Strategic Risk Flashcards
Strategy
A plan of action designed to achieve a particular goal
Corporate mission
According to Froot, Scharfstein & Stein (1994, HBR) the overriding strategic goal (mission) is:
- to ensure sufficient cash is available
- at the time needed
- to invest in positive NPV investments
This view derives from finance theory!
It encapsulates what strategic risk management should aim to achieve!
Key Strategic Objectives
Accepting that the overarching corporate mission is to maximize firm value (share prices) through the management of strategic risks, then the key strategic objectives of firms are likely to be to:
Increase/protect share price
Secure future growth opportunities
Generate future cash flows - liquidity is key
Secure the supply chain - especially international (geopolitical risk)
Maximise income (e.g., by increasing market share)
Minimise expenses (e.g., taxes)
Reduce cost of capital (tend to happen when you have a healthy share price)
Optimise capital allocation
Ensure compliance with laws & regulations
Enhance corporate governance (at least cost)
Ensure corporate survival (solvency)
Protect & promote corporate reputation (brand)
Risk management can help realize these objectives!
Elements of successful strategy
- Simple, consistent, long term goals
Steadfast commitment to achieving outcomes - Understand the competitive landscape
Know the business you’re in
e.g. Coca Cola in the business of carbonated soft drinks – not beverages… - Objective appraisal of resources
Internal vs. External (SWOT) - Effective implementation
i.e. Leadership:- Capacity to reach decisions
- Energy in implementing decisions
- Foster loyalty and commitment
Strategic Analysis: A Framework
Strategy as a link between the firm and its environment
i.e. Links internal and external forces
The firm
- Goals and values
- Resources and capabilities
- Structure and systems
The industry environment
- Competitors
- Customers
- Suppliers
PEST analysis
Political
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
Economic
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
Social
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
Technological
Development of new products and processes
Automation
Developments in information and communication technologies
Developments in the natural sciences
Extension to PESTEL Analysis
Environmental – e.g., climate change initiatives; recycling requirements; emissions reductions
Legal – e.g., health & safety requirements; public & product liabilities; employment risks; data privacy rules
Business Environment
Formed by relationship between:
Customers, suppliers and competitors
Industry environment
Essential to link environmental analysis to industry analysis
- The national/international economy
- Technology
- Government and politics
- The natural environment
- Demographic structure
- Social structure
Porters Five Forces of competition framework
Industry competitors
Rivalry among existing firms
- Suppliers: bargaining power
- Substitutes: threat | e.g. invention of Netflix (Blockbuster)
- Buyers: bargaining power | What are your alternatives to maintaining your power
- Potential entrants: threat of new entrants
Industry Analysis
Industry analysis can be used to:
- Explain differences in profitability between industries and changes in the profitability of a given industry over time
- Assist managers 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
Establishing a Competitive Advantage
Two conditions need to be met:
- Scarcity: how rare/unique is the competitive advantage? Unique proposition.
- The greater the better
- Maintain barriers to entry
- Relevance: A resource or capability must be relevant to key success factors in the market.
- E.g. Music shops are on the wane due to online downloads
Structural changes that needs to be anticipated and managed
Sources of Competitive Advantage
Competitive advantage creation:
i) Cost advantage: Sell a similar product at a lower price
ii) Differentiation advantage: Supply a unique/differentiated product with a premium price
Cost leadership & Differentiation
Cost leadership:
- Scale-efficient plants
- Design for manufacture
- Control of overheads and R&D
- Process innovation
- Outsourcing (especially overseas)
- Avoidance of marginal customer accounts
Resources: capital, engineering skills, frequent reports, tight cost control, specialisation of jobs and functions, incentives linked to quantitative targets
Differentiation
- Emphasis on branding advertising, design, service, quality and new product development
Resources: Marketing abilities, product engineering skills, cross-functional coordination, creativity, research capability, incentives linked to qualitative performance targets.
Diversification
- The expansion of a firm into another product line or field of operation
- May be related or not related
- Related: a firm expands into a similar field operation
- Unrelated: new product line is very different from core business
- Horizontal: the firm moves into different lines of production & sales (e.g., Virgin company)
- Vertical: firm undertakes investment in ‘up-stream’ (supply) &/or ‘down-stream’ activities (e.g. car industry)
Real Options & Strategic Risk Management
- Real option = opportunity to delay/adjust investment/operating decisions in response to change & uncertainty
- Value of projects is thus: NPV + ROV
- Real options allow firms to exploit uncertainty & so they have value (via the Black-Scholes pricing model)
- Example: Buchanon Street Development Glasgow, 1990s
- Strategic management of real options can both complement & substitute for hedging
- Thus risk management needs to be viewed in a holistic manner – this is ERM!
Captive insurance company: a wholly owned subsidiary created to provide insurance to its non-insurance parent company
