1. Chapter6 Risks
ACCA P1

2. 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.

3. 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.

4. 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.

5. 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)

6. 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.

7. 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.

8. 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.

9. 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?)

10. 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.

11. 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.

12. 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

13. 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

14. 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

15. 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)）

16. 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

17. 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

18. 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.