A Firms Risk Consciousness - Essay Example

?A firm’s risk consciousness governs the underlying strategies that are employed by the enterprise. To what extent do you agree with this ment? Unequivocally, the world has become a global village as boundaries among nations are shrinking due to technological advancements (growth in ICT) and modern inventions. For instance, the countries also negotiate to reduce trade barriers for mutual benefits. The global economy has recorded tremendous growth primarily because of WTO, NAFTA etc. Business enterprises and consumers benefit from this expansion since new opportunities are created and new products are launched respectively. However, it should not be forgotten that today’s business environment is highly competitive, unpredictable, unstructured and complex; therefore, only fittest and stronger firms having proactive approach could survive in contemporary business outlook. Proactive approach is actually about sensing problems before hand and devising alternate solutions / strategies to avert damage in upcoming future. In addition, the proactive approach also refers to setting trends in the industry or marketplace through product development, quality maintenance, innovation, branding and differentiation strategies. It should be highlighted that business is all about taking risks. An entrepreneur identifies the gaps and opportunities in the market after which risks one’s resources to capitalise them for profit generation and monetary gains. Risks are identified, evaluated and measured through quantitative tools and statistical methods so that the strategic planners would gain a near-to-accurate insight over the potential scope in any specific industry (Lynch, 2008); (Emmison & Smith, 2002); (Johnson & Scholes, 2008). In other words, if all perceived risks are not evaluated and measured correctly then the probability of business failure and financial losses will be higher. For instance, if the risks associated with any business are high then investors also expect high rate of return because of effort and risk involved. This means that it is difficult to enter in a risky field and industries (more barriers) because of greater probability of losses and low chance of survival; however, the success of an entrepreneur in a riskier venture would entitle him / her to high profit margins and financial benefits (Beasley et al, 2005). As mentioned before that the organisations are operational in a highly complex and uncertain business environment; therefore, there is immense need of risk consciousness because even small mistakes and blunders may lead to adverse consequences. I would, thus, agree with this statement that a firm’s risk consciousness governs the underlying strategies that are employed by the enterprise. Risk consciousness, in simple words, refers to paying serious attention to identify any small and large risks associated in setting up a new business, expanding an existing firm (in either domestic or foreign markets), introducing a new product, innovating an existing product range, acquiring diversified businesses, shifting from debt to equity financing and others etc (Neale & Haslam, 1994). Nonetheless, risk consciousness takes place when top management / policy – makers implement measures that would help instilling risk management culture within a corporate setting (Glen, 2007). In fact, the more prudent, judicious, efficient and calculated the strategic planners are in determining, assessing, measuring and communicating risks with their subordinates and organizational members, the more effectively risk management culture and risk consciousness could be developed and implemented with the support of chief risk officers (Lam, 2000); (Colquitt et al, 1999) (Bender & Ward, 2002). In addition, the firms that are not risk conscious face situations in which problems have to be tackled immediately when they occur due to absence of proactive risk management approach and contingency plans. Obviously, this leads to nothing but inefficiencies and losses in the short run that could have been avoided through risk consciousness. In short, neglecting the business risks bring financial losses to the organisation and decline in wealth of valued shareholders (Rutterford, 1998); (Copeland et al, 1990). Strategic planning, indeed, plays the most important role in shaping the internal work environment / culture as well as in enhancing chances of success. It is worth mentioning that strategic planning includes defining short and long term enterprise goals, mission, vision and code of conduct and formulating strategies / procedures to accomplish business goals (De Wit & Meyer, 1998). In addition, strategic planners also have strong forecasting abilities that enable them to look into future and make amendments in existing policies where necessary. Therefore, when strategic planners have in-depth knowledge of organisational risks then they would consider these critical risk factors to devise new business policies and bring in-line existing strategies with their risk management process. For instance, the most important benefit of risk consciousness and near-to-perfect risk management process is that the policy – makers could set realistic / achievable goals followed by realistic expectations with organisational personnel. In this way, the risk consciousness not only facilitates in minimising business losses and waste of organisational resources but also reduces the probability of conflicts among enterprise owners and employees (McWilliam, 2004). It should be recalled that employee – employer conflicts over unrealistic performance standards and individual targets adversely affect internal working environment, since they lead to absenteeism, high employee turnover rate, decline in morale, job commitment (affective and normative), trust factor, employee confidence, job satisfaction, socio-emotional and instrumental cohesion (Koch, 1994); (Bainbridge, 2009). It is foremost for a firm to instill risk consciousness if it has genuine inclination to prosper / thrive in the long run through product / market development and diversification strategies. In simple words, the firm which is well aware of short and long term risk factors in its task and general environment could align its business strategies, thereby resulting in implementation of right policies at the right time in the right format with support of right people. Indeed, this risk consciousness becomes the basis of whether entering in a new domestic or global market for sales growth of existing products or whether introducing new products in the existing markets to attract maximum customers and obtain greater market share (Liebenberg & Hoyt, 2003). Another core advantage of risk consciousness is that it helps formulating policies that foster sustainable development. Nevertheless, the enterprises of 21st century are concerned about their sustainable development, which has becomes a major challenge for enterprises strategic managers in this precarious work environment. One of the major reasons is the existence of largely unpredictable markets, which contribute to unstructured environment. In simple words, the more risk conscious an enterprise is, the better the policies and contingency plans and the greater the probability of sustainable growth (Lynch, 2008); (Beasley et al, 2005); (Walsh, 1996). In order to fully comprehend the importance of risk consciousness for 21st century organisations, I would like to elaborate on the example of UK based airline industries (large scale businesses) such as Ryan Air, Easy Jet and British Airways that face numerous risks such as sudden oil price hikes, inflation (increase in Consumer Price Index and Sensitive Price Index), liquidity issues, global economic downturn (recession) and subsequent decline in air travel demand, surge in interest rates. Indeed, the aforementioned risk conscious airlines are aware of the fact they have significantly high overheads; therefore, they constantly focus on minimising costs to attain cost leadership and cost effectiveness. The airlines are concerned with their cost structure because any changes in business atmosphere (critical risk factors) may lead to financial debacle at any point. Ryan Air minimises its costs and negative impact of risk factors by using no-frills low cost air travel services business model, which helps in offering lowest possible fares. It should be revealed that Ryan Air enjoyed largest passenger base even during economic recession of 2008 – 2009 when airlines incurred colossal losses, thereby forcing to either close their operations or merge with other airlines in stronger financial position (Annual Report, 2009). British Airways (normal charge airline with premium quality travel services), however, faced severe issues when it incurred colossal financial losses during economic recession because of steep decline in consumer demand and subsequently in revenue streams. Another risk conscious low cost carrier Easy Jet minimises the risks by having strong internal control (social audit), analysis of changes in economic indicators and use of business marketing research techniques. The airline modifies its strategic initiatives after measuring risks and using pertinent recommendations from middle level managers / executives (Easy Jet Report, 2009). I would now like to conclude this paper by emphasising the fact that a risk conscious organisation enjoys a competitive advantage over its rivals that do not have strong risk management culture because it could formulate and implement effective business strategies that could stand against perceived critical risks. Nonetheless, risk consciousness directly benefit in evaluating business potential / scope, capitalising available opportunities and ensuring sustainable development because the firms set realistic goals followed by realistic expectations with organisational personnel. In addition, the risk consciousness leads to internal efficiency because employers control their cost structure to maximise their margins. For instance, employees in a risk conscious organisation are mentally prepared about perceived risks and the contingency measures that need to be taken when external environment aggravates. References / Bibliography Gerry Johnson & Kevan Scholes, (2008), Exploring Corporate Strategy, 8th edt, Prentice Hall Ruth Bender and Keith Ward, (2002), Corporate Financial Strategy 2nd edition, Butterworth Heinenann Glen Arnold, (2007), Essentials of Corporate Financial Management, Prentice Hall Easy Jet Report (2009) “Financial Report of Easy Jet 2009” www.easyjet.com Annual Report (2009) “Financial Report of Ryanair 2009” www.ryanair.com McWilliam, Erica (2004). On being accountable: Risk-consciousness and the doctoral supervisor. In: AARE Annual Conference http://www.aare.edu.au/04pap/mcw04267.pdf De Wit, B. and Meyer, R., (1998) Strategy: Process, Content, and Context. 2nd edition, London: International Thompson. Neale, A., and Haslam, C., (1994) Economics in a Business Context, London. Thomson Business Press Copeland, T, Koller, T and Murrin, J. (1990) Valuation: measuring and managing value, New York: John Wiley Rutterford, Janette (1998) Financial Strategy: Adding Shareholder Value. John Wiley & Sons Bainbridge, Stephen (2009). Caremark and Enterprise Risk Management. The Journal of Corporation Law, Vol. 34:4, pp. 967-990 Koch, R. (1994). The Financial Times Guide to Management and Finance, London, FT Pitman Walsh, Gary (1996 - Latest), Key Management Ratios, Financial Times Lynch, Gary (2008). At Your Own Risk: How the Risk-Conscious Culture Meets the Challenge of Business Change. John Wiley & Sons Inc. Emmison, Michael and Philip Smith (2002). Confronting the Millennium: Beck, Risk and Y2K. Risk Management, Vol. 4, pp. 17–27 Beasley, Mark, Richard Clune and Dana Hermanson (2005). Enterprise risk management: An empirical analysis of factors associated with the extent of implementation. Journal of Accounting and Public Policy, Vol. 24, No. 6, pp. 521-531 Whitfield, Rick (2004). Creating a Risk Conscious Climate. NACUBO Business Officers, pp. 27-32 http://isis.fastmail.usf.edu/uac/documents/riskmanagement.pdf Liebenberg, A. & R. Hoyt. (2003). The determinants of Enterprise Risk Management: Evidence from the appointment of Chief Risk Officers. Risk Management and Insurance Review, vol. 6(1), pp. 37-52. Lam, J. (2000), Enterprisewide risk management and the role of the chief risk officer. ERisk, pp. 15. Colquitt, L.L., Hoyt, R.E. & Lee, R.B. (1999), Integrated risk management and the role of the risk manager. Risk Management and Insurance Review, 2, pp. 43-61. Read More