Risk Final Topic 8 Strategy Risk the Global Financial Crisis What is strategy strategic risk Strategy should make companies more competitive alert to their circumstances and resilient Mistakes in strategy however can be severe strategic risk Was strategy thrown aside with the mortgage crises and resulting financial markets meltdown Did companies forgo long term strategy for quick profits Is there a problem with Strategy Competitive advantage time shortened Positional volatility of leaders How cool is Facebook Need for adaptive strategy Strategy cannot ignore risk Instead of developing one strategy based on analysis prediction and deduction Create a set of optimal conditions for the continuous emergence of superior strategies Strategy will need to incorporate risk boundaries corporate purpose environment Systemic risk is real How to build contingencies into strategy to deal with risk how can we be resilient Real trade off between efficiency and redundancy excess capacity Topic 8 Overview of Risk Overview of Risk for Corporations Business risk definition Overview of Risk for Corporations Operational Risk Deviations in profitability Can be caused by many things prices regulation competition etc Very broad category many will define as risk caused by operational hazard financial or strategic risks Focus of BP case and Analytics readings Potential losses from internal sources Fraud Manufacturing processes Mismanagement Employee mistakes Overview of Risk for Corporations Financial Risk Overview of Risk for Corporations Strategic Risks Potential variation due to financial causes Losses due to exchange rate investment losses credit risks liquidity risks etc Potential losses variation from poor business decisions Product mix Supplier choice Financing options Many decisions fall under strategy if any of them are wrong faulty strategic risk I often lump reputational risk under strategic risk but is often a separate classification Topic 8 Risky Business How Data Analytics Can Help Overview Big Data What is it We create so much data today how can organizations use it Data mining Buying trends Targeted marketing Mitigate risky business practices employee fraud operational risk black swans How does operational risk relate to big data Q A What is a black swan risk An extreme outlier high impact hard to predict rare events that generally people don t expect E g Bernie Madoff mortgage crisis Where does data analytics fit in Tools to predict areas of vulnerability in organizations to black swans and other kinds of risk Look for markers of situations where human behavior can impact operational risk Look for factors that influence human behavior Laziness fatigue moral or ethical opportunities stressors debt job concerns family issues Future of behavioral analytics Systems are pretty good at looking for potential risks ignoring the human element Behavioral analytics adds that examination of the human component mixed with statistics and external analysis More complete or intelligent risk analytics Topic 8 BP Putting Profits Before Safety Overview Overriding Themes of Case Corporate Strategy Public Relations Corporate Culture Workplace Safety Background Rebranding Process Management Alternative Fuels like solar Was Safety First OSHA Environmentally friendly oil company Health Safety Environmental HSE performance Growth through M A Green Company Climate Change talk in 2002 21 3M fine by OSHA 300 willful violations of OSHA rules US Chemical Safety Hazard Investigation Board CSB BP endangered workers to cut costs 23 accidents in 30 years 8 severe incidents in 10 years leading up to explosion this is all evidence proving safety was not first Was Safety First Pipeline and Hazardous Materials Safety Administration more evidence ineffective leak detection system Pipeline had several defects internal corrosion BP used a different inspection system UT technology vs pipeline inspection guages PIG The Baker Report s 10 recommendations focused on process safety The Baker Report Critical of BP s approach to process safety Failed to give process safety the same emphasis as other initiatives including environmental and other safety initiatives Should have paid more attention to previous incidents chemical releases fires Refineries did not get the same importance as exploration Decentralized management and entrepreneurial culture delegated substantial discretion to plant managers without outlining expectations regarding process safety responsibility or accountability Topic 9 Overview of Risk Individuals Risk Management for Individuals Loss Exposures Any condition or situation that presents a possibility of loss regardless of whether that loss actually occurs Three Elements to a loss exposure Asset exposed to loss Cause of loss Financial consequences of the loss Asset exposed to loss Real property Land buildings crops etc Personal property Cause of Loss Financial Consequences Reduction in property value Increased expenses Lost income Asset exposed to loss Money other financial assets General Special Punitive damages Property Liability Your stuff furniture jewelry art autos watercraft etc Fire theft windstorm accidents lost pretty much anything you can think of Cause of Loss Claim lawsuit Civil law vs criminal law Tort contract statutory negligence Financial Consequences Defense costs Monetary damages Specific Types of Liability Property owners Automobiles Employer employee Parents and children Animals Financial Impact of Premature Death severity exposure Wage earning adult Married Single with dependents Single with no dependents Non wage earning adult Married Child Single with dependents Single with no dependents Financial Asset exposed to loss Your wealth Cause of Loss Financial Consequences Inadequate savings Back to work Can t retire Health disability unemployment poor planning etc Topic 10 Is the International Community Making Progress in Addressing Natural Disasters Natural Hazards Disasters can happen anywhere Great disasters megadisasters are actually very concentrated 26 of disasters caused 78 2 of deaths 28 of disasters caused 40 of the economic losses Poor countries High share of risk because of their location Greater economic losses of GDP Least resilient Leads to real poverty some live on a dollar a day Risk Not Evenly Distributed risk is not uniform Biggest exposure Small island developing states SIDS land locked developing countries LLDC Potential losses relative to wealth development GDP Exam question
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