Chapter 13 strategic management

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Oxford University Press 2011

Strateg ic Management

N. Chandrasekaran,VicePresident Currently, Take Solutions Ltd

P.S. Ananthanarayanan, Visitingfaculty at Bharathidasan Institute ofManagement (BIM), Trichy


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Chapter 13Corporate Risk Management


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Corporate Risk Management

There is no perfect strategic decision. Onealways has to pay a price. One always has to

balance conflicting objectives, conflictingopinions and conflicting priorities. The beststrategic decision is only an approximationanda risk.

Peter Drucker


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Learn ing Objec t ives

To identify the relationship between risk andstrategy

To identify and delineate the various types of

corporate risk

To discuss specific approaches that address each

type of corporate risk and relate them to risk

management principles


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Impact of Risks

Country Risk

Caused by changes occasioned by political influence

Market Volatility

Markets are no longer protected and the whole world

has shrunk due to price changes

Human aspect of Corporate Strategy

Changes have been observed in the relationship

between labour and management.


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Geo-politics at an international level

Current Middle East Crisis

Shifting of economic power from west to east

Risks affecting capital influx

Capital Formation through foreign directinvestment (FIIs)

Camouflage of investments through

participatory notes and the like.



Risks affecting global governance

the kaleidoscope of different nationalaspirations, social and commercial networks &integration barriers.

WTO Doha summit

Agriculture

Technical assistance

Environment

Trips

Risk due to differing business conditions



Types of Corporate Risk

Industry Risk

This risk arises when the industry itself facesextinction suddenly, due to unavoidablereasons.

Transition Risk

Risk usually arises when technologicalobsolescence suddenly overtakes thecompany. This risk can be traced partly to thecomplacencies developed by the firms incertain industries



Stagnation Risk

This risk is associated with the stagnation of acompany caused by a sudden fall in demanddue to a recession.

Unique Competitor Risk

This risk arises when a unique competitorenters the scene unexpectedly. It happenswhenever protected industry faces an openmarket.



Brand Risk

Any company can grow and build its marketshare on the basis of its brand equity andbrand loyalty.

Vicco cream and toothpaste

Project Risk

This risk arises when a project fails to take off

due to sudden and drastic changes in the baseassumptions.



Operational Risk

Operational risk is the risk of loss resultingfrom inadequate or failed internal processes,people and systems or from external events

Arises from execution of the normaloperations of the company involving people,systems, and processes.

Eg. Vedanta



Types Of Operational Risks

Internal Fraud

External fraud

Employment practices and workplace

safetyClients, Products and Practices

Damage to physical assets

Business disruption and Product failures

Execution, Delivery and processmanagement



Relating Corporate Risk To

Management Principles

Industry RiskIndustry can mitigate risks by creating new

versions of its products through research anddevelopment.

Transition Risk

One approach to manage this in certainindustry circles is through technologyforecasting.

Transition risk management and mitigation

Risk management table



Stagnation Risk

Concerted efforts have been made both bycompanies and the government of thecountries.

Unique Competitor Riskcan be mitigated by ingenious and innovative

ideas of developing self-help groups

Brand Risk

can be mitigated by Quality FunctionDeployment (QFD) policies and procedures.


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Project Risk

Lack of project team skills

Ineffective communication

systems

Inadequate supplier stability and

performance

Ineffective consultants

Ineffective strategic plans

Mitigation

Proper leadership monitoring

and coordination, and on

the job training

Project coordination meetings

held on a daily or weekly

basis

Stakeholders made aware of

the repercussions

Selecting appropriateconsultants

Proper documentation of

technical contracts



Implementation of Project risk

management

Identify project risk at the start of the project

Analyze the project risk

Rank the risks

Respond to deviations in project risk

Track the risk

Evaluate and control the risk



Operational RiskCompanies consider operational risk an unavoidable cost of

doing business

Companies collect data on operational losses and use these

data to develop a model for operational risk

Capital for operational risk

Basel II guidelines for banking and insurance sector1.Basic indicators approachbased on annual revenue of financial

institutions

2. Standardized approachbased on annual revenue of each of

the broad business lines of the financial institutions

3. Advanced measurement approachesbased on internally

developed risk measurement framework of the bank adhering to

the standard prescribed.



More Questions

1. Identify an industry that has been affected bytechnical obsolescence and develop a technique

for turnaround of a company belonging to such an

industry

2. How do the risks in a traditional sense transformthemselves into corporate risk and under what

conditions?

3. Take a secured bank in India and analyze the

steps taken by the bank to manage operationalrisk.

Chapter 13 strategic management

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