lecture 8 - strategic risk

Question 1

what is strategy?

Answer 1

a plan of action designed to achieve a particular goal

Question 2

what do Froot, Scharfstein and Stein (94) say overriding strategic goal or mission of a company is?

Answer 2

ensure sufficient cash is available
at the time needed
to invest in positive NPV investment

encapsulates what strategic risk management should aim to achieve

Question 3

what are the key strategic objectives, accepting that the overarching corporate mission is to maximise firm value through mgment of strategic risks

Answer 3

• Increase/protect share price
• Secure future growth opportunities
• Generate future cash flows
• Secure the supply chain
• Maximize income (e.g., by increasing market share)
• Minimize expenses (e.g., taxes)
• Reduce cost of capital
• Optimize capital allocation
• Ensure compliance with laws & regulations
• Enhance corporate governance (at least cost)
• Ensure corporate survival (solvency)
• Protect & promote corporate reputation (brand)

Question 4

what are the underlying elements of a successful strategy?

Answer 4

simple, consistent, long term goals. steadfast commitment to achieving outcomes

understand the competitive landscape. know the business you’re in

objective appraisal of resources - internal vs external (SWOT)

Question 5

how can effective implementation of a successful strategy be achieved?

Answer 5

leadership - capacity to reach decisions, energy in implementing decisions, foster loyalty and commitment

Question 6

what does PESTEL stand for?

Answer 6

Political
Economic
Social
Technological
Environmental
Legal

Question 7

what are important political factors to consider in a firm’s strategy?

Answer 7

Changes in government economic policy, e.g. taxation, government spending, monetary policy
Changes in legal requirements e.g. employment
law, health and safety legislation, licensing practices, environmental regulations, competition policy
Changes in the government ownership
e.g. nationalisation, privatisation, de-regulation

Question 8

what are some key economic factors to consider when developing firm strategy?

Answer 8

Changes in the level of economic activity, e.g. growth rates, rates of unemployment, inflation
Changes in wage rates and income distribution
Changes in exchange rates

Question 9

what social factors should be considered when creating a successful strategy?

Answer 9

Changes in demographics e.g. the size of the population, the age distribution with the population
Changing attitudes e.g. work/life balance, concern for the environment, ethical standards
Changes in social structure e.g. socio-economic groupings, social mobility

Question 10

what technological factors need to be considered to develop a successful strategy?

Answer 10

Development of new products and processes
Automation
Developments in information and communication technologies
Developments in the natural sciences

Question 11

what environmental factors can impact a firm’s strategy?

Answer 11

climate change initiatives, recycling requirements, emissions reductions

Question 12

what legal factors should be considered when creating a firm’s strategy?

Answer 12

health and safety requirements, public and product liabilities, employment risks, data privacy rules

Question 13

what is formed by relationship between customers, suppliers and competitors?

Answer 13

the business environment of a firm

Question 14

what are porters 5 forces?

Answer 14

threat of new entrants
threat of substitutes
bargaining power of buyers
bargaining power of suppliers
rivalry among existing firms

Question 15

what can industry analysis be used for?

Answer 15

explain differences in profitability between industries and changes in profitability of given industry over time

assist mgrs in positioning the firm advantageously

predict possible changes in competition and profitability in the near future

identify opportunities for changing industry structures and alleviating competitive pressures

Question 16

what two conditions must be met to achieve competitive advantage?

Answer 16

scarcity - how rare/unique is CA? greater the better, maintain barriers to entry

relevance - resource or capability must be relevant to key success factors in the market, e.g. music shops on the wane due to online downloads

Question 17

what are the two sources of competitive advantage?

Answer 17

cost advantage - same product, lower price

differentiation advantage - price premium for unique product

Question 18

what are the key strategy elements of a cost leadership strategy?

Answer 18

scale-efficient plants
design for manufacture
control of overheads and R&D
process innovation
outsourcing (esp overseas)
avoidance of marginal customer accounts

Question 19

what key strategy elements are needed for a differentiation strategy?

Answer 19

emphasis on branding advertising, design, service, quality and new product development

Question 20

what resource and organisational requirements are needed for a cost leadership strategy?

Answer 20

access to capital
process engineering skills
frequent reports
tight cost control
specialisation of jobs and functions
incentives linked to quantitative targets

Question 21

what resource and organisational requirements are necessary for a differentiation strategy?

Answer 21

marketing abilities
product engineering skills
cross-functional coordination
creativity
research capability
incentives linked to qualitative performance targets

Question 22

what is the BCG growth-share matrix?

Answer 22

looks at rate of market growth vs relative market share.

low growth-low share: low/unstable earnings, neutral or negative cashflow, divest.

low growth-high share: high stable earnings, high stable cash flows, milk.

high growth-low share: low unstable growing earnings, negative cash flows, need to analyse to determine if will get higher share or if growth will fall off

high growth-high share: high stable growing earnings, neutral cash flows, invest in for growth.

Question 23

what is diversification?

Answer 23

expansion of a firm into another product line or field of operation

Question 24

what are the types of diversification?

Answer 24

related: a firm expands into a similar field operation

unrelated: very different from core business

horizontal: firm moves into different lines of production and sales

vertical: firm undertakes investment in up (supply) or down stream activities

Question 25

what is a real option?

Answer 25

opportuntiy to delay/adjust investment/operating decisions in repsonse to change and uncertainty

value of projects therefore NPV + ROV

Question 26

what is benefit of real options?

Answer 26

ROs allow firms to exploit uncertainty and so they have value

strategic mgment of real options can both complement and substitute for hedging

risk mgment therefore needs to be viewed in a holistic manner - ERM

Question 27

when might strategic risk management not add value?

Answer 27

• Strategic risk hedging is an ‘economic good’ & so subject to cost-benefit analysis
• Strategic risk management is costly – managers might over-hedge!
• May be more cost-effective not to hedge some (minor) risks or establish an alternative risk management vehicle – e.g., an offshore insurance captive (e.g., avoid insurers’ profit loadings/adviser fees!)
• Hedging may be superfluous in an ERM context because of ‘natural hedges’ within the corporate group – e.g., forex risks in MNEs could be naturally ‘neutralized’
• Hedging might be a ‘false market signal’ – firms benefit from risk-takers!
• by over-hedging risk mgment may actually increase (serve mgerial risk aversion) rather than decrease agency costs and hence reduce firm value