title: Risk Management Approaches in SMEs: A Study of Owner-managers in Jordan
Creators: name: Al-Lahham, Yazan
Publisher: name: University of Liverpool Repository
Year: 2023

description: The body of literature on managing risks in Small- and Medium- size Enterprises (SMEs) is young but growing. The small corpus of research mostly focuses on formal risk management processes, assuming that managing risks is, or should be, rational – that is, it is optimal, objective and independent of human judgement, procedural, and based on mathematical models. The existing research suggests that SMEs do not apply formal risk management strategies, describing them as reactive to risks. This suggestion is based on evaluations of the sophistication of formal processes of risk management. Formal processes of risk management, however, are developed for large organisations. SMEs are often informal and have little bureaucracy. Despite the growing effort to study management of risk in SMEs, there is a lack of insight into how they actually approach risks. Understanding management of risks in SMEs would allow us to develop more relevant tools which appreciate the structures and processes of SMEs. This raises the question: how are risks approached in SMEs? This research aims to address the limited knowledge on how SMEs approach risks, increasing our understanding of the role of the owner-manager in managing risks and what shape their decisions on how to approach them. To achieve this, the research explores the broader literature on the concept risk and the notion of risk management. This research argues that the study of managing risks in SMEs should not be confined to the formal processes of risk management. The research represents a shift in approach to studying management of risk in SMEs. This shift focuses on informal decisions and actions to approach risks embedded within the activities of the SME, and the owner-managers’ account on approaching risks. The research is informed by the wider literature on decision-making. Decision-making literature provides a theoretical insight into how owner-managers make risk-related decisions. The research embodies the notion of bounded rationality as conceived by Simon, Gigerenzer, and Selten. Bounded rationality addresses limitations of the notion of a rational decision (which requires unlimited cognitive capabilities such as knowledge, time, and computational powers). It suggests that to understand human decisions, one should take account of cognitive limitations of the decision-maker and of the structures of the environment in which the decisions are made. To develop this further, the research turns to boundedly rational concepts and theories, particularly the work of Gigerenzer and Goldstein on decision-making heuristics, Kahneman, Tversky and Slovic on risk perception, and Sitkin and Pablo on risk-behaviour. The research also embodies the possibility that decisions are influenced by irrational forces, exploring concepts such as cognitive dissonance. The empirical part of the research consists of a qualitative study of SMEs in Jordan and their owner-managers’ account of managing risks. Data were collected using semi-structured interviews with owner-managers of 31 Jordanian SMEs from five industries: production and manufacturing, construction and contracting, trade and commerce, software development, and services. The collected data was analysed thematically. Contrary to existing research on risk management in SMEs, the findings of this study suggest that SMEs are not reactive to risks, providing evidence that they approach risks informally. The study shows that owner-managers of SMEs approach risks by approaching their occurrence, approaching their consequences, or dealing with their consequences. What emerges from the study is a more nuanced understanding of informal and undocumented approaches to risks actually used in SMEs. The findings also demonstrate how owner-managers approach risks non-rationally and heuristically: they do not rely on probabilistic calculations or objective models, but make subjective decisions based on how they perceive both the risk itself and the way they would approach it. The findings also demonstrate that the context and environment of the risk, the company, the industry, and the owner-manager shape the owner-managers’ decisions on how to approach risk. This research provides a shift in perspective from the existing literature on risk management in SMEs. It also bridges decision-making literature to the discipline of managing risks. This work contributes to our knowledge on managing risks in SMEs by offering a more nuanced insight into how risks are actually approached in SMEs.