Chapter6 Risks ACCA P1

Basic division of risks Strategic risks: the potential volatility of profits caused by the nature and type of the business operations. Operational risks: the risks of loss from a failure of internal business and control processes.

Strategic risks The threats sometimes come from the products and services the company supplies, sometimes not. The risks relate to the outside environment of the company, and the influences are long-term. It is difficult to mitigate the strategic risks.

Operational risks Operational risks relate to matters that can go wrong on a day-to-day basis, and are relevant to the internal environment. It is simpler to mitigate the risks, because the internal environment is under the company’s control.

Dec, 2008, 1 (b) Distinguish between strategic and operational risks, and explain why the secrecy option would be a source of strategic risk. (10 marks)

Dec, 2008, 1 (b) Strategic risks These arise from the overall strategic positioning of the company in its environment. Some strategic positions give rise to greater risk exposures than others. Because strategic issues typically affect the whole of an organization and not just one or more of its parts, strategic risks can potentially concern very high stakes- they can have very high hazards and high returns. Because of this, they are managed at board level in an organization and form a key part of strategic management. Operational risks Operational risks refer to potential losses arising from the normal business operations. Accordingly, they affect the day-to-day running of operations and business systems. Operational risks are managed at risk management level and can be managed and mitigated by IC systems.

Dec, 2008, 1 The secrecy option would be a strategic risk for the following reasons. It would radically change the environment that SHC is in by reducing competition. This would radically change SHC’s strategic fit with its competitive environment. In particular, it would change its ‘five forces’ positioning which would change its risk profile. It would involve the largest investment programme in the company’s history with new debt substantially changing the company’s financial structure and making it more vulnerable to short term liquidity problems and monetary pressure. It would change the way that stakeholders view SHC, for better or worse. It is a ‘crisis issue’, certain to polarize opinion either way.

Dec, 2008, 1 It will change the economics of the industry thereby radically affecting future cost, revenue and profit forecasts. There may be retalitory behavior by SHC’s close competitor on 25%of the market.

Risks faced by organizations Financial risks and non-financial risks Strategic risks and operational risks Many risks are not independent of each other, which means that some risks are related or correlated with each other. (any example?)

Jun, 2013, 1 (a) Briefly explain ‘related’ and ‘correlated risks’. Explore the correlation between legal risk and reputation risk for Hoppo if it were to cancel its contract with Red Co.

June, 2013, 1 Related risks are risks that vary because of the presence of another risk or where two risks have a common cause. This means when one risk increased, it has an effect on another risk and it is said that the two are related. Risk correlation is a particular example of related risk. Risks are positively correlated if the two risks are positively related in that one will fall with the reduction of the other, and increase with the rise of the other. They would be negatively correlated if one rose as the other fell.

Financial risk Financing risk: sources of finance Liquidity risk: the mismatch of cash inflows and outflows (Dec, 2010, 4) Cash flow risk: operating cash flow’s volatility Gearing risk: debt and share capital Credit risk: fail to meet obligations

Financial risk Currency risk: the changes of exchange rates, including transaction risk, translational risk and economic risk Interest rate risk Finance providers’ risk: when the company provides finance for others Accounts risk: misleading

Non-financial risks-strategic Market risk: because of the market price movement, or arising from any of the market (Dec, 2011, 3, (b)) Legal and political risks: for international corporations Environmental risk: the operation is affected by the environment (Dec, 2010, 2, (c)) Industry-specific risks: unexpected events or changes

Non-financial risks-operational Entrepreneurial risk: arising from carrying out business activities (June, 2009, 4, (c)) Product risk: have to consider the legal system and cultural environment Technological risks Health and safety risk: relate to the employees（Dec, 2011, 1, (c)）

Non-financial risks-operational Fraud risk: fraudulent activities Probity risk: unethical behavior Knowledge management risk: about knowledge resources Property risk: damage, destruction and taking of property Trading risk: domestic and international traders Disruption risk

Non-financial risks-operational Cost and resource wastage risk: excessive costs Organizational risk Reputation risk: a loss of reputation caused as a result of the adverse consequences of another risks

Risk identification In order to manage risk efficiently, you have to identify risks at first. There’re conditions and events which can result in risks. The means to identify: physical inspection, enquiries, checking the paperwork, brainstorming, checklists, benchmarking, etc.