The present-day business environment is highly volatile, and the trends and factors that constantly emerge at both national and international levels can substantially affect companies’ economies and performance. Thus, evaluation and prediction of environmental changes and timely response to them in a way that prevents loss and maximises opportunities to profit and growth are important, which makes the implementation of an integrated risk management system pivotal. Acknowledging this, one of the leaders in the global oil and gas industry, Orpic, has developed a comprehensive enterprise risk management (ERM) framework (Appendix A) and is currently working towards its implementation.
The creation of the ERM in Orpic was associated with the establishment of the internal Risk Management and Insurance Department (RMID) that has a purpose to align the company’s strategic goals with traditional risk management practices, including risk assessment and response. The initiative already differentiates Orpic from its rivals since the majority of enterprises in the oil and gas sector normally focus on the management of either engineering or financial risks alone. However, the major challenge that the firm, in general, and the RMID, in particular, face at the present moment is the development of an organisation-wide culture that would support the realisation of the ERM across disparate levels and units.
Traditional risk culture framework comprises four basic elements. They are risk leadership, activities targeted at the establishment of the right environment, promotion of risk transparency through open communication, and realisation of incentives aimed to motivate employee compliance with ERM (Thai Union Group PCL, n.d.). Just like any other type of culture, risk culture integrates “soft” elements – behaviours, values, and various cultural symbols, – which differ it from traditional risk management systems that mainly focus on such “hard” aspects as infrastructures, policies, and governance (Kells, 2014).
Nevertheless, risk culture is inseparable from the hardware of risk management. Moreover, as stated by Abuzarqa (2019), in some industries, cultures go far beyond norms and employees’ beliefs and capture operational elements: HR practices, strategic resource allocation, environmental analysis, and so forth. In this way, culture can directly impact both internal and external operations and affect organisational performance to a significant extent.
The abovementioned observations indicate that the integration of soft cultural aspects of risk management with the hard ones can influence Orpic’s activities favourably. An organisational culture that considers risk management alters leadership, strategies, products and services and, besides, modifies the relationships with external stakeholders (Abuzarqa, 2019). Additionally, cultures that view risks as positive phenomena and explore them in order to stimulate improvement, innovation, and creativity may allow companies to outperform their rivals (Bozaykut-Buk, 2017).
Based on this, the present report will aim to evaluate the role of risk culture and ERM on disparate aspects of Orpic’s performance, including people, finance, marketing, strategy, and operations management. To attain this objective, a set of different analysis tools, models, and theories will be used and, among them, the transformational leadership theory, Maslow’s hierarchy of needs, cost-benefit assessment, PESTLE, and 4P’s of marketing. The results of the analysis will demonstrate why and how the realisation of risk culture in Orpic will lead to an improvement in its value chains, as well as efficiency, profitability, and growth.
Another section of the analysis will be dedicated to the evaluation of the risk culture implementation process from the project/change management perspective. To do so, Kottler’s eight-step change management model will be utilised as a theoretical framework. As part of the discussion, it will be shown how changes in leadership, HR management, and strategic planning may be linked to distinct steps in the change process.
The rest of the paper will be dedicated to a critical review of literature, a summary of findings and provision of recommendations. As part of the review, some high-quality scholarly and professional sources will be evaluated, and the evidence retrieved from them will be compared and contrasted to the results of the conducted research on Orpic’s risk management approach and the challenges the company currently faces. As an outcome of the critical appraisal, the distinctive features of the carried-out study will be revealed along with its contribution to the existing body of literature.
Analysis
People
The implementation of organisation-wide risk culture will influence internal stakeholders at Orpic to a substantial degree. It will affect the overall approach to leadership and impact employee behaviours and performance in a way that stimulates creativity and innovation. To demonstrate this, the role of leadership and HR practices in risk culture development will be discussed in this section.
Risk leadership
As the risk culture framework proposed by the Thai Union Group PCL (n.d.) indicates, risk leadership is a key towards its successful promotion at the workplace. A risk leadership model developed by Maladzhi (2015) shows that to stimulate risk-taking behaviours among employees, leaders must themselves be risk-takers and should aim to foster entrepreneurial and enquiring culture (Appendix B). The model suggests that risk leadership is not only about the identification and prevention of environmental threats to the business but more about the view of risks as opportunities and their use as a way to induce innovation and increase competitiveness.
Transformational leadership and the hierarchy of needs
Clearly, the promotion of entrepreneurial values and encouragement of curiosity and unconventional ways of thinking among workers requires effective communication methods. It may be argued that the transformational leadership framework is more conducive to the successful fulfilment of this task. Steinmann, Klug, and Maier (2018) distinguish four major activities that transformational leaders routinely seek to perform.
They serve as role models for employees, strive to develop followers’ awareness of significance and value of formulated goals, inspire them to meet collective and organisational interests by articulating a clear vision and provide workers with opportunities to fulfil their higher-order psychological needs (Steinmann et al., 2018). The latter activity is in line with the principles of Maslow’s hierarchy of needs (Appendix C), which implies that to stimulate the adoption of positive behaviours among employees, managers must ensure that the company’s culture and HR practices meet different interests of workers.
According to Jerome (2013), to enhance employee performance, the company must provide safe work environment (safety needs), generate the atmosphere of acceptance and performance (social needs), recognise workers’ achievements through rewards and praises (self-esteem needs), and gives them a chance to realise their potentials (self-actualisation needs). In other words, by linking risk culture values with HR and leadership practices in a way that creates a favourable and supportive workplace environment, Orpic will eventually promote desirable risk management behaviours among workers and attain such outcomes of risk-taking as innovation.
Current situation at Orpic
It is valid to say that Orpic’s leaders already aims to align individual interests with the organisational ones. The management recognises the efforts of high-performers and by rewarding them and offering opportunities for career growth (Orpic, 2015). Besides, Orpic views a well-developed health and safety environment and people empowerment as two of its strategic pillars (Orpic, 2018). The company raises employees’ awareness of process safety, encourages them to comply with safety standards and engages workers in training and job-related education (Orpic, 2018). Thus, some elements of the environment at Orpic already allow meeting the diverse psychological needs of individual employees, including the needs for safety and self-esteem.
At the same time, there is no evidence that the company’s management implements the risk leadership model, whereas the components of the transformational leadership can be applied in Orpic only to a limited extent due to its cultural background, as well as the size and the structure of the organisation. It is valid to say that Orpic’s management employs a classical leadership model in which employees have limited authority and decision-making power (Brungardt and Crawford, 2005). This leadership type is associated with top-down communication and reduced worker flexibility in terms of task completion (Brungardt and Crawford, 2005).
Classical leadership is efficient in controlling performance yet it may affect motivation negatively (Brungardt and Crawford, 2005). Thus, to promote risk-taking behaviours and values among employees, a change in communication mode and managerial approaches at Orpic is required.
Financial Performance
Effectively implemented ERM can potentially have a favourable impact on the financial performance of Orpic. ERM supported by a well-integrated risk culture provides “a holistic approach to identifying, assessing, managing, monitoring and prioritising responses to all critical risks across the organisation in a manner that supports business strategies and plans” (Investors in Risk Management [IIRM], 2015, p. 7). Thus, it allows preventing financial loss and maximising financial gains either through the cost-saving activities or a timely capturing of opportunities. The overall value of organisation-wide, holistic risk culture can be analysed by using the cost-benefit approach.
Costs and benefits of risk management culture
According to IIRM (2015), direct costs of risk management are associated with the maintenance of practices and the general level of the ERM system maturity. At the same time, indirect costs are linked to “increased focus on risk management activities” (IIRM, 2015, p. 7). As for the benefits of risk management, they include the optimal balance between the realisation of strategic opportunities and minimisation of losses, better corporate governance, enhanced decision making, greater efficiency in attaining objectives and goals (IIRM, 2015).
Overall, it means that direct costs may include human and capital resources required to implement ERM and risk culture – wages, employee training expenses, necessary technologies, and so forth, – whereas the indirect ones primarily relate to the time spent on the management of risks. It is also implied that at the beginning of the ERM implementation, costs are usually more substantial than at the stage when the system has become more advanced and the company has gained more experience in operating it.
The value of ERM and risk culture at Orpic
The very fact that Orpic is still in the process of implementing its ERM and developing the risk culture indicates that risk management is not very mature in the company. At this phase, the firm bears direct costs associated with employee training on risk assessment and essential communication tools (Orpic, 2016). Indirect costs are linked to time spent on the performance of assessment activities and communication of risks across organisational levels.
Although there is no hard evidence regarding the benefits of ongoing ERM integration at Orpic, some of them may include the reduced amount of losses due to job-related injuries and consequent employee absenteeism and well-captured investment and development opportunities, such as the launch of the Liwa Plastics project that is expected to contribute to the development of the national economy (Liwa Plastics project, 2019). It is valid to conclude that the more mature Orpic’s ERM will become, the greater the value it will provide through both cost reductions and maximisation of benefits.
Strategy and Operations Management: PESTLE
As it was mentioned in the previous section of the paper, the implementation of ERM and organisation-wide risk culture have the potential to enhance the strategic decision making at Orpic. The holistic approach to risk management allows evaluating different types of risks that disparate company units may face and develop appropriate comprehensive plans of responding to those threats (IIRM, 2015). The PESTLE analytical framework gives an insight into the variety of risks that the holistic ERM will help Orpic to address. The following six paragraphs will briefly discuss the major macro-environmental trends that currently put Orpic at risk and demonstrate how the introduction of the risk culture and ERM will increase the firm’s strategic and operational competitiveness.
Political
The Middle East region has a high incidence of social-political unrest and terrorism, therefore, Orpic mainly faces external political risks. By threatening Oman’s neutral position, the escalating conflicts in the Gulf region can impact Orpic’s international affairs adversely (Goldsmith, 2018). The ongoing monitoring of the political situation will allow the company to protect its assets and reduce substantial financial loss since it will provide data for the appropriate choice of mitigation techniques and their timely implementation (Blomquist, 2015). Considering that the majority of enterprises usually do not go beyond forecasting political risks (Blomquist, 2015), Orpic’s engagement in the development of strategies aimed to manage political factors will provide it with an advantage.
Economic
Economic risks that Orpic faces are linked to its operations characteristics and general market uncertainty. Yanting and Liyun (2011), “petroleum operations have a long cycle, wide geographical distribution, a large number of employees, and a large amount of funds,” so the firms in the industry frequently encounter such risks as “financing, fund turnover, interest and exchange rate in the course of petroleum operations” (p. 2332). At the same time, fluctuations in fuel and workover material prices can increase operations’ costs and decrease their effectiveness (Yanting and Liyun, 2011). It means that operations management and economic risk management are inseparable. By increasing risk awareness and providing tools and environment for the active control of diverse risks simultaneously, ERM will allow Orpic to use its funds more efficiently while increasing operational effectiveness.
Social
According to Wagner and Armstrong (2010), international stakeholders are demanding higher levels of social performance from the oil and gas industry nowadays. It means that disrespect to human rights, poor revenue management, inadequate health and safety regulations, corruption, and noncompliance with ethical standards not only can adversely impact Orpic’s image but also affect its financial performance by making it less attractive to investors, partners, and customers. Conversely, the implementation of the holistic management of social risks is closely linked with good governance and corporate social responsibility practices (Wagner and Armstrong, 2010). Their enhancement as part of ERM will help Orpic to show itself as a responsible corporate citizen and improve its public image.
Technological
As the interest in renewables grows, cleaner technologies that allow reducing the rate of emissions and pollution are the major trend in the fossil industries (Yudha et al., 2018). Besides, there many emerging and advancing technologies that may disrupt traditional ways of performing such tasks as manufacturing, transportation, and data analysis. They include automation, artificial intelligence, quantum computing, cloud computing (Prevett, 2018; Prevett, 2019).
The consideration of new technological trends as part of ERM will allow for timely integration of disruptive technologies into internal operations at Orpic, increasing their efficiency and reducing overall costs. Moreover, by commencing to use those technologies earlier than its rivals, the company can become an innovation leader in the industry, whereas a failure to do so may result in the competitiveness decrease.
Legal
A few examples of laws and regulations that enterprises in the oil and gas industry must consider are concerned with occupational safety and health, environmental sustainability, intellectual property protection, and financial accounting (Yudha et al., 2018; International Labour Organization, 2016). Orpic should strive not only to demonstrate impeccable compliance with all of them but also track even minor changes in different laws to adjust own behaviours timely.
Noncompliance with either domestic or international laws and standards reduces competitiveness, whereas by acknowledging regulatory mandates and following them, organisations may foster greater efficiency and innovation while meeting the needs and interests of both the corporation and society (Bird and Park, 2017). Since risk culture aims to promote impeccable compliance with ERM that, in turn, aims to integrate risk monitoring with different organisational practices and operations, including R&D and governance, it most likely will help Orpic to fulfil those strategic objectives more efficiently.
Environmental
Worldwide, consumers demand greater levels of environmental protection and a shift towards more sustainable and green practices from diverse companies (Conner, 2015). At the same time, the oil and gas firms are considered to be among the most polluting and, due to this, an increasing number of stakeholders consider that the industry has no future (Vaughan, 2019). It means that besides managing actual and potential negative impacts of its operations on ecology, Orpic also needs to manage risks associated with the negative perceptions of the industry and the company held by international investors and policymakers who may favour alternative energy sources more than fossils. It is valid to say that a successful application of ERM and risk culture will help Orpic to integrate the management of these issues with corporate sustainability practices, compliance with environmental regulations, and public relations strategies.
Effects of ERM and risk culture on operations management
Environmental trends identified through PESTLE analysis affect both strategic and operational management decisions. Political tensions, technological changes, financial instability, and other possible problems in the business context can either decrease product demand or/and the ability to supply products (Giunipero and Eltantawy, 2004). Risk analysis thus assists in detecting uncertainty in supply continuity, risks of transportation disruptions and financial instability that could undermine supplier/partner capacities. In this way, by using ERM well, Orpic will avoid financial losses and reputational damage.
At the same time, with the integration of the risk culture, Orpic will be able to undertake a more proactive approach to risk management in the sphere of supply chain and procurement. In other words, seeing risks and environmental changes as opportunities, the company will be able to increase the competitiveness of its supply chain: reduce transaction costs, enhance partnerships, and optimise the use of assets (Giunipero and Eltantawy, 2003). Innovation-oriented procurement and supply chain management serve to sustain the economic development of organisations in the long run (Kalvet and Lember, 2010). In this way, the alignment of general strategic decisions with holistic risk analysis and operations management will help Orpic to improve its performance in terms of profitability and brand quality.
Marketing
Risk assessment is an essential part of marketing strategy development. To form an effective marketing strategy, companies must evaluate such environmental trends as primary demand and market share and must control all the core elements of the marketing mix (Cook and Page, 1987; Išoraitė, 2016). By using the 4P’s of marketing model, it is easy to demonstrate how ERM and risk culture can impact distinct areas of marketing focus at Orpic, which will be done in the following paragraphs.
Product
The main marketing aspects of products are design, utility, technology, value, quality, convenience, brand, and guarantees (Išoraitė, 2016). The integration of risk culture and ERM that involve a comprehensive assessment of risks will allow maximising these product features. For instance, when managing technological trends, Orpic is likely to advance its oil and gas treatment technologies, upgrade its IT systems, equipment and plants to meet high production standards. As a result, the product quality will improve and will meet consumer needs better. It is valid to say that through the exploration of ways to improve product features as part of holistic environmental analysis, ERM will allow adding and changing product characteristics in a way that exceeds consumer expectations.
Price
ERM will affect Orpic’s product pricing by reducing costs and enhancing product quality. As the fuel refining costs decrease due to an effective response to technological trends, Orpic’s final product price can also become lower. However, an increase in petroleum quality can make product price higher without compromising the demand because consumers are usually willing to pay more for higher-quality products (Zeithaml, 1988). Thus, regardless of the chosen approach, the ERM used to inform marketing and pricing will result in greater profits and cost-savings.
Place and promotion
The holistic ERM will help Orpic to integrate product placement and promotion activities with other components of the marketing mix, as well as its overall strategic goals and orientations. It will allow not only selecting the best and the most cost-effective promotion and distribution methods but also communicate the right messages to potential consumers and partners in a way that increases their trust and loyalty (Marakanon and Panjakajornsak, 2017). Thus, ERM integrated into Orpic’s marketing activities will help to both maintain and expand the customer base (Marakanon and Panjakajornsak, 2017). Besides, it will assist in capturing new placing and partnership opportunities as a result of enhancing various product values and characteristics.
Change Management
The development of an organisation-wide risk culture implies substantial changes in employee behaviours, corporate value systems, and overall approach to the work process. Thus, the task requires effective change management that can be done by using the eight-stage change model developed by John Kotter (Appendix D). This framework is selected to explain the implementation of risk culture at Orpic mainly because it supports the assumption about the necessity of establishing a supportive environment through HR practices and leadership for easier adoption of risk culture, as well as the integration of different focus areas of ERM into the corporate strategy and operations. The following paragraphs will demonstrate the links between the evidence that was introduced in the previous sections of the paper and Kotter’s eight change management stages.
Sense of urgency and guiding coalition
Before building a commitment to holistic risk management, it is essential to promote understanding of the practice and its benefits among various internal stakeholders. For this reason, Kottler’s model suggests convincing managers that status quo and a traditional approach to risk management are dangerous and assemble a group of professionals who would lead the change process (Stragalas, 2010). It is valid to say that these two steps are realised in Orpic to a substantial degree since RMID (a guiding coalition) is already endowed with the power to lead the endeavour. The creation of the unit signifies that top management is aware of the potential advantages of ERM and risk culture. However, there is still a need to stimulate subordinates’ awareness and motivate them towards the accomplishment of the change.
Transformational leadership, vision, and communication
To transform employee behaviours and mindsets, Kotter recommends to target individuals’ emotions and stimulate their intellect (Stragalas, 2010). Thus, his model emphasises the role of a clear and inspiring vision and communication in employee motivation. One of the core components of transformational leadership is inspirational motivation (Appendix E), which not only refers to the communication of a vision for change but also the development of an optimistic attitude towards the achievement of future goals and the creation of a sense of purpose in employees (Korejan and Shahbazi, 2016).
Besides, another component of transformational leadership, individual consideration, indicates that employees are actively involved in the communication process and can provide their feedback, which is important for the removal of barriers towards change management (Stragalas, 2010). Thus, a shift from a classical leadership style towards a more progressive and flexible one can indeed help Orpic’s management to implement the risk culture more effectively since it provides tools for the minimisation of psychological resistance to change.
Risk leadership, HR management, and employee empowerment
To empower employees to act in accordance with the values embedded in risk culture, it is pivotal to promote innovation and risk-taking in them and develop their competence (Stragalas, 2010). Thus, the empowerment step in Kotter’s model requires the implementation of both effective leadership and HR practices. In this situation, it is appropriate to combine trust-building associated with transformational leadership with such elements of risk leadership model as high-gain risk-taking, entrepreneurial nature, and enquiring culture because the latter can foster the elimination of internal factors inhibiting the change and interfere with the free flow of ideas that result in greater innovation (Maladzhi, 2015).
The same can be said about HR practices because they ensure that resources needed for the cultural transformation at Orpic, including talents and knowledge sharing systems, are available. HR management is responsible for the creation of short-term wins and consolidation of change as well since they link individual achievement with rewards.
Strategy development and institutionalisation of new approaches
It would be wrong to presume that only leadership and HR management are required for efficient change actualisation. The planning and implementation of transformation should take place at the strategic level since risk culture must be well-integrated into diverse Orpic units. As such, institutionalisation is defined as “the process of embedding learning that has occurred by individuals and groups into the institutions of the organization including systems, structures, procedures, and strategy” (Wiseman, 2007, p. 1114).
In other words, risk assessment and innovation practices, two-way leader-subordinate communication, entrepreneurial culture promotion, HR practices encouraging risk-taking and risk prevention practices, and other behavioural and operational changes that have been proven to lead to desired outcomes in terms of ERM implementation at Orpic must become incorporated into its organisational strategy with the holistic risk management as its core element.
Besides, the institutionalisation of such a strategy means that it must become internalised as an additional process in the company’s structure and extensively present in the overall decision-making process (Sergio, 2011). Considering that in order to implement ERM and risk culture effectively and maximise their favourable impacts it is essential to ensure organisational openness, dispersed knowledge creation, decentralised communication, and flexible task definition (Sergio, 2011), the overall strategy planning aimed to integrate ERM-related activities at Orpic should primarily target at the development of a more organic organisation type.
As it stands now, Orpic is highly hierarchical, rigid in terms of task specialisation and performance, has a vertical communication flow and top-down management of the majority of workplace issues, which makes it a mechanistic organisation (Sergio, 2011). Thus, the very ability of the company to manage change and uncertainty efficiently and timely will depend on its willingness to manage structural barriers strategically.
Literature Review
ERM Impacts on Organisational Performance
ERM is a current trend and a greater number of companies are either integrated it or are in the process of implementing it nowadays due to the potential benefits that this risk management approach may offer. However, research on the effects of ERM is rather scarce and, as noted by Bromiley et al. (2015), recent studies primarily investigated its role in the fields of accounting and finance, whereas the links between the holistic risk management and such areas as strategic management and organisational change remain underexplored. Thus, there is no clear evidence that ERM indeed enhances the strategic performance of enterprises and facilitates the attainment of their missions and goals.
However, the results of a study on managers’ perceptions of the effectiveness and utility of ERM in a banking institution in Kenya revealed that ERM boosts performance and supports business sustainability (Virdi, 2016). Besides, the study by Arnold et al. (2011), demonstrated that enterprises with stronger ERM systems usually respond to changes in laws and regulations easier and at lower costs. Between the two identified studies, the one by Arnold et al. (2011) provides higher-quality evidence because it employed a more rigorous research design and used quantitative, statistical methods to analyse the data.
Therefore, the findings obtained by Arnold et al. (2011) are characterised by a higher level of objectivity compared to the results acquired through qualitative methods and the case study design implemented by Virdi (2016). However, both of the studies have a narrow focus on the finance industry and financial reporting, which verifies the observation made by Bromiley et al. (2015) regarding the scarcity of research evidence on the effects of ERM in terms of strategic management.
Still, some research studies suggest that ERM can indeed have a positive effect on organisational performance and strategy. In their review article, Esa et al. (2018), indicated that the findings obtained by Sara et al. (2016) who explored ERM impacts on performance in Malaysian firms revealed that the holistic risk management provides opportunities for more informed decision making and a high degree of accountability. However, their conclusions were contradictory to the results in previous research (Esa et al., 2018). Thus, there is a need to investigate the issue in the future.
Appraisal of Theories
Regardless of the availability of concrete evidence, the analysis conducted in the present paper was based on the assumption that ERM and risk culture can improve Orpic’s strategic decision making and overall performance. The evaluation of various aspects of the company’s activities was carried out by using such tools as PESTLE, cost-benefit analysis, and 4P’s of Marketing that allowed revealing which advantages Orpic may gain by applying holistic risk management principles to the sphere of financial assessment, strategic and operational management, and marketing. These tools and models will be briefly described and appraised in the following sections of the paper.
Cost-benefit analysis
The cost-benefit assessment is frequently utilised as a part of risk management. The tool allows evaluating the weaknesses and strengths of different solutions systematically and contrasting them in terms of expenses, labour, and time (Bialas, 2016). Noteworthily, the cost-benefit analysis considers not only quantitative data but the qualitative as well, which means that both direct and indirect financial impacts are taken into account during the assessment (Bialas, 2016). As a result of such a comparison, the best solution can be easily identified.
Taking into account the fact that the cost-benefit assessment tool is meant to evaluate different types of numerical and non-numerical information and take into account a plethora of factors that can influence the performance both directly and indirectly, its main disadvantages are the complexity and the necessity to invest a lot of time in the development of an analysis framework and the evaluation process itself. Nevertheless, the tool allows for a comprehensive overview of issues and a flexible approach to the assessment of costs and benefits. Therefore, it can be applied to multiple business and organisational contexts.
This feature made the instrument suitable for the identification of costs and benefits associated with the realisation of ERM and risk culture at Orpic. As such, the evaluation of risk culture through cost-benefit assessment is not particularly common in the academic field, but the analysis in the paper was not entirely original and was conducted by using the framework developed and introduced by IIRM (2015) experts in their guide to ERM.
IIRM’s explanation of the links between better governance and ERM implies that the cost-benefit framework can help to evaluate the potential impacts of risk management on various stakeholders. It is valid to say that managers, shareholders, and stakeholders frequently have disparate perceptions of risks and they are often in conflict among each other. It means that while the cost-benefit analysis of Orpic’s ERM was carried out in the paper from the perspective of strategic management, ERM implementation, and workplace safety, the tool can be used to review gains and expenses that the company may bear as a result of ERM effects on customers, local communities, and other relevant parties. This feature makes the cost-benefit assessment a valuable tool for a comprehensive evaluation of direct and indirect, immediate and long-term financial and economic risks.
PESTLE analysis
The tool allows investigating political, economic, social, technological, legal, and environmental factors and, thus, is meant to facilitate the comprehension of the dynamics of multiple problems that industries may face at any point in time (Yudha, Tjahjono and Kolios 2018). Overall, PESTLE helps to identify the major characteristics of the external environment pertinent to a particular company or an industry in general. However, this analysis framework may be regarded as too broad, whereas its scope as too limited.
The tool did not allow a detailed evaluation of such environmental and market-specific factors as competition, the threat of substitutes, and others. Therefore, for a more precise, objective, and in-depth analysis of risks, it is always better to combine PESTLE with other frameworks, for example, Porter’s Five Forces. Moreover, as noted by (Chao, Peng and Nunes, 2007), “there is an almost unlimited number of variables that may emerge from each [PESTLE] dimension,” which makes the prioritisation of variables a pivotal task (p. 230).
For instance, in the analysis section of the present paper, the risks associated with the strongest perceived impact on strategic decision making in the company were discussed because by focusing on them, it was possible to demonstrate the value of ERM in terms of their management. Overall, the findings indicate that PESTLE was appropriate for the context of the given assignment and it made a valuable contribution to the discussion of the strategic importance of ERM.
4P’s of marketing
Marketing mix traditionally comprises four tools that allow achieving a desired response in the target consumer group/market and they are conventionally called the 4P’s of marketing: Product, Price, Promotion and Place (Išoraitė, 2016). The idea behind the model is very simple – the company decides on the proportions and features of every P and consequently mixes them into a single integrated marketing strategy, depending on the overall business long-term goals and short-term orientations (Goi, 2009). Considering this, the chosen framework allowed identifying approaches that Orpic could use while designing distinct elements of its marketing strategy with the help of ERM and revealed that the holistic risk management can alter the company’s marketing strategy, not just in one but several alternative ways.
While the 4P’s framework dominated the market for a significant time, it has been criticised by contemporary scholars and practitioners. The main concerns with 4P’s are summarised in the articles by Möller (2006) and Goi (2009) and include the lack of consideration of consumer behaviours and their changes, primary focus on internal company processes, and overly simplistic nature of the tool that has the main purpose of merely drawing managers’ attention to specific tasks. Besides, the model fails to capture stakeholder relationship-building activities and implies that firms sell products in isolation whereas, in reality, they are often marketed as part of lines and brands (Möller, 2006; Goi, 2009).
Since in the present paper the 4P’s of marketing were utilised in the context of strategic risk management and with the goal of demonstrating the role of ERM in marketing, the identified flaws of the framework were overcome to some degree and did not affect the analysis findings adversely. In real-life situations, it may be advisable to implement the model along with the preliminary environmental analysis as well and with the focus on consumer behaviours and relations.
Main ERM Success Factors
It is worth mentioning that a company’s ability to capture the potential favourable impacts of ERM and risk culture on its performance largely depends on various internal and external factors. Therefore, the question about what makes ERM strong and what defines its success is of great importance, and the present research paper aimed to explore this issue as well. Overall, there are several key determinants of effective ERM implementation. They are leadership, strategy (mission and vision), HR, communication, organisational infrastructure, overall orientation towards innovation, staff competence, internal and external knowledge sharing, and employee involvement (Schoenfeld, 2013; Ahmed and Manab, 2016).
However, the presence of risk culture is identified as one of the most significant success factors in holistic risk management (Schoenfeld, 2013; Ahmed and Manab, 2016; Gandz, Seijts and Seijts, 2013). As stated by Schoenfeld (2013) and Gandz et al. (2013), leadership, and especially a leader’s attitude to subordinates, his or her manner to communicate with them, and the willingness to recognise their contributions, play a crucial role in the establishment of risk culture in a company. This evidence verifies the assumption that the shift in the approach to leadership and HR management will facilitate the promotion of organisation-wide risk culture at Orpic.
Appraisal of Theories
The problems of employee communication and empowerment through leadership and HR management were analysed by using the transformational leadership framework, Maslow’s hierarchy of needs, and Kotter’s eight-step change management model. They will be critically evaluated in the present section of the literature review.
Transformational leadership
The theory of transformational and transactional leadership was created as a result of a historical leadership analysis by a political scientist, James McGregor Burns (Korejan and Shahbazi, 2016). He revealed that transformational leaders usually seek to transform organisations by delivering inspirational messages to their subordinates and addressing the psycho-emotional aspects of human behaviours.
In contrast, transactional leaders focus on maintaining positive relations with subordinates by utilising rewards and punishments (Judge and Piccolo, 2004). Thus, transformational leadership is considered to be the most appropriate for managing organisational change because it helps to overcome employees’ resistance to change through inspirational motivation, idealised influence, individual consideration, and intellectual stimulation (Korejan and Shahbazi, 2016).
According to Korejan and Shahbazi (2016), these key components of transformational leadership result in greater employee commitment, creativity, and self-actualisation. However, the meta-analysis of 87 studies conducted by Judge and Piccolo (2004) made it clear that transactional leadership is as effective in promoting employee motivation and may be even more effective in stimulating job satisfaction than transformational leadership since it always aims to link achievement to rewards. Thus, the main disadvantage of the transformational leadership theory is that it does not consider the role of contingent reinforcement in the development of employee commitment and performance.
Besides, while it seems that transactional leadership style is associated with authoritarian attitudes more than the transformational one, it may not always be the case. Dhakal (n.d.) states that the latter style may induce a higher risk of power abuse because leaders adhering to this style “motivate people through strong emotional aspects regardless the effects on followers” (p. 16). It means that even though there are a plethora of positive examples of transformational leaders, by using charisma, some individuals may manipulate their followers in a way that harms the latter and the community in general. Therefore, to avoid this, the idealised influence of a leader must be based not merely on the characteristics of the desired behaviour they want to develop in their subordinates but on moral characters and ethics as well.
Overall, the value of the transformational leadership and its outcomes will depend on an organisational and a leader’s mission. It is also valid to say that it is possible to maximise the benefits of the transformational leadership style when combining it with some features of the transactional leadership in order to not only target the emotional aspect of motivation but also make sure that positive behaviours are recognised and appropriately rewarded. For this reason, when analysing the implementation of risk culture at Orpic and the impacts of the workplace environment on people, it was emphasized that leadership should be supported by the right HR practices. As noted by Avolio (1999), “transactions are at the base of transformations” (p. 37). In other words, contingent rewards allow meeting employees’ basic expectations associated with the completion of certain tasks, whereas transformational inspiration assists in motivating them to move beyond those expectations and excel.
Abraham Maslow’s hierarchy of needs
The theory was included in the analysis section of the paper because it allows exploring the issue of how organisational culture and workplace environment may impact employees either favourably or negatively in-depth. Overall, the Maslow’s model suggests that every kind of lower-order needs, such as immediate physiological needs and safety needs, is the most basic and, without satisfying them, a person will likely not be interested in fulfilling higher-order psychological needs, including love, esteem, and self-actualisation (Priddy, 2017).
Thus, it may be difficult to motivate a person to behave in a certain way by providing them with opportunities to attain greater respect and self-actualisation when the basic physiological needs are not met. However, when those basic needs and interests are satisfied, the absence of meaningful relationships and activities in one’s life become more apparent (Priddy, 2017).
First of all, these observations imply that unsatisfied needs may be used by employers to drive employee motivation. For instance, by providing the opportunities to develop a greater sense of achievement and actualise oneself through career growth, it is possible to encourage individuals who are interested in those things to alter their behaviours and perform better. Study findings reveal that abilities to meet different-level needs of employees in a workplace setting can indeed foster greater job satisfaction, commitment, and motivation to fulfil firms’ missions and visions (Jerome, 2013; Steinmann et al., 2018). However, Maslow’s model fails to take into account the differences in individual interests.
As the study of 519 workers in distinct professional fields revealed, the order of needs is not fixed and, in fact, many professionals nowadays place esteem needs above all others, including the needs for safety and socialisation (Uysal, Aydemir and Genc, 2017). Therefore, it would be difficult to promote employee motivation across the organisation by using a universal motivation and reward system that does not take individual preferences and views into account. Nevertheless, it may be argued that by combining employee motivation activities at Orpic with such an element of transformational leadership as individual consideration, it will be possible to overcome this flaw of the hierarchy of needs.
The analysis of workers’ peculiar needs, wishes, aspirations, and values allows building greater trust in a leader and a commitment to the organisation (Ogola, Sikalieh and Linge, 2017). Thus, the right balance between transformational and transactional leadership principles and the implementation of right HR practices aimed to link desired employee behaviours with organisational objectives are similarly important for the successful company-wide acceptance of ERM and risk culture at Orpic.
Kotter’s change management model
According to Stragalas (2010), Kotter’s model “offers clear guidance for large-scale change management efforts” by “providing a three-dimensional linkage between individuals, groups, and the organization” (p. 31). Among other existing change management models, including those developed by Lewin and Bridges, the framework created by Kotter is probably one of the most detailed.
For examples, while Lewin’s model comprises three steps (Unfreeze – Change – Refreeze), Kotter’s framework has eight steps that provide “fundamental conceptual inputs on implementing a change successfully and disseminating in to the culture of an organization” (Rajan and Ganesan, 2017, p. 198; Dijesh and Roseline, 2017). More specifically, it indicates how the management may overcome certain barriers to organisational transformation, including the lack of managerial support and understanding of change.
However, Kotter’s model is merely theoretical and does not specify how to implement either of the phases in the change process. In other words, it is open to interpretation, which made it possible to link the main propositions of Kotter’s theory to other theoretical concepts, including transformational leadership, in the analysis section of the paper and explain it from the perspectives of HR and strategic management.
Overall, the implementation of the selected framework allows for a share degree of leaders’ creativity in terms of approach providing the key conditions for success (Appendix D) are satisfied. Even though flexibility in terms of application can be viewed as an advantage, it does not make the model stronger per se because this feature is linked to increased outcome uncertainty. In the end, even if leaders follow Kotter’s recommendations strictly, the success of change management based on his model will depend on the availability of necessary resources, knowledge, and capacities in the organisation where the change is taking place.
For this reason, during the analysis, it was stated that change management should not be approached in isolation but must be integrated with efforts to improve leadership, HR management, and strategic planning and decision making in general.
Conclusions
The literature review revealed that the establishment of organisation-wide risk culture is indeed a major prerequisite for the effective implementation of ERM. Besides, it is essential to ensure that ERM mission is well-captured in the company’s overall strategy. For this reason, it is pivotal to realise various initiatives aimed to stimulate cultural change at Orpic, including leadership shift, improvement of the HR management approach, and transformation of the overall workplace structure with a purpose of facilitating risk management behaviours across disparate organisational levels. Moreover, there is a need to enhance the strategic planning framework in a way that allows treating different types of risks – financial, operational, marketing, and others, – in a holistic manner rather than independently.
The analysis results also made it clear that although Orpic is aware of the benefits of ERM and strives to integrate it across the organisation, it faces some barriers to a successful realisation of this risk management framework. Managers in the company primarily adhere to the classical leadership style that, to a substantial degree, inhibits employees’ workplace autonomy and deprives them of a chance to provide feedback on many occasions.
The workplace processes are not very flexible either due to a highly hierarchical company architecture. These characteristics may interfere with the adoption of risk-taking behaviours and decentralisation of risk management activities and decision making, which are essential characteristics of ERM. However, the enterprise has a good basis where the improvement process can start. It already uses contingent rewards to motivate workers to perform in accordance with corporate vision and mission, invests in employee training in the field of risk management, and has experience in the practice of risk assessment and response activities in some spheres of performance, including finance and project investment.
When all determinants of ERM application success are considered and a comprehensive risk culture is adopted at Orpic, the firm may expect to enjoy such of its positive results as reduced operational costs, increased operational efficiency, higher quality of strategic decision making, minimal risk of financial loss due to emergencies, better competitiveness, improved innovation capacities, and so forth. Overall, the findings of some empirical studies reviewed in the present report verify the abovementioned theoretical assumptions regarding the effects of ERM and risk culture. However, the amount of research on the topic is still scarce.
Considering the significant potential of holistic risk management to enhance strategic management and alter organisational performance in a way that produces benefits not only for internal stakeholders but also the external ones, there is a need to investigate this matter in greater detail in the future as part of high-quality, rigorous empirical studies.
Recommendation
Based on the review of ERM and risk culture characteristics, it may be concluded that both of them are targeted at the development of new knowledge, as well as innovation with a purpose of increasing business competitiveness and sustainability. To function well, ERM and risk culture should be established in an environment characterised by a high degree of social-professional interaction since this factor is essential for a free flow of information within firms, feasible knowledge-sharing, and creativity. Thus, one of the best ways for Orpic to remove the existing structural, behavioural, and psychological barriers to change is through the adoption of some features of the organic organisation.
The major features of mechanistic and organic organisation types are outlined in Appendix F, and as the information provided there indicates, Orpic shares much more qualities of the mechanistic organisation since it is very formal, hierarchical, and largely inflexible in terms of task definition and performance. However, it is apparent that for such a big company as Orpic it would be extremely difficult to undergo the restructuring process as a whole.
Therefore, it would be better to proceed with the task at the managerial level and in units that do not require compliance with strict standards and where all the decision making and idea generation take place. RMID may be viewed as a good example of such a unit, yet the restructuring should not be limited to the department specialised in risk management alone but must embrace many other organisational activities, including marketing, sales, finance, HR, and so forth.
To guide the restructuring effort, Orpic may utilise Kotter’s change management model that was discussed previously in the paper and start the process with the establishment of a sense of urgency for such an activity, communication of a vision, and creation of a system for employee empowerment. In the end, by making the workplace environment more flexible and by providing employees with more autonomy and opportunities for decentralised decision-making and interprofessional collaboration/communication (within an established system aimed at better risk management), the company will facilitate knowledge development and sharing. In this way, it will become possible to maximise the positive effects of ERM and risk culture.
Reference List
Abuzarqa, R. (2019) ‘The relationship between organizational culture, risk management and organizational performance’, Cross-Cultural Management Journal, 21(1), pp. 13-20.
Ahmed, I. and Manad, N. A. (2016) ‘Influence of enterprise risk management success factors on firm financial and non-financial performance: a proposed model’, International Journal of Economics and Financial Issues, 6(3), pp. 830-836.
Arnold, V. et al. (2009) ‘The role of enterprise risk management and organizational strategic flexibility in easing new regulatory compliance’, International Journal of Accounting Information Systems, 12(3), pp. 171-188.
Avolio, B. J. (1999) Full leadership development. Thousand Oaks: Sage.
Bialas, A. (2016) ‘Cost-benefits aspects in risk management’, Polish Journal of Management Studies, 14(1), pp. 28-39.
Bird, R. C. and Park, S. K. (2017) ‘Turning corporate compliance into competitive advantage’, University of Pennsylvania Journal of Business Law, 19(2), pp. 285-339.
Blomquist, L. B. (2015). Political-security risk in the oil and gas industry: the impact of terrorism on risk management and mitigation. Web.
Bozaykut-Buk, T. (2017) ‘Giving risk management culture a role in strategic planning’, in H. Dincer and U. Hacioglu (eds.) Risk management, strategic thinking and leadership in the financial services industry: a proactive approach to strategic thinking, New York: Springer, pp.311-321.
Bromiley, P. et al. (2015) ‘Enterprise risk management: review, critique, and research directions’, Long Range Planning, 48(4), pp. 265-276.
Brungardt, C. and Crawford, C. (2005) ‘Deny the consent to be governed: risk leadership theory’, Journal of Business and Leadership: Research, Practice, and Teaching, 1(1), pp. 103-114.
Chao, G., Peng, A. and Nunes, M. B. (2007) Using PEST analysis as a tool for refining and focusing contexts for information systems research. Web.
Conner, H. (2015) Managing environmental risk in the oil and gas industry.
Cook, V. J. and Page, J. R. (1987) ‘Assessing marketing risk’, Journal of Business Research, 15(6), pp. 519-530.
Dhakal, M. (n.d.) Critical evaluation of main leadership theories. Web.
Dijesh, K. J. and Roseline, R. M. (2017) ‘Analysis of change models and evolving business strategies for proposed change in dynamic environment’, International Research Journal of Engineering and Technology, 4(3), pp. 1351-1357.
Esa, M. et al. (2018) ‘Impact of enterprise risk management on organizational performance’, Journal of Advanced Research in Dynamical and Control System, 10(6), pp. 190-197.
Gandz, J., Seijts, G. and Seijts, G. (2013) Leadership and risk culture.
Goi, C. L. (2009) ‘A review of marketing mix: 4Ps or more?’, International Journal of Marketing Studies, 1(1), pp. 1-15.
Goldsmith, L. (2018) ‘OMAN – the conflict in Yemen endangers Oman’s neutrality’, The Maghreb and Orient Courier. Web.
International Labour Organization (2016) Occupational safety and health and skills in the oil and gas industry operating in polar and subarctic climate zones of the northern hemisphere.
Investors in Risk Management (2015) A practical guide to enterprise risk management. Web.
Išoraitė, M. (2016) ‘Marketing mix theoretical aspects’, International Journal of Research – GRANTHAALAYAH, 4(6), pp. 1-13.
Jerome, N. (2013) ‘Application of the Maslow’s hierarchy of need theory; impacts and implications on organizational culture, human resource and employee’s performance’, International Journal of Business and Management Invention, 2(3), pp. 39-45.
Judge, T. A. and Piccolo, R. F. (2004) ‘Transformational and transactional leadership: a meta-analytic test of their relative validity’, Journal of Applied Psychology, 89(5), pp. 755-768.
Kells, D. (2014) Fostering a risk intelligent culture–why behaviour matters.
Korejan, M. M. and Shahbazi, H. (2016) ‘An analysis of the transformational leadership theory’ Journal of Fundamental and Applied Sciences, 8(3), pp. 452-461.
Liwa Plastics project in Oman is on track for 2020 completion (2019)
Maladzhi, R. W. (2015) Impact of risk-taking leadership on organisational performance and sustainability in SMEs. Web.
Marakanon, L. and Panjakajornsak, V. (2017) ‘Perceived quality, perceived risk and customer trust affecting customer loyalty of environmentally friendly electronics products’, Kasetsart Journal of Social Sciences, 38(1), pp. 24-30.
Möller, K. (2006) ‘The marketing mix revisited: towards the 21st century marketing by E. Constantinides’, Journal of Marketing Management, 22(3), pp. 439-450.
Ogola, M. G. O., Sikalieh, D and Linge, T. K. (2017) ‘The influence of individualized consideration leadership behaviour on employee performance in small and medium enterprises in Kenya’, International Journal of Business and Social Science, 8(2), pp. 163-173.
Orpic (2015) Employment benefits. Web.
Orpic (2016) Risk management training programme. Web.
Orpic (2018) 1st edition 2018 newsletter. Web.
Prevett, R. (2018) ‘18 disruptive technology trends for 2018’, Disruption.
Prevett, R. (2019) ‘9 disruptive technology trends for 2019’, Disruption.
Priddy, L. (2017) A critical analysis of Maslow’s hierarchy of needs theory. Web.
Rajan, R. and Ganesan, R. (2017) ‘A critical analysis of John P. Kotter‟s change management framework’, Asian Journal of Research in Business Economics and Management, 7(7), pp. 181-203.
Sara, S. et al. (2016) ‘Business strategy, enterprise risk management and organizational performance’, Management Research Review, 39(9), pp. 1016-1033.
Schoenfeld, D. (2013) Organisational risk culture: differences between managerial expectations and employees’ perception.
Sergio, J. (2011) Strategic management: the theory and practice of strategy in (business) organizations.
Steinmann, B., Klug, H. and Maier, G. W. (2018) ‘The path is the goal: how transformational leaders enhance followers’ job attitudes and proactive behavior’, Frontiers in Psychology, 9(2338), pp. 1-15.
Stragalas, N. (2010) ‘Improving change implementation: practical adaptations of Kotter’s model’, OD Practitioner, 42(1), pp. 31-38.
Strategic performance of I&M Bank Limited, Kenya. Web.
Thai Union Group PCL (n.d.) Risk management.
Uysal, H. T., Aydemir, S. And Genc, E. (2017) ‘Maslow’s hierarchy of needs in 21st century: the examination of vocational differences’, in H. Arapgirlioğlu et al. (eds.) Researches on science and art in 21st century Turkey, Ankara: Gece Kitaplığı, pp. 211-227.
Vaughan, A. (2019) ‘Saudi Aramco says oil industry faces ‘crisis of perception‘’, The Guardian.
Wagner, J. and Armstrong, K. (2010) ‘Managing environmental and social risks in international oil and gas projects: perspectives on compliance’, The Journal of World Energy Law & Business, 3(2), pp. 140-165.
Wiseman, E. (2017) The institutionalization of organizational learning: a neoinstitutional perspective.
Yanting, Z. and Liyun, X. (2011) ‘Research on risk management of petroleum operations’, Energy Procedia, 5, pp. 2330-2334.
Yudha, S. W., Tjahjono, B. and Kolios, A. (2018) ‘A PESTLE policy mapping and stakeholder analysis of Indonesia’s fossil fuel energy industry’, Energies, 11(1272), pp. 1-22.
Zeithaml, V. A. (1988) ‘Consumer perceptions of price, quality, and value: a means-end model and synthesis of evidence’, Journal of Marketing, 52(3), pp. 2-22.