Managing Strategic Risk - Case Study Example

Name Managing Strategic Risk Course Date Word Count: 2937 Managing strategic risk: Formaldehyde Chemical Company case study Introduction The case study involves Formaldehyde Chemical Company whose main process entails producing Formaldehyde that is supplied to several industrial customers in UK and Europe. Formaldehyde (CH2O) is an organic compound and is the simplest of aldehydes. Normally it is a gas at room temperature. Formaldehyde is a colorless gas and has a pungent, irritating smell. It is used as a precursor to several materials and chemical compounds (Robert, 2005). The company is located outside the Industrial Centre of the City and is relatively close to three housing estates and a small village, with about 3000 people. A tributary to the River Ure passes directly alongside your company boundary and the river is a habitat for salmon and other wildlife species. The Formaldehyde is the most important and profitable part of the company. Some local community members would like the site should be relocated due to a leak that occurred three years ago from the storage bund. The local authority would prefer the site relocating. This report seeks to carry out a strategic risk management of Formaldehyde Chemical Company. Risk assessment to ascertain the risk to your business from the on-site process and transportation off site of formaldehyde Storage risk The gas in the storage tanks may leak which might end up being released in the environment. The business premise is near a river which is a successful habitat for salmon and other wildlife species. Therefore, this poses an environmental risk to the species habiting in the river because formaldehyde is hazardous due to its mobility, and endurance, aquatic toxicity as well as toxicity to vertebrates. The probability of formaldehyde leaking increases this risk. However, since the leak has occurred just once in a period of 40 years, this shows that the risk of formaldehyde leak to the environment is low. Additionally, if there are effective mechanisms to control the diffusion of formaldehyde to the environment the risk is relatively low (Damodaran, 2008). Likelihood scoring scale Level 2 Descriptor Medium low Comment There is a relatively low likelihood of formaldehyde leaking into the river although the location of the business premise near the river relatively increases the environmental risk (Paul, 2012) Process risk The technology used in the manufacturing of formaldehyde may at one time go be erroneous or a technological change may occur which might render the current technology redundant. Additionally, workers working in the company exposed to a probability of airborne exposure to formaldehyde. Within workplace, formaldehyde exposure can take place through gaseous form where the respiratory tract absorbs it and can also be absorbed through skin contact. The health effects resulting from formaldehyde exposure vary with the route of exposure and the absorbed concentration. Moreover, the preparations used in manufacturing formaldehyde if swallowed can be harmful and irritating to the eyes. However, since there is good ventilation, respiratory protection and all workers use respirators, the likelihood of the risk occurring is low (Lynn, 2004). Likelihood scoring scale Level 1 Descriptor Low Comment The business has set the required protective measures against formaldehyde exposure and thus the likelihood of the risk occurring is low (Paul, 2012) Transportation Formaldehyde is highly flammable especially if exposed to open flames, sparks, static discharge, heat, in addition to other ignition sources. This exposure can occur during transportation. In addition, formaldehyde can explode if exposed to high temperature. For example, in the area where temperature is 180 C, there is an explosive reaction with nitrogen dioxide which is readily available in the air. With high temperatures there can also be explosion hazard indoors and runoff of the gas to sewer can result to fire breakout or explosion hazard (Damodaran, 2008). Likelihood scoring scale Level 2 Descriptor Medium Low Comment The necessary precautions have been implemented and the likelihood of high temperature exposure is low. However, there is a relatively low chance of fire breakout or explosion. Evaluate the risk against the following strategic categories of risk Potential storage risks Causes Risks Incident Consequences Wear and tear A hole on the storage facility Gas leakage Exposure to toxic gas (respiratory and skin contact) Pollution High temperature Exothermic reaction Explosive reaction Fire/explosion Exposure to smoke Inadequate supervision Spilling gas from the tank Gas Overflow Exposure to toxic gas (respiratory and skin contact) Pollution Exposure to open flames/ heat/ other ignition sources Explosive reaction Flammability Fire breakout (Schroder, 2012) Potential transport risks Causes Risks Incident Consequences Over speeding Accident occurring Gas leakage Fire breakout Exposure to toxic gas (respiratory and skin contact) Pollution Robbery attack Lost revenue Loss of the gas on transit Financial loss Long distances Accident Gas exposure Gas leakage Fire breakout Exposure to toxic gas (respiratory and skin contact) Pollution Exposure to air (nitrogen dioxide) Explosive reaction Flammability Fire breakout (Schroder, 2012) Potential process risks Causes Risks Incident Consequences Technological error Incorrect gas preparation Equipment failure Flammability Explosion Fire breakout Exposure to toxic gas (respiratory and skin contact) Pollution Changes to technology used in production of formaldehyde Technology being rendered redundant Faulty technological processes Financial loss Changes to industry standards Technology being rendered redundant Faulty technological processes Financial loss (Schroder, 2012) Risk assessment for the identified risks Storage processes for Formaldehyde The major risk on the site involves the storage of formaldehyde. This is depicted in the case study where three years ago there was a gas leakage which was contained within the tank storage bund. This indicates that gas leakage is imminent and hence the likelihood of gas leaking is high. Additionally, gas leakage has a likelihood of the consequences being catastrophic. There is a possibility of the incident occurring (Damodaran, 2008). However, there are other risks involved with the storage of the gas that could cause notable consequences though their likelihood of occurring is not high since Formaldehyde Chemical Company has not witnessed them before but have been identified as a precaution measure (Damodaran, 2008). Transport processes for formaldehyde The major risk in transport of formaldehyde is accident taking place because this could cause a gas leakage to an open environment and hence causing a likelihood of fire breakout, exposure of human beings and also animals to the toxic gas which can eventually result to death. Since transportation of the gas from the site to the supply centers occurs frequently, the likelihood of this hazard taking place is high. Transport process also faces other hazards such as vehicle breakdown and robbery attacks during transit which could result to loss of revenue to the company, long distances while transporting the gas and this might expose the gas and also there is a likelihood of an accident occurring. Furthermore, during transit, the gas might be exposed to nitrogen dioxide which is readily available in the air and this may end up causing an explosive reaction because when these two gases reaction an explosion occurs (Anderson, 2006). Technology process for formaldehyde The technological error in the process can result to incorrect preparation of the gas which can result to explosion and flammability. The impact of this risk is major because the consequences are very severe. On the contrary, the likelihood of the risk occurring is relatively low. Since innovations are endeavor ongoing, there is a likelihood of the technology used in the production of formaldehyde changing and this might result to redundancy of the technology that Formaldehyde Chemical Company is currently using. This would definitely result to a huge financial loss to the company because for instance all the machines being currently used in the company would need replacement in order to keep up with the new technology. Similarly, changes to the industry standards would also mean some aspects of the technology the company is currently using being rendered redundant. This would also result to heavy financial loss to the Formaldehyde Chemical Company. However, the likelihood of the changes to industry standards and changes to technology used in production of formaldehyde is relatively low (Alexander, 2005). Document your risk assessment and conclusions in an appropriate format indicating inherent risk (PESTL) Political risks Formaldehyde Chemical Company faces various political risks which include: include the part of the local community that has been very vocal with their objection of the company’s continued presence at the site due to the small leak that occurred from an on-site storage tank. This is because there is a high likelihood of the local community deciding to protest against the company. Another political risk is the possibility of planning law changing which might end up to the relocation of the company. Moreover, increased health and safety regulation which may end up reducing the threshold of Formaldehyde may take place. Finally, there is a risk of changes regarding the gas emissions to the atmosphere where the government may demand zero tolerance to gas emissions to the environment. The risk strategies that should be adopted for the political risks include transfer and mitigate. This can be achieved by ensuring that the company is insured against the political risk, mitigating the risk by being prepared to take up changes and through complying with the set rules (Harris, 2012). Environmental risk The environmental risks include the gas spillage to the causing pollution. There is a river and a tributary besides the factory and thus there is a higher probability of the aquatic habitants being harmed in case of a spillage. Additionally, there are some emissions which cause air pollution that are produced during the production of Formaldehyde. The risk strategies that can be adopted for the environmental risk include transfer, avoid and mitigate (Paul, 2012). Transfer can be done by insuring the company against the environmental risk so as to ensure that the risk is transferred to an insurance company. For example, in case of oil spillage and the company is sued for compensation, the insurance company would be the one to compensate the locals rather than the company. The risk can be avoided and mitigated by the company establishing the appropriate measures to deal with pollution in case of the gas emissions or spillage and by setting onsite and offsite emergency plans to make sure that in case of an oil spillage or such an incident the emergency department responds to the risk as soon as possible and therefore mitigating even the impact of the risk (Anderson, 2006). Economical risks The business faces economic risk through ways such as, customers not paying after being supplied with formaldehyde, cash flow shortages in the company, and increased costs in maintaining the business. The risk strategies that can be adopted for the economical risks include transfer and mitigate. Risk transfer can be done by insuring the company against the risk to make sure that the company does not encounter any financial loss in case for instance the customers fail to pay for a delivery or in case the company faces a calamity and experiences financial strain (Mark, 2007). Social risk The social risk involved is the pressure from the local people for the Formaldehyde Chemical Company to be relocated. The pressure started when the small gas leak occurred from an on-site storage tank. The pressure from the locals could increase to a point where action groups and the authorities would really start demanding for the company to be relocated. The risk strategy that should be adopted for the social risk is risk mitigation. Risk mitigation of social risk will include public relations strategy and employment strategy. The public relations strategy will involve making the locals think positively about Formaldehyde Chemical Company and its offering in order to reduce the gap between how the company views itself and how the locals view it. The key objectives would be develop, maintain as well as protect the reputation of the company, improve its prestige and present a favorable image for the company. On the other hand, employment strategy would involve giving the locals employment opportunities to ensure that the public relations strategy towards the locals by the company is put into actions (Harris, 2012). Technological risks The technological risks involve; an error occurring with the technology, using unproven technology, changes to technology used in production of formaldehyde, and changes to industry standards. The technological process entails production of formaldehyde which faces a great risk from the presented hazards. The risk strategies that can be avoid and mitigate. This can be achieved by employing experts in the latest formaldehyde production as well as researching on the latest technologies on formaldehyde production to ensure there is no lagging behind for the Formaldehyde Chemical Company in terms of technology. Additionally, hiring of experts in formaldehyde production would ensure that the probability of a technological error taking place is mitigated as much as much as possible (Alexander, 2005). Legislative risk The business faces legislative risk such as resolving the dispute that may arise between the business and the locals, non-compliance with the set regulations and also misunderstandings with the local authority, for instance, where the local authority may opt for the business to relocate. The risk strategy that should adopted for the legislative risk include avoid and mitigation (Paul, 2012). This can be achieved by the complying with the regulations set by the local authorities, and ensuring that the company has set guidelines for dealing and resolving disputes that may arise between the company and the people from outside the company. Additionally, the company can also transfer the legislative risk by insuring the company where in case of a legal dispute and the company loses the case, the insurance takes care of the risk. The risk such as legal dispute following an oil spill can be mitigated through compliance where if the company complies with the set guidelines and ensures that all safety measures are taken into place; there is lesser likelihood of a spill taking place (Anderson, 2006). Competitive risk Formaldehyde Chemical Company faces competition from other companies in UK and Europe that also supply formaldehyde. This is because the company supplies its formaldehyde in these regions and hence in an event where the other companies out do it, the company’s sales are likely to reduce. The risk strategies that can be adopted for the competitive risk include avoid and mitigate. This can be achieved by the company setting up a marketing department that would promote the company’s product in UK and Europe. It can also be achieved by the company ensuring its product is of high quality so as to maintain the competitive edge (Mark, 2007). Customer/stakeholder risk The company stands the risk of losing its customers if the customers and not satisfied with the product and the services or losing the customers to its competitors. . The risk strategies that can be adopted for the competitive risk include avoid and mitigate. This can be achieved by the company ensuring its product is of high quality in order for the company to maintain its clients (Mark, 2007). Principles of Integrated Risk Management to define the issues to be addressed to control the risk and reduce it to an acceptable level Anticipate To ensure there are mechanisms of anticipating storage risks, there should be a predictive maintenance where analytics should be installed to predict potential storage equipment faults in order to provide sufficient notice to procure other storage facilities to replace the faulty ones. Additionally, algorithms that identify a departure from usual operating levels should be installed (Edward, 2005). Assess The first step is the identification of hazards and threats to make sure that they are dealt with in case they are present. Assessing the likelihood of the hazards taking place follows so as to put up the necessary mechanisms to be ready to respond to the hazards when they occur and also employ the necessary preventive measures for the risks with high likelihood of occurring. Appreciating the spread of the risk and assessing the resultant consequences of the risks is necessary in order to compute the necessary responsive mechanisms. Prioritizing the risks that need first priority will follow. In this case, the storage risk should be prioritized. Lastly, there is dynamic monitoring of the hazards and in this case it will encompass monitoring the storage process, technological process and transportation to ensure the processes do not get out the required standards (Edward, 2005). Prevent In order to prevent the risk of gas emissions during storage, inspection and maintenance of the storage facilities to ensure they are in good condition. The technologies should also be updated often to make sure that the company does not lag behind technology wise. Also, all the measures to counter risks involved in transportation of Formaldehyde should be implemented to prevent the risk from occurring (Martin, 2008). Prepare This includes emergency plans to handle emergencies like gas leakage and training the organizational workers to ensure they have the required skills to respond to the emergencies in case the risk occurs (Anderson, 2006). Respond Emergency plans of tackling the immediate effects of the hazard should be there. For example, the company should come up with emergency responsive plans of responding to spillage and the ensuing damage in order to ensure that the hazard is responded to on time and effectively as well (Martin, 2008). Recover For Formaldehyde Chemical Company recovery would mean risk assessment in order to be ready, prevent and take the necessary measures when faced with the risk such as the spillage that took place three years ago. In case of occurrence of risks such as spillage, litigation and compensation would follow. In conclusion, the risk assessment would also be important in identifying the likely risks so as to find measures of avoiding and mitigating them (Edward, 2005). Bibliography Anderson, T., 2006, Perspectives on Strategic Risk Management, Copenhagen, Copenhagen Business School Press DK. Alexander, C., 2005, The Professional Risk Managers' Handbook: A Comprehensive Guide to Current Theory and Best Practices, London: PRMIA Publications. Damodaran, A., 2008, Strategic Risk Taking: A Framework for Risk Management, Melbourne: Pearson Prentice Hall. Edward, B., 2005, Risk, Crisis and Security Management. New York: Wiley Harris, E., 2012, Strategic Project Risk Appraisal and Management, Leicester: Gower Publishing, Ltd. Lynn, A., 2004, An Assessment of Texas State Government: Implementation of Enterprise Risk Management, Applied Research Project. Texas: Texas State University. Mark, S., 2007, Introduction to Risk Management and Insurance (9 ed.), Englewood Cliffs, N.J: Prentice Hall. Martin, G., 2008, Risk Management Systems: Technology Trends (Finance and Capital Markets), Basingstoke: Palgrave Macmillan. Paul, K., 2012, Fundamentals of Risk Management 2nd Ed., New Jersey: Kogan-Page. Robert, C., 2005, CRC Handbook of Chemistry and Physics, Boca Raton, FL: CRC Press. Schroder, W., 2012, Strategic Risk Management Practice: How to Deal Effectively with Major Corporate Exposures, Cambridge: Cambridge University Press. Read More