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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 companys 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 Orpics 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 Orpics 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, Maslows hierarchy of needs, cost-benefit assessment, PESTLE, and 4Ps 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, Kottlers 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 Orpics 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 Maslows hierarchy of needs (Appendix C), which implies that to stimulate the adoption of positive behaviours among employees, managers must ensure that the companys 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 Orpics 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 companys 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 Orpics 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 Orpics 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 firms 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 Omans neutral position, the escalating conflicts in the Gulf region can impact Orpics 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), Orpics 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 Orpics 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; Iaorait, 2016). By using the 4Ps 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 (Iaorait, 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 Orpics product pricing by reducing costs and enhancing product quality. As the fuel refining costs decrease due to an effective response to technological trends, Orpics 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 Orpics 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 Kotters 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, Kottlers 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 Orpics 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 Kotters 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 companys 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 Orpics strategic decision making and overall performance. The evaluation of various aspects of the companys activities was carried out by using such tools as PESTLE, cost-benefit analysis, and 4Ps 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 dif
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