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Risk%20management%203%20per%20page - Seminar 10 Strategic...

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Unformatted text preview: Seminar 10 Strategic Risk Management External Internal environment environment Performance management & control Strategy analysis & formulation Are we creating Shareholder Value? Seminar 9 Environment/Society Suppliers You are here! Seminar 7 Seminar 8 Customers Seminar 6 Employees Strategic risk management & Control Seminar 10 & 11 2 Required Readings • In the supplementary reading materials • • Reading 10.1, Simons, R. (2000) Reading 10.2, Simons, R. (2000) 3 1 Strategic Risk Management These steps in the risk management cycle are also the learning objectives for the material this week. At the end of the seminar students should understand and be able to explain: 1. Identifying risk 2. Measuring/assessing risk 3. Managing/controlling risk 4 Definitions of Risk • “The possibility of meeting danger or suffering harm/loss” Oxford Advanced Learner’s Dictionary, 4th ed. 1989 • “The possibility of suffering harm or loss” American Heritage Dictionary of the English Language, 3rd ed., 1992 5 Concept of Risk in Business • STRATEGIC RISK – risks that significantly reduces the ability of managers to implement their intended business strategy. 6 2 Is Risk an Important Issue? • Significant business consequences, which may include: – costs of repairing (replacing) damaged (lost) property; – compensation for injured individuals; – cost of investigating, reporting and accounting for a loss; – tarnished public image and reputation; – recalling products distributed to retailers and/or sold to customers. 7 1. Identifying Risk 1st Step: Identify Risks • Three sources: – operations/process Operations risk Asset impairment risk – assets – competition Competitive risk • Consequence: – reputation of the business Franchise/reputation risk 9 3 1st Step: Identify Risks Operations risk – the consequences of a breakdown in core operating, manufacturing or processing capability. value chain activities results in defective products being shift up consequnce will be law sues lost sales or the product will be poor in the market coursed by employee errors 10 1st Step: Identify Risks Asset impairment risk – risk that an asset loses current value because the likelihood future economic benefits are significantly reduced. relate to the damage value of assets in the balance sheet as well as intangible recourses 11 1st Step: Identify Risks Asset impairment risk – includes: • Financial impairment: Decline in the market value of a significant balance sheet item (cash flows from asset no longer support BS valuation) uncollectable debts due to bankcrupt • Impairment of intellectual property rights: Loss of rights over intangible intellectual property and capabilities. due to unauthorised use of patent by competitors • Physical impairment: Physical destruction of key processing or production facilities. floods/ fire 12 4 1st Step: Identify Risks Competitive risk – arises from changes in the competitive environment that could impact on business value creation and product/service differentiation. 13 Porter’s Five Forces Model of Industry Competition Threat of new entrants coming up with new or better products or services Bargaining power of suppliers of suppliers change in pricing policies stop supplying Bargaining po power of buyers buye change in the taste Threat of Substitute products and services Adapted from Exhibit 2.2 Porter’s Five Forces Model of Industry Competition 14 1st Step: Identify Risks • Three sources: – operations/process Operations risk Asset impairment risk – assets – competition Competitive risk • Consequence: – reputation of the business Franchise/reputation risk reputation is critical especially for the firms that rely on public trust and maintaining integrety to attract customers law firm/ accouting firtm /financial institutions 15 5 1st Step: Identify Risks Franchise/reputation risk – a consequence of excessive risk in the previously identified sources of risk. – loss of confidence by a company’s constituents (including customers, suppliers, business partners or regulators). 16 Seminar Question One • In light of the risk categories identified by Simons in Chapter 12 (Reading 10.1), consider the Mattel company. Background information can be found on their website: www.mattel.com – Identify two business risks and for each; • • • • Describe the risk; classify the risk; assess the strategic impact; assess the potential impact on franchise/reputation risk. 17 1 Stocks asset impairment risk: financial medium no impact on reputation 2 other small firms competitors high high 3 lower producing in peak time operation risk high high 4 safety of the product risk of recall and litigation asset high highest 2. Measuring/Assessing Risk 6 2nd Step: Measure/Assess Risks • Assessing internal risk pressures: – the risk exposure calculator – identify pressure points and estimate the magnitude and type of pressures that might lead to substantial failure or breakdown. find the nature of risks 19 Risk Exposure Calculator Growth Culture Pressures for performance 1-5 score + Rewards for risk taking + 1-5score Information management Transaction complexity & velocity + 1-5 score Rate of expansion 1-5 score + Inexperience of key employees 1-5 score Superiors resistance to bad news 1-5 score + Level of internal competition Gaps in diagnostic performance measures 1-5 score + = score = score 1-5 score Level of decentralisation = score 1-5 score Total Score lower the better 20 focus on growth can creat risks in these three ways Growth Pressures for + performance 1-5 score score Rate of expansion 1-5 score score + Inexperience of key employees 1-5 score score due to growth and demanding performing above capacity goals theres additional emphasis which will lead to mistakes for workers to perform which is and breakdowns tight to rewards due to the need of recruting of people to a common date growth there will be a rush to fill position eg: background check waved these leads to increase errors becasue of imcompetor 21 7 culture is determined by the history and leadership style of the firm Culture Rewards for + Superiors + Level of internal resistance to competition risk taking bad news 1-5score 1-5 score 1-5 score when u look for new opportunities to find new not knowing and markets or existing choosing not to know market share when u r fighting against each other to promotions this resistence to interest shares 22 Information management Transaction + complexity & velocity 1-5 score Gaps in diagnostic performance measures 1-5 score + Level of decentralisation 1-5 score high volumn more freedom for low level managers and high prossessing speed and encourages engagement in risk activities which tend to increase the chance of risk few people know how managers are unaware of potential probles no warning to do and control it signs because of no measure in place to detect the problem 23 Risk Exposure Calculator Growth Culture Pressures for performance 3 1-5 score + Rewards for risk taking + 1-5score Information management Transaction complexity & velocity 1-5 score + Rate of expansion 1 1-5 score + Inexperience of key employees 5 1-5 score Superiors resistance to bad news 1-5 score + Level of internal competition Gaps in diagnostic performance measures 1-5 score + 9 = score 6 = score 1-5 score Level of decentralisation 13 = score 1-5 score Total Score 28/45 24 8 when u convince urself that sth is wrong claiming that is in the best interest of the firm Rationalisation having access to assets and ability to mainpulate accounts and not be dedected Opportunity Pressure these are the three conditions which leads to the misrepresentation and fraud extrinsic: promotions, bonuses and dismisal intrinsic: personal probs out of firm Misrepresentation & Fraud 25 5 4-5 Seminar Question Two • a) Assess Steve and Barry’s risk exposure using the “Risk Exposure Calculator”. Support your answer with evidence from the case. • b) Does the final score you derived have any ) meaning of its own? How could the meaning of this risk assessment be further enhanced? the total score between 9-20 21-34 35-45 paragraph 3 3 not complexity high velocity 26 last page 5th para knowing and doing nothing about it 4 3-4 high level inconsistence to the company goal 5 3. Managing Risk 9 3rd Step: Manage Risks • Possible ways to manage risks – belief systems – boundary systems • business conduct conduct • strategic control systems – internal control systems 28 Belief Systems • Definition: Explicit set of organisational definitions that senior managers communicate formally and reinforce systematically to provide basic values, purpose and direction for the organisation. control from the board level to direct emplyees intentionly to appeal to all workers there is not enough Mission statements, vision statements 29 1. You shall have no other gods 2. You shall not make any graven images and bow down 3. You shall not take the name of the Lord in vain 4. You shall not work on the Sabbath day 5. Honour your father and mother 6. You shall not kill shall not kill 7. You shall not commit adultery 8. You shall not steal 9. You shall not bear false witness against your neighbour 10. You shall not covet anything that is your neighbour’s 30 10 Should top management tell employees what to do employees what to do or what not to do? enovation and creativity leave to the employees initiative 31 3rd Step: Manage Risks • Possible ways to manage risks – belief systems – boundary systems • business conduct conduct • strategic – internal controls design to avoid or remove the ability to rationalise 32 Business Conduct Boundary Systems • Standards of business conduct or codes of business conduct. • Establish the “rules of the game” and identify action and pitfalls that employees must avoid i Codes of ethical conduct, Company policy 33 11 Examples • Avoid actual or apparent conflict of interest and advise all appropriate parties of any potential conflict. • Employees are forbidden from owning a are forbidden owning significant stake in a business that supplies goods or services to the business. 34 Strategic Boundary Systems • Establish the types of business opportunities that should be avoided: – financial performance – product or services – market positions and competitors Strategic planning systems, asset acquisition systems 35 • “To be very clear, we are not going to own any telecommunication networks – phone companies, cable companies, things like that. We’re not going to build hardware – the computer makers and consumer electronics companies will do that. We’re not going to do system integration or consulting for corporate information systems…” Source: Brent Schlender, Fortune (January 16, 1995): 40 36 12 Incentives for Compliance? punishment 37 3rd Step: Manage Risks • Possible ways to manage risks – belief systems – boundary systems • business conduct conduct • strategic • structural safeguards • systems safeguards • staff safeguards – internal controls design to protect assets and integraty accounting information intentional extentianl: doing things in rush 38 Internal Controls • Formal policies and procedures that – protect assets – integrity of accounting information 39 13 Internal Controls • STRUCTURAL SAFEGUARDS: – segregation of duties min 2 people one to report other hold – defined levels of authorisation not anyone can sign out eg: cheque – physical security of assets alarm system – independent audits external auditors 40 Internal Controls adequate procedure for transactional prossesion • SYSTEMS SAFEGUARDS: – complete and accurate record keeping – restricted access to information systems and access to information systems and databases – timely management reporting 41 Internal Controls • STAFF SAFEGUARDS: – adequate expertise for accounting and control staff – rotation in key jobs – sufficient resources hiring the righ people 42 14 2005 ANZ Annual Report Extract (p.82) 43 Seminar Question Three • What is the importance of internal controls for an organisation? • Describe a recent occurrence, in a business context, of a failure in internal controls. Explain how more adequate controls could have prevented this situation from occurring. reliablity and accuracy of the information identify problem prenet problems and fix problems 44 Strategic Risk Management These steps in the risk management cycle are also the learning objectives for the material this week. At the end of the seminar students should understand and be able to explain: 1. Identifying risk 2. Measuring/assessing risk 3. Managing/controlling risk 45 15 External Internal environment environment Performance management & control Strategy analysis & formulation Are we creating Shareholder Value? Seminar 9 Environment/Society Suppliers You are here! Seminar 7 Customers Seminar 6 Employees Seminar 8 Strategic risk management & Control Seminar 10 & 11 46 External Internal environment environment Performanc e managemen t & control Strategy analysis & formulation BSC Are we creating Shareholder Value? EVA Lecture 11 EMA Environment/Society CSR Suppliers You are here! Lecture 9 TCO ABC Lecture 10 TBL Customers Lecture 7 CPA CRM ABC Employees HRM Strategic risk management & Control Lecture 12 & 13 47 16 ...
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This note was uploaded on 09/14/2011 for the course ACCT 1001 taught by Professor John during the Spring '11 term at Renmin University of China.

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