Principles of Risk of J. Sainsburys - Case Study Example

RISK ASSESSMENT HERE YOUR SCHOOL INFO HERE HERE WORD COUNT: 2,550 TABLE OF CONTENTS I. Introduction II. Risk Assessment Risk identification 2. Understanding the risk content III. Identification of three key risks 1. Wrong business strategy adoption 2. Turbulent financial markets 3. IT system failures IV. Appropriate risk responses V. Conclusion References I. INTRODUCTION Managing uncertainty is an appropriate definition of risk management, involving the ability to identify, evaluate and prioritise potential hazards and threats to business continuity and sustainability (Hubbard, 2009; Flyvbjerg, 2003). Risk management activities require appropriate allocation of resources (both economic and human capital-related) to minimise perils to business operations, to establish appropriate monitoring systems, and attempt to control the probability of inopportune or otherwise regrettable events from occurring (Borodzicz, 2005). The process of risk management is to better assist the organisation to avoid interruption to the achievement of established business objectives and ensure that the organisation does not experience despondency (Sadgrove, 2005). Risk management is a holistic methodology of policies, best practices and procedures to identify, treat, evaluate and measure risk (Haneef, et al. 2012). This research project attempts to provide a critical review of the risk assessment procedures and best practices of J. Sainsbury’s, a UK-based supermarket chain currently sustaining a 15.5 percent market share over major competitors such as Tesco and Morrison’s (Thompson, 2010). This strong market position is attributed to Sainsbury’s firm commitment to identifying and controlling risk to ensure smooth operations and maintain competitive advantages over competition. Without risk management, the company would not be well-insulated against unfortunate events that could impose significant economic costs on the entire business model. The structure of the project is to first outline potential risk factors which facilitates the construction of a risk map and risk register to evaluate the priority, impact and overall ranking of identified risks. The project then focuses on three specific risks that are most influential in proposing hazards to the supermarket chain. Against the identified key risks, the research project works to create suggestions of the most suitable risk management strategies that are most beneficial for this particular business model in an effort to minimise and control risks at J. Sainsbury’s. II. RISK ASSESSMENT 1. Risk identification In order to properly evaluate risks to a business, the first priority is to establish a universal understanding of what actually constitutes risk. Risk is best defined as the potential to lose something of significant value. It can also be defined as the likelihood that uncertain events, into the future, will occur which will lead to future losses of valuable resources both human and economic (Jones, 2006). There are many potential methodologies for measuring risk, which include brainstorming, the development of checklist instruments that identify a variety of diverse criteria and organisational/market-based variables, the respected PESTLE Analysis procedure (AIRMIC 2010), internal auditing practices or even quantitative/qualitative instruments that measure aspects of the external market to better align internal processes and activities to met changing market demands. These techniques all have their benefits and disadvantages, however there is usually a need for a more ambidextrous risk management methodology that demands the utilisation of differing, intersecting methodologies to ensure a thorough review of all potential risk factors that could interrupt the business and its attainment of organisational goals. 2. Understanding the risk content Review of risk management and risk factor attributes for Sainsbury’s is derived from the organisation’s own annual report, from external literature on risk management practices, and the overall framework of risk. Sainsbury’s mission is “is to be the consumers first choice for food, delivering products of outstanding quality and great service at a competitive cost through working faster, simpler and together." (Biz/ed, 2012, p.1). However, in order to sustain competitive costs, ensure outstanding quality, and be the first choice for food products, the company must minimise and control risks that could complicate achievement of these mission objectives. For Sainsbury’s, the most viable tool for identifying risks is the PESTLE framework, a type of mind-mapping strategy that identifies the political, economic, social, technological, legislative and environmental factors (all externalised) that could potentially contribute to the absorption of risk to the business model. This is illustrated in Figure 1. Figure 1: Risk identification utilising the PESTLE Analysis framework The above mind-mapping utilising the PESTLE analysis framework identifies the potential risks that could, theoretically, impact the profitability and competitive advantages of Sainsbury from a multitude of different dimensions. Sainsbury’s, in the company’s annual report, has identified five specific risks that are the most critical and dangerous to maintaining forward momentum as a company with strong cost controls and significant competitive advantage (Sainsbury’s, 2013): Description Risk I.D. Probability Impact Threat Major Event T1 1 -5 Wrong Business Strategy Adoption T2 4 -3 IT System Failures T3 3 -4 Changes in currency value, interest rates or turbulent financial markets T4 4 -3 Supplier Failures T5 2 -3 Legend: Probability: 1 – Very Unlikely; 2 – Unlikely ; 3- Possible; 4 – Likely ; 5 – Very Likely Impact Threat: -1 – Negligible; -2 – Marginal; -3 – Significant; -4 – Critical; -5 – Crisis The above table describes the probability of identified risks already identified by Sainsbury’s governance and executive leadership group as well as the potential impact threat ranging from negligibility to crisis situation against the company’s current business model. It would be prudent to point out that risk ratings are highly dependent upon individual evaluation and ability to discern the holistic business model. Now that each risk factor identified that legitimately impacts Sainsbury’s has been labelled with an appropriate Risk I.D., an appropriate risk map identifying the potential dangers and impact on Sainsbury’s business model can be formulated. Figure 2: Risk Map of Identified Sainsbury’s Risks Threat Legend Very High Medium Low By comparing the potential risk scores and threat scores holistically, the executive team at Sainsbury’s will be able to assign appropriate resources to the correct individual, team or department to combat the potential risk based on analysis of probability and potential threat levels. To further secure the reliability and integrity of the risk management system, risks should be recorded in an appropriate risk register for a more fluid documentation of risks to operations, finance and other important aspects of business objectives. See Figure 3. Figure 3: Risk Register with Detailed Description of Risk I.D. impact and threat level Risk I.D. Risk Category Cause Risk Description Consequence Status Overall Likelihood Impact Priority T1 Major Event Natural disasters, terrorist activities Any scenario that halts distribution or the ability to ensure procurement of needed product. Complete disruption of business operations Active 1 Very unlikely -5 Crisis Undesirable level of risk T2  Wrong Business Strategy Adoption  Failure to Properly Comm-unicate, poor leadership skills  Bad marketing, poor pricing decisions, inferior distribution methodology  Loss of revenues, loss of customers, food spoilage  Active 4 Likely -3 Significant  Undesirable level of risk T3  IT Systems Failures  Blackouts, software failures, poor support services Register failures, BRP software failure, payroll and invoicing system failures Delay in receipt of accounts receivable, short-term business disruption Active 3 Possible -4  Critical  Undesirable level of risk T4  Changes in currency value, interest rates or turbulent financial markets  Monetary policy changes in the UK, stock market speculation  Loss of profit, invaluable common stock. Moderate to significant revenue losses  Active 4 Likely -3 Significant  Undesirable level of risk T5  Supplier Failures  Bankrupt suppliers, supplier layoffs. Inability to procure adequate stock levels  Higher costs along supply chain, shortages of supply  Active 2 Unlikely -3  Significant  Undesirable level of risk III. IDENTIFICATION OF THREE KEY RISKS This section spotlights the three most significant and probable risks to Sainsbury’s business operations and objectives. 3.1 Wrong Business Strategy Adoption One of the main risks to businesses is placing all of their proverbial eggs into a single basket, hence failing to diversify (Thompson, Strickland and Gamble 1992). Many of Sainsbury’s competitors have diversified offerings, such as Tesco, which now offers financial services and a vast array of service-oriented businesses that do not necessarily involve food sales and grocery sales. Companies are considered to be diversified when they operate at least two businesses and maintain a large volume of different products that are unique to the original parent organisation (Muszynski, 2011). The main risk with adopting a wrong strategy is that in today’s contemporary environment and with the impact of globalisation, it is becoming technologically and economically easier for companies to replicate another company’s product offerings (Nandan, 2005). Companies that do not diversify are at constant risk of having competitors mimic product offerings and the general business model of organisations. The problem is that when this occurs, it can be quite expensive for those who have had their strategies and products replicated to respond fast enough to avoid loss of market share and sales revenues. Just the development of a small innovation on behalf of the imitator company can lead to an existing product or service entering the decline stage along the life cycle model (Dooley, 2005). When products enter the decline stage, it is usually accompanied by consumer defection to the new pioneer and loss of sales revenues that are vital to sustaining competitive advantage and market share. Yet another example of improper strategy development risks is improper marketing strategy, a function of operations that is often crucial in highly competitive environments for gaining consumer interest and attention to a brand (Schiffman and Kanuk, 2010). Because many supermarkets, today, have very homogenous product offerings, they often resort to marketing as a means of differentiating the brand and creating a unique brand personality. Failure on behalf of marketing teams or executive leadership to develop appropriate marketing plans could seriously erode the brand equity of the organisation and subsequently lead to revenue losses. For example, Sainsbury’s currently attempts to appeal to a phenomenon in consumer behaviour known as ethical consumption, whereby consumers are more dedicated and loyal to those companies that have a strong ethical stance and contribute strongly to corporate social responsibility (Grande, 2007). Sainsbury’s currently has a strong commitment to CSR (Sainsbury 2011), however market conditions could change and consumer behaviour related to ethical consumption could shift to a different social aspect. Additionally, companies that utilise improper pricing strategies run the risk of angering consumers and causing them to defect to competitor brands that are perceived as having more value economically. Tam (2004) identifies that consumers find satisfaction and value when they perceive quality aligned with the costs of obtaining the service or product. Pricing promotions are known to be one of the most influential on consumer attitude as it relates to quality perceptions (Dawes, 2004). As indicated, there are countless risks associated with adopting an improper marketing, pricing or diversification strategy. 3.2 Turbulent Financial Markets The recession of 2008-2010 taught the business world that volatility in the stock market and changing monetary policies can significantly inhibit business operations. The probability of this occurring for Sainsbury’s is significant based on trends in government intervention for interest rate stabilisation efforts and improving national fiscal policy. Sainsbury is under constant threat of a changing market where stock market speculation occurs regularly, which erodes stock prices, thus impacting capital production. Additionally, currency valuation and devaluation radically changes profit potential for the business. These situations are largely out of the control of Sainsbury and involve the interventions of government and shareholder investors. 3.3. IT System Failures As with all industries, there are human errors that occur in IT support services as well as server failures that can temporarily disrupt business. Software failures as a result of programming, though correctable in most cases, can slow down receivables receipts, invoicing capabilities and other inter-connected business functions. Sainsbury’s has very inter-connected business activities that are wholly reliant on successful information technology systems that are crucial to revenue production, replenishment planning and resource planning needs. Though only short-term to the business, it represents a more probable business interruption, thus Sainsbury’s should be aware of this potential risk. IV. APPROPRIATE RISK RESPONSES Managing risk effectively depends on the nature of the organisation, its level of risk appetite, its tolerance, and the approaches towards managing risk. Finding the appropriate strategy for Sainsbury’s, a company that has many steering committees in its corporate governance model, is well equipped to tolerate risk and subsequently measure and reduce its prevalence in the business model. Hence, the author will offer a variety of risk reduction strategies to effectively deal with the identified three key risks most likely to impact the organisation. To combat the risk of adopting an inappropriate business strategy, the company should be utilising questionnaires and other quantitative research instruments to measure consumer responses and behaviour patterns toward existing product offerings both pre- and post-launch of product strategies and innovation creations. The PESTLE framework of analysis recognises economic conditions and social conditions that are strongly influential in what drives consumer patterns and demands for supermarket services and product offerings. Sainsbury’s should be recruiting its consumer-oriented steering committee members to conduct market research regularly addressing such issues as pricing, competitive product offerings and the overall view of the corporate brand. This is a reduce-enhance approach whereby actual data achieved through surveys and questionnaires can allow the company to be more responsive and adapt the business model to meet changing consumer conditions and consumption behaviours. To combat the risk of IT failures, the company should be assigning championship to internal staff members involved in IT support services to run regular diagnostics of existing software programs and run periodic testing scenarios to measure potential failures or inefficiencies identified in the infrastructure of information technology services. This might involve outsourcing expert professionals with unbiased viewpoints about software integrity who can be more neutral, balanced and detached from Sainsbury’s corporate mission so that they can be more adept in fixing, proactively, any potential problems that might arise with software integrity. Though this action might impose short-term costs, this is offset by the tremendous losses that would occur as a result of significant IT failures. Finally, to mitigate risk associated with turbulence in the financial and currency markets, Sainsbury should adopt a transfer-share approach to risk management by transferring risk to a third party. The organisation has many opportunities to change its internal investment strategies (such as hedging) that would offset losses related to currency, common stock valuation, or other important financial risks. A steering committee should be developed that recognises and monitors trends in the stock market and report on findings so that new investment strategies with higher yields can be identified proactively in the event of a sudden market drop or when speculation occurs in the capital markets. There is a well-established credit default swap market that allows businesses to transfer these risks to third parties that are well-versed in hedging strategies and alternative investment opportunities. By hiring external professionals and having internal experts monitor changing financial conditions, the company will have a proactive strategy for reducing risk and offsetting any potential losses in the event of capital market failures or poor government intervention in the redevelopment of fiscal policy. V. CONCLUSION This study sought to identify the most substantial risks to Sainsbury’s current business model and identify risk mitigation strategies that would be most viable for sustaining the company’s current market share and competitive advantages. The three key risks identified were IT system failures, development and implementation of poor business strategies, and the somewhat uncontrollable elements of currency and other financial markets impacting future business success. If Sainsbury’s follows the recommended risk reduction and response strategies identified in the research, following the risk map and risk register-documented threat levels and probability, the company can be more well-insulated against risk today and well into the future. References AIRMIC. (2010). A structured approach to enterprise risk management and the requirements of ISO 31000, The Association of Insurance and Risk Managers. Retrieved January 15, 2014 from http://www.theirm.org/documents/SARM_FINAL.pdf Biz/ed. (2012). Sainsbury’s case study home page. Retrieved January 14, 2014 from http://www.bized.co.uk/compfact/sainsbury/sainsindex.htm?page=9 Borodzicz, E. (2005). Risk, crisis and security management. New York: Wiley. Dawes, J. (2004). Assessing the impact of a very successful price promotion on brand, category and competitor sales, Journal of Product and Brand Management, 13(5), pp.303-314. Dooley, F. (2005). 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