Topic 8 Strategy Risk and the Global Financial Risk RMI Study Guide What is strategy Stategy should make companies o More competitive o Alert to their circumstances o Resilient Did strategy cause financial crises Probably not but did nothing to avoid it Strategy pointed to stock prices as only measure of success over priced Is there a problem with strategy Competitive advantage time shortened for leaders Leads to volatility of leaders Need for an Adaptive Strategy o Create a set of optimal conditions for the continuous emergence Trade off between efficiency and redundancy excess capacity of superior strategies Strategy cannot ignore risk Strategy must incorporate o Risk o Boundaries o Corporate Purpose o Environment Systemic risk is real Strategy must define boundaries Market definitions segments What activities should we pursue How broad should our scope be What are your core competencies Strategy should define corporate purpose Shareholder value is a result not a strategy Stability Growth Employees Strategy should reflect environment Shareholder value is a result not a strategy Stability Growth Demographic trends Consumption trends Employees Lots of ways categories of looking at risk at an organizational level Topic 8 Overview of Risk Overview of Risk for Corporations o Business risk o Operational Risk o Hazard Risk o Financial Risk o Strategic Risk Business Risk Why Categorize o Expertise o Risk Management techniques o Reports to stakeholders Categories may not be mutually exclusive Some risk may appear in multiple categories The possibility that a company will have lower than anticipated profits or that it will experience a loss rather than a profit Business risk is influenced by many factors including Sales volume per unit price input costs competition overall economic climate and government regulations A company with a higher business risk should choose a capital structure that has a lower debt ration to ensure that it can meet its financial obligations at all times Investopedia Deviations in profitability Very broad category many will describe as risk caused by operational hazard financial or strategic risks Operational Risk Focus of BP case and Analytics readings Operational Risk is the risk or loss resulting from inadequate or failed internal processes people and systems or from external events Wikipedia Potential losses from internal sources o Manufacturing processes o Fraud o Mismanagement o Employee Mistakes Hazard Risk Very traditional risk management stuff Typically used in insurance industry to describe potential losses that only have a down side pure risks such as fire auto accident tornado flood or earthquake Financial Risk Potential variation due to financial causes Financial risk is used to imply downside risk meaning the uncertainty of a return and the potential for financial loss stocks investments Wikipedia Losses do to exchange rate investment losses credit risks liquidity risks Strategic Risks Potential losses variation from poor business decisions Product mix Supplier choice Financing options Often lump reputation risk under strategic but is often a separate classification Other Risks Legal Risks Liability Risks IT risks All have an impact on business some how Topic 8 Risky Business How Data Analytics Can Help Big Data We create so much data today how can organizations use it o Data Mining o Buying Trends o Targeted Marketing black swans Most Risk Management Mitigate risky business practices employee fraud operational risk and Use past data to prevent future risks Risk landscape is changing so fast that historic data is no longer a good predictor for tomorrow Q A Article What are the different types of risk organizations need to think about from operational risk to the so called black swans Operational risk the people processes and systems in place to produce the company s product service Fraud workplace fraud practice damages system failures process management workplace safety What is a black swan risk An extreme outlier high impact hard to predict rare events that generally people do not expect Bernie Madoff Mortgage Crisis How has risk changed in recent years Globalization cascading network effect Operational risk 30 of business loss 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 o Laziness fatigue moral or ethical opportunities stressors debt Could Data analytics have helped BP job concerns family issues There were reports that on site employees were worried about such an event but no channel to communicate BP didn t monitor systems closely costly to do so cut corners 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 statics and external analysis More complete or intelligent risk analytics Topic 9 Overview of Risk Individuals Categories of risk at the individual level Property Liability Life Health Financial Why Categorize o Risk Management techniques o Reports to stakeholders Categories may not be mutually exclusive Some risk may appear in multiple categories Loss Exposure Any condition or situation that presents a possibility of loss regardless of whether that loss actually occurs Three elements to loss exposure o Asset exposed to loss o Cause of loss o Financial Consequence of loss Property Risk Asset Exposed to loss o Real Property land buildings crops o Personal Property furniture jewelry art car Cause of Loss o Fire theft windstorm accidents lost ect Financial Consequences Liability Risk o Reduction in Property Value o Increased expenses o Lost Income Asset Exposed to loss o Money Other financial assets o General Special Punitive Damages Cause of Loss o Claim lawsuit o Civil vs Criminal Law o Tort Contract Statutory o Negligence Financial Consequences o Defense Costs o Monetary Damages Special Types of Liability o Property Owners o Automobiles o Employer Employee o Parents and Children o Animals Life Risk Premature Death Asset being exposed to loss o Your life Cause of Loss o Premature death illness accident stupidity Financial consequences o Wage Earning Adult Married Single Single with dependents largest financial impact from premature death o Non Wage Earning Adult Married o Child Single Single
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