of an organization to identify the threats and opportunities besides ensuring efficient use and allocation of the resources for dealing with the risks. The ISO 31000 thus assists in the provision of the necessary guidance on the internal and external audit that is key in allowing the firm in comparing their risk management practices with the internationally approved benchmarks.

Risk control serves as an important element of the risk management procedure. The fundamental objective of the process remains to ensure increase in the level of and stability of the company’s value by the implementation of the various methods, tools, and techniques effective in the reduction of the negative consequences of the events (Menapace, Colson & Raffaelli, 2013). The tools, methods, and techniques thus play a crucial role in ensuring maximization of the potential benefits associated with the risk assumption. The firms’ exhibit a preference for the adoption of three stage based approach in the management of their risks.

The first step entails identification of the potential risks that the firm might face. The second phase involves assessment of the possible effects of particular risk factors on the performance of the enterprise while the third stage entails selecting and implementing the risk control and monitoring tools.

The risk identification step involves the identification of the potential sources of risks and the necessary circumstances for activating these risk factors. Furthermore, the stage includes determination of both the direct and indirect consequences of risk assumptions. The objectives of the stage are achievable through the adoption of a systematic presentation of the threats that tend to hamper the realization of the set objectives and the opportunities crucial for the achievement of these goals (Hampton, 2009).

The static presentation of the potential risks and opportunities deprived of the matrix system tend to exhibit little importance in such instances. Therefore, the succeeding stage in the risk management process is crucial due to its role in the measurement of the specific risk factors and determination of the allowable limits. The extension of the risk factors beyond tolerable limits results in the perceptional changes, which triggers the mitigation actions. The outcome of the assessment procedure thus results in the classification of the risk factors that is crucial in the identification of the risk associated with insignificant consequences that would thus be disregarded (Taylor, 2006). Furthermore, the outcome of the procedure facilitates identification of the material risks that necessitates the application of the control methods and some of the risks under observation whose attributable consequences at the time of assessment are insignificant but are likely to become material in future.

The risk controls usually occur at the strategic levels of the firm. The crucial aspects entail some of the risk factors whose manipulation is easier using the company’s available resources and in compliance with the objectives of the firm. There is the necessity for ensuring that the selection of the control methods and their implementation obtain the necessary support from the continuous flow of information regarding the events occurring within the firm and its environs concerning the accepted risk limits (Andersen & Schrøder, 2010).

The strategies adopted by the firms in dealing with the risks tend to fall under the risk handling approaches that can be defensive, cautious, or offensive. Realization of the defensive approach occurs through avoidance and isolation of trouble for the longest time possible. As such, the firms adopting this method tend to exhibit overly prudence and unwillingness to assume any risk. The company thus presents the preference for focusing on survival and actions that prevent failure. However, such companies tend to miss the opportunities that come along and further waste their resources (Gloy & Baker, 2002).

The manifestation of the cautious strategy occurs in the careful undertaking of some of the activities associated with risks. The risk-wary companies tend to focus on channeling its efforts towards the identification of the threats, application of necessary measures for mitigation of some of the consequences of adverse changes in the firm’s environment and insuring itself against the potential losses (Johnson, 2010).

Additionally, the companies exhibiting offensive strategies tend to show the will for undertaking risks to facilitate their gaining of the benefits. Such firms, therefore, exhibit the preference for anticipating the unfavorable turn of events and thus try to prevent it besides identification and exploiting the opportunities that come along through the active seeking of information and the focus on making efforts towards implementation of solutions that are useful in predicting the conditions of the business.

How to Use Risk Management

The firms tend to adopt various control approaches within the risk handling procedures. The risk control actions can be either fiscal or organizational. The corporate systems involve assumption of the sensible precautions aimed at either eliminating or reducing the possibility of the occurrence of a particular event or the focus on limiting the consequences associated with the materialization of certain risks (Hachicha & Elmsalmi, 2014). The financial control, on the other hand, entails securing the resources to facilitate covering of the effects related to the materialization of certain risks.

Risk Avoidance

The approach serves amongst the significant negative risk control methods. The approach implies to the firm undertaking particular activities in fear of the consequences of the risk. In some cases, the approach tends to exhibit effectiveness due to its role in allowing the decision makers gain peace of mind due to the confidence in the fact that the company is not likely to make losses (Paterakis, 2016). However, the approach results in missing of certain opportunities that would otherwise lead to the firm making profits. As such, the approach is thus considerably a curb on initiative and entrepreneurship.

Risk Reduction

The approach is more practical due to its role in facilitating the adoption of the preventive techniques crucial for the prevention of the occurrence of adverse events besides the assumption of the repressive approaches characterized by actions that is crucial in limiting the consequences of the potentially negative events. The basis of the prevention entails facilitating addressing of likelihood of materialization of the risks ex-ante. The repressive approach, on the other hand, entails ex-post application (Hain, 2011).

The important risk reduction measures adopted by the various firms include sensible safety precautions, staff training, and developing the security and indemnity procedures. The necessary the physical security precautions entail installing the fire alarms or burglar alarms and hiring of security personnel. Training of the staff, however, entails equipping the customer care with essential skills while safety and indemnity procedures involve assessment of the extent to which the business partners are credible besides the inclusion of the crucial indemnity clauses in the contracts and developing of contingency plans (Bernardel & Panizzolo, 2012). Furthermore, other compensation procedures relevant to the hospitality industry include the requisition of guarantees on payments and quality control.

Transfer Operations

The approach has similar characteristics to risk avoidance. Both methods tend to play a crucial role in facilitating avoidance of particular activities to promote elimination of risks. The actual difference between the approaches is, however, the fact that the risk transfer operations tend to ensure the assumption of the risk-burdened activities by another business unit (Sickel, 2017).

Risk Retention

The method entails bearing of the financial consequences associated with the materialization of the risk by the company. The approach comprises of two forms that include active or passive retentions. The passive retention refers to the unintentional retention of risk due to indifference, ignorance, or negligence and is hardly considered a risk management approach (Cokins, 2009). On the other hand, the active risk retention entails the intentional risk retention whereby the firm exhibits readiness to use the financial resources in covering the potential losses associated with the risk. The firm may thus resort to covering the losses through surcharging the present operating costs, the sale of assets, developing an insurance fund or arranging for loans.

Transfer of Financial Liability

Shifting the financial responsibilities is a critical risk management approach as it entails another party bearing the economic consequences of the risk materialization that an organization experiences (Pennings, et al., 2008). However, the risk bearer does so for a particular premium. The advantage of the approach is that it allows the risk transferors in gaining guarantee of access to the external resources to facilitate their covering of the potential losses.

Repartition

Repartition refers to the risk management approach that entails atomization or distribution. The approach serves as an intermediary to both the risk retention and risk transfer. The objective of the method involves spreading the financial consequences associated with the materialization of the risk over a group of organizations (Keul, 2009). An example of risk repartition entails the corporation structure whereby there is the parent company with some subsidiaries. There is the necessity for noting that the effects of the risk management approaches tend to be distributed in time.

Hospitality in Saudi Arabia

Hospitality entails the generous reception and entertainment of visitors, strangers, or guests. The importance gained by the hospitality sector in the Gulf Corporation Council (GCC) nations over the years is significant. Previously, the economies of such states substantially relied on oil production. However, there is notable shift attributable to the economic changes in the past decades forcing the governments to focus on non-oil sectors in generating revenue for the countries. The hospitality industry for instance substantially relies on tourism as evident in the large share of tourist spending in accommodation. Of the region’s entire accommodation that stood at more than 458k rooms by the end of 2013, Saudi Arabia accounts for the greatest share of about 63.6%.

Furthermore, the kingdom ensured addition of the largest number of hotel rooms between 2006 and 2013. The basis of the tourism activities in Saudi Arabia entails the holy cities of Madinah and Makkah that are in the western part of the kingdom. The hospitality market for both cities exhibit interrelation as the pilgrims tends to perform Hajj in Makkah before their travelling to Madinah to visit the prophet’s mosque. The tourism sector tends to serve as one of the most critical service industries that play a crucial role in supporting income generation, increasing export, and attracting investment hence its improvement of the living standard through improving the growth of the economy. The sector is expected to create more than 340 million jobs globally. Furthermore, the impact of the tourism sector on other sectors that includes hospitality, recreation, and travel is significant. The hospitality industry, which forms a crucial component of the tourism sector, thus plays a major role in the generation of both the direct and indirect economic development.

Source: Aljazira Capital, 2015.

The evident diversification of the Saudi Arabian hospitality industry is attributable to the subdued oil demand. Tourism that significantly relates to hospitality serves as one of the most promising sectors with its contribution to the growth of the GDP being the second highest in the kingdom. The value of the Saudi’s tourism industry as at 2015 was $21.33 B. the industry thus contributed 5.4% and 2.7% of the total non-oil GDP and total GDP respectively in 2015. The religious tourism plays a crucial role in the contributions as the reported contributions of the religious hospitality entail $ 5.68 B while more that 19 million pilgrims visited Madinah and Makkah in 2015. The figure is expected to rise significantly over the years to about 30 million pilgrims annually by 2025.

The two star and the minimum Hotels represents about 68.2% of the total number of hotels in Saudi Arabia with the three, five and four-star hotels representing 18.8%, 8.3% and 4.6% respectively. Some of the crucial statistical information drawn from the findings of SCTA entails the fact that the annual average room occupancy of the Saudi hospitality sector stood at 63% in 2011. The average annual bed occupancy rate, on the other hand, is 62.1% while the mean number of persons per room is two (Aljazira Capital, 2015). On the contrary, the average length of stay for the locals and foreigners stood at 3.1 and 4.3 nights respectively.

The occupancy rates of the rooms tend to reach maximum levels in the months of September, August, and November attributable to the Hajj season in November and summer holiday seasons in August and September. Furthermore, the hotels comprising of more than 300 rooms tend to achieve the highest room occupancy rates while those having between 150 and 299 rooms produce the largest number of selling rooms. The reports as well indicate that the non-Saudi tend to stay in the hotel establishments longer than the locals do.

Source: Tourism Information and Research Centre, (2012)

Besides the hotels, another crucial aspect of the hospitality industry entails the Furnished Apartment Units (FAU) that is crucial in facilitating accommodation across the kingdom. The number of the FAU according to the statistical information presented by SCTA in 2011 stood at 2026 units with the majority located in the Eastern and Makkah regions. The third class groups tend to constitute 65.4% of the total furnished units while the second class represents 34.3% of the total units in Saudi. The annual bed occupancy rate for the units is 57.1% while the annual occupancy rates for the apartments are 68.3%. Regarding the average lengths of stay, the Saudis and the non-Saudis tend to spend averagely 4.4 and 3.9 nights respectively. The anticipated growth in the hospitality sector in the following years implies the increased demand for the accommodation services. However, there is the need for acknowledging the fact that just as the other areas; the hospitality industry in Saudi as well is vulnerable to certain risks.

Risks in Saudi Arabia

The risks in the hospitality industry tend to relate to exhibit a relation to the sales factors. The fact that the market tends to show orientation towards the improvement of the profits necessitates that the firm focuses on ensuring the growth of its profits through the assumption of certain risky decisions. The significant risk that affects Saudi’s hotel industry entails the demand risk. The risk relates to the inherent attributes of the tourism market as evident in its relation to the independence of some of the related factors, space concentration, the tendency to time and remoteness from the places of delivery and consumption of services.

The fact that uncertainty couples the demand of tourism industry tends to pose significant bearing on the planning process of the hotel operations especially because the service capacity of the hotel industry tend to be fixed with the production and consumption of its services being inseparable. The industry thus has a seemingly unfavorable cost structure. The capacity of the hotel industry tends to exhibit inflexibility. The hotels have fixed number of rooms tend to face numerous issues in ensuring success in matching their supply to the available demand (Zadakbar, Khan, & Imtiaz, 2015). The sudden increase in the request tend to imply turning of some of the clients away and thus forfeiting the potential profits associated with their orders. A reduction in demand, on the other hand, tends to generate losses attributable to the high costs of maintaining readiness in performing the services and receiving the visitors.

Source: Wooller, 2015.

Analysis of the Necessity for Using Risk Management Methods on Decisions in Opening Offices in Saudi Arabia

The uncertainty that characterizes the demand for tourism tends to suggest the inflexible nature of the hospitality industry. The hotels have fixed number of rooms usually experience challenges in matching their supply to the available demand. The sudden increase in demand implies the forfeiture of the potential profits that presents risks to the business. There is thus the necessity for ensuring that the production and consumption activities in the hospitality industry are simultaneous. Furthermore, the performance of the services necessitates the active participation of both the producers and consumers and such occurs on the manufacturer’s premises (Henderson, 2006). The temporal and spatial inseparability implies the impossibility for the hotel operator’s capability to create stocks and ensure their effective physical distribution. Therefore, failure to sell the services involves the potential loss of the revenue and cannot be recovered.

Another crucial aspect of Saudi’s hospitality industry that requires attention entails the fact that it is coupled with the high ratio of fixed to variable costs. Consequently, the hotel occupancy rates tend to exhibit minimal bearing on the total costs. The average cost of sales thus greatly depends on the room sales. The hospitality industry thus exhibits high levels of vulnerabilities to the fluctuations in demand with even a small change in the volume of sales implying a significant shift in the operating income of the hotel. The performance stability of the hotel thus exhibits strong dependence on demand with the fluctuations resulting in adverse effects (Henderson, 2006). Given the specific features of the hospitality industry, the risk management efforts are thus of great significant in the prediction of the nature of demand and effects that it has on the level of sales. The potential investors thus need to consider the approaches to management of risks before their settlement on the exploitation of the industry.

Conclusion and Recommendation

The use of the entire spectrum of the risk control approaches is crucial in determining whether the firm is capable of accepting the risk to gain a certain amount of benefits. As such, the company is capable of ensuring avoidance of its sole focusing on the contingent perils but rather focus on the identification and exploitation of the available opportunities. Such approach is crucial in ensuring the efficient use of the resources besides improving the competitiveness of the hospitality industry. Following such path, however, necessitates that the decision maker realizes the fact that the risks do not imply to potential threats to the business neither does it refer to the flaws of the project that necessitates avoidance or reduction. The companies should thus ensure assumption of the risks with precision to ensure exploitation of the opportunities. There is thus the necessity for using the risk management approaches as main criteria for deciding on the opening office in the hospitality sector in Saudi Arabia.

References

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Aljazira Capital (2015). Saudi hospitality sector report. King Fahad Road, Riyadh 11455, Saudi Arabia

Andersen, T. J., & Schrøder, P. W. (2010). Strategic risk management practice : How to deal effectively with major corporate exposures. Cambridge, UK: Cambridge University Press.

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Hain, S. (2011). Risk perception and risk management in the Middle East market: Theory and practice of multinational enterprises in Saudi Arabia. Journal Of Risk Research, 14(7), 819-835. doi:10.1080/13669877.2011.571777

Hallowell, M. R., Molenaar, K. R., & Fortunato, B. R. (2013). Enterprise risk management strategies for state departments of transportation. Journal Of Management In Engineering, 29(2), 114-121. doi:10.1061/(ASCE)ME.1943-5479.0000136

Hampton, J. J. (2009). Fundamentals of enterprise risk management : How top companies assess risk, manage exposure, and seize opportunity. New York: Amacom.

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Pennings, J. M., Isengildina-Massa, O., Irwin, S. H., Garcia, P., & Good, D. L. (2008). Producers' complex risk management choices. Agribusiness, 24(1), 31-54. doi:10.1002/agr.20145

Sickel, J. (2017). Taking on travel risk management. Business Travel News, 34(6), 10-14.

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February 09, 2023
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