Risk management and Planning in Tesco plc - Essay Example

Risk management and Planning in Tesco plc Part A Introduction TESCO is the third largest retailer in the world. Tesco was the first major retailer to introduce carbon labeling on products. Initially established as a grocery retailer in the UK, the company has expanded its business to various countries across the world and its operations include from clothing, electronics, furniture and petrol to books, banking, telecom and software. The phrase "The Tesco Way" coined by its CEO Terry Leahy seeks to hold out to the public the company’s philosophy and values. The company has been in the forefront in its risk management policies, technological innovations such as camera and self-service tills in the retail industry and CSR initiatives over the period of time. The business risk is different from the financial risk in relation to a company. While the financial risk is related to the capital structure and debt, the business risk is related to the economic conditions. The prevailing economic conditions in relation to an industry will affect the different companies differently, based on the relative exposure to the economy, which has been strategically structured by the companies concerned. However, failing to react in tune with the external environment is the greatest risk as it will affect the performance of the companies in the background of liberalization and globalization. Current Risk Management Process The company (2010) states “We recognise the value of the ABI [Association of British Insurers] Guidelines on Responsible Investment Disclosure and confirm that, as part of its regular risk assessment procedures, the Board takes account of the significance of SEE [Social, Ethical and Environmental] matters to the business of the Group... and incorporates SEE risks on the Key Risk Register.” The group operates in a highly competitive environment. TESCO’s five year business rolling plan forms the basis for risk management in the company in line with the company’s objectives, policies and values. The standards formulated based on the core values are the guiding principles in its relationship with the various stakeholders on balanced scoreboard approach. Woods, M. (2008) states “The popularity of the scorecard can be explained in part by the fact that it recognises the significance of non financial factors in determining strategic success, and hence moves performance measurement away from its traditional focus on purely financial measures”. The Key risk register maintained by the company updated with the risks identified at various levels on a regular basis through internal discussions also contains the controls and procedures in relation to mitigation of the risks listed in the register, which lends focus to the management processes. Tesco CEO, Sir Terry Leahy (2009) states “A low-carbon strategy is also vital if we are to minimize the risk to our business: the physical threat of climate damage to our supply chains, the resulting economic damage; and the serious effects of rushed and inefficient regulation if we fail to act in time and governments are forced to take draconian action.” TESCO: Risk management - Flow chart Corporate Strategy Risk management problems The climate change is considered to be real risk by the company. UK is committed to 80% reduction in CO2 emissions by 2050 at the recent Copenhagen Climate Change Summit in December 2009. Finamore (2009) states “a carbon intensity target will require each province and major enterprise to measure, report and reduce their CO2 emissions and energy consumption, year-on-year, acting as a driver for greater efficiency and renewable”.  Elaborate system of internal controls and continuous review and monitoring of the processes is important in risk management. An excellent reporting system within the company ensures coordination of the risk management activities through Audit Committee, Internal Audit, External Audit, Finance Committee, Compliance Committee, CSR Committee and whistle blowing policy in respect of malpractices. There are several tools available for risk analysis. The system which is in place for control and monitoring needs to be effective in identifying the internal strengths and weaknesses. The Balanced-scorecard system in TESCO unites the group’s resources at all levels throughout the organization aids monitoring on a balanced basis in relation to various divisions and all the stakeholders. SWOT analysis is predominantly used to analyse the Strengths, Weaknesses, Opportunities and Threats relating to an organization. PESTLE an acronym for Political, Economical, Social, Technological, Legal and Environment, is effective in the analysis of macro environmental factors in relation to the current as well as future operations of a business. PESTLE analysis in the recent years includes ethical and demographic dimensions of the businesses, and called as PESTLIED or STEEPLE. (Rapidbi, 2007) The developments over the period of time CSR front and environmental protection post Kyoto protocol and demographic factors in the backdrop of liberalization and globalization are increasingly relevant in the macro environmental analysis. An organization as a part of the community is responsible to the society as it is to the other stakeholders in the business. Identification of the risks enables the company to overcome the weaknesses with its strengths and avoid threats in exploiting the opportunities existing in the environment. The weaknesses and the threats relating to the groups are reviewed here. Weaknesses The company leverages its strength in the UK markets for its expansion overseas while the equation in retail industry within the UK has been undergoing changes. Developments such as revival and consolidation of Sainsbury’s under restructuring and Morrison group’s takeover of Safeway chain need to be considered in the overall business strategy of TESCO. BBC news (2001) stated “Sir Peter, credited with revitalizing the Prudential in the mid-1990s, has been working the same trick at Sainsburys after replacing Dino Adriano as chief executive early last year”. TESCO’s aggressive expansion through debt is yet to be reflected fully in the operational efficiency, profitability and quality of the earnings. Overseas expansion is wreaked with several uncertainties and dependence on external agencies for advice. For example Tse, V. (2010) states that audit work performed and the investigations conducted in the IKEA’s Russian operations by the firms like KPMG, Ernst & Young, PriceWaterhouseCoopers, Sweco and Cowi revealed the shortcomings in shopping centres buildings, lack of permission for operations, poor corporate governance and weaknesses in internal controls and poor personnel management. Threats The structural changes in the industry could lead to intensive competition and fight for market share. As far as the overseas expansion is concerned, the economic development of these countries and the improvements in the outlook and policies of the governments with regard to foreign direct investment (FDI) hold the key for its success. The dominance of TESCO in the market could also face threat from the other international players’ strategies. Betting on TESCO brand in the international operations is considered to be riskier as it involves heavy promotional expenses. The retailers’ foray into other sectors, for instance into financial services as in the case of Sainsbury’s could neutralize the advantages of TESCO’s entry into the sectors like financial services and insurance in the long run. The retail stores due to its proximity and constant touch with the consumers are increasingly under pressure to follow the best CSR policies as well as environmental practices. From the legal perspective, the industry has been recently accused of price fixing and such issues could affect the growth of the industry in the long run. Poulter (2008) stated “Supermarkets and big brands could face fines of more than £300million after claims they colluded on the price of food and health and beauty products.” In the environmental front, waste disposal assumes greater significance for the retail companies. According to letsrecycle.com, the Secretary of state Caroline Spelman has commented that “Defra [Dept. for environment food and rural affairs] is specifically charged with working towards a zero waste economy, encouraging paying people to recycle and working to reduce littering.” Disposal of waste and renewable energy from waste which has been advocated against land filling involve capital investment, whereas the benefits would accrue to the business over a longer time horizon. Part B Proposed Risk Management Plan Risk with reference to the business needs to be analyzed from a long term objectives of the company which is reflected in its Corporate Social Responsibility (CSR), rather than the short term objective of profitability. Unless a company integrates its policies with the emerging trends in the backdrop of its CSR policies in line with the developments in technology and telecommunications, the sustainability of the organization in the long run becomes questionable. There are several instances in the corporate history where poor CSR policies resulted into serious consequences like “H&M, which was caught by the New York Times shredding unsold clothes from a Manhattan store, rather than donating them to the homeless; and a KFC television advertisement in Australia which provoked … accusations of racism in the US”. (Gapper, 2010) A risk management plan needs to be realistic taking into account the various aspects involved in the process, viz. Risk identification, Risk responsibilities, Risk assessment, Risk response, Risk mitigation, Risk contingency planning, Tracking and reporting and Processes to address immediate unforeseen risks. Qualitative and quantitative methods are used in risk analysis for evaluating the application of various risk management options. Risk Mitigation Planning aims to eliminate the weaknesses with the inherent strengths for combating the threats. Efficiency in risk monitoring and control hinges on constant review. It is essential to monitor risk for establishing control over the operations, and this process involves documentation, reporting and feedback for ensuring proper implementation of the strategies. Alertness on the part of the management is essential for addressing the unforeseen risks. The system should be in a position to give signal or identify the risks well in advance. For instance, the pattern of demand as reflected in ordering, order size or frequency of the orders might portend risk or its probability, especially for a company like TESCO which is in close and constant touch with the consumers. Risk Identification The source of risks which have impact on the performance or results may be internal or external. The internal risks are identified in the monitoring process, variance analysis or analysis of quality control statistics and the pointers may include deviations from the standards, fall in demand and increase in customer complaints. Identifying the source of risks is very important to eliminate its recurrence or make advance planning to avoid the risks foreseen. TESCO has identified greenhouse gas emission as a major risk to the society and consequently to the company’s operations, and started making advance plans to overcome the risk. The Corporate Responsibility Report of TESCO states that new stores built between 2007 and 2020 to emit half the CO2 of a 2006 new store and reduce emissions per case delivered by 50% by 2012, and plan for zero carbon by 2050. Risk Assessment Primarily, the effectiveness of the controls may also come under question in the assessment of the risk. The risk foreseen may materialize eventually or its probability is very limited or remote. The assessment is related to the direct as well as the indirect impact of the likely consequences on the business operations. Almost every action in a business has an element of risk, and it is for the management to decide whether it is acceptable or not, and if it is acceptable, the level of acceptability. Risk response and risk mitigation The management has several options in dealing with the risk and the risk management strategy includes risk avoidance, reducing the likely hood of occurrence and/or reducing its impact on performance, transfer of risk and retaining the risk. Avoidance of risk could be considered based on the cost, question of principle, unpredictability or uncertainty in consequences or simply if the risk is unacceptable. Risk mitigation involves reducing the likely hood of occurrence or reducing its impact on performance. In this case, procedure for monitoring and reporting of the progress needs to be established. Sometimes it may be necessary to revise the control mechanisms or standards in the light of the actual experience. Transfer of risk is undertaken when the risk is acceptable to somebody else or at some other area. For instance, insurance is taken by way of transfer of risk only. The management sometimes takes a conscious decision to assume the risk if the risk profile is acceptable and in tune with the risk appetite of the management or the risk reward ratio is extremely favourable for retaining the risk. Diversification into new businesses involves careful consideration to evaluate whether the risk profile of the business is compatible with the objectives of the management and its policy in respect of risk. The risk is associated with cost-benefit analysis, because every action is intended to create benefit at a cost. For instance, when TESCO plans for recycling of waste, the total cost involved in the new project and cost saved in land filling needs to be compared with the savings which will result on account of recycling and the environmental benefits arising out of recycling. There is shift in the consumption pattern noticed in the industry which has influence in TESCO’s strategy, and proper evaluation is necessary to avoid any negative impacts to the business in future. Grijp and Hond (1999) observed “companies in the conventional food industry and retail trade are taking initiatives aimed to increase the market share of food products produced with substantially less or no pesticides (p. iii) European organic production steeply increased in the last decade: the number of organic farms rose from less than 10,000 to more than 80,000, and the acreage from less than 250,000 to more than 2,200,000 ha (cp. Comber, 1998, Rippin, 1999, Willer, 1999). (p. 10)” Risk Contingency Planning Contingency planning aims for preparedness on the part of the organization with a plan to deal with the risk, if and when it materializes. The business activities need to be classified based on the risk profile, and a plan with specific tasks formulated, to implement the strategy on risk occurrence. A comprehensive contingency plan should identify and quantify the resources needed with a realistic time table. The proper authorities to be notified need to be specified along with a policy framework for coordination with escalation procedures in various stages. The risk in an organization could be triggered due to several factors. Proper knowledge of the processes is essential to understand the elements which might lead to a risky situation. This could be gained from the history of the accidents or incidents and previous experiences in the industry. The risk register maintained by TESCO will serve as a guide in this regard. The team leader should be knowledgeable and should be able to inspire the team to handle the emergency situations with confidence for restoring normalcy. Communication is important in contingency planning, and the established procedures need to be reviewed regularly in the light of the changes in the organizational set-up and other variables. The people should be trained and their knowledge updated on a regular basis. The plans, any modifications thereof, allocations in the budget, changes in responsibilities or personnel should be communicated to all concerned, and periodical review meetings conducted would enhance the credibility of the management actions and its commitment to the contingency planning. Risk Tracking and Reporting Proper documentation at all levels enhances tracking of risks effectively. Standardisation of the formats, language and procedures would enable all the people in the organization understand the process as it is intended to be understood. Monitoring staff should be watchful for triggers, and they should be in a position to infer danger signals ahead of the actual problem. Identifying the areas which are prone to risk for continuous monitoring and review of the system, equipments and processes on a regular basis is essential. All activities in an organisation need to be classified based on the risk factors, measured on basis. E – Extreme risk: Calls for continuous monitoring and review. Comprehensive and Contingency planning and reporting to Board is essential. H - High risk: Periodical review is required and reporting to risk manager is required. M -Medium risk: Responsibilities at various levels need to be fixed. L – Low risk: Regular risk management procedure under line is essential. This process includes all activities related to risk management such as risk identification, risk assessment and monitoring. The reporting system should ensure that the dissemination of information with reference to risk is in line with the level; communicating low risk information to board will defeat the purpose. Categorization based on the likely hood or probability of an event will make the system more efficient because it lends focus to the risk manager in his functions as it prioritizes the activities. For instance probability of one to ten, hundred or thousand indicate the level of attention required, because one in thousand could be treated as unlikely. This categorization along with the categorisation on the basis of risk factors forms the basis for risk matrix. The secondary risks in relation to retail business are multifarious which emanates from supply chain, storage, customers or suppliers. However, the cumulative effect of risks in relation to minor quality issues, smaller delays in deliveries, crowding in the counters, haphazard display of products in the shelves, defective trolleys, etc. would affect customer satisfaction in the long run. Building up of statistics through proper documentation could reveal the weak spots which deserve management attention. Qualitative techniques such as periodical consumer survey with regard to quality and service through questionnaires could reflect the changes of the consumers not only in tastes and fashions but also their satisfaction and other negative aspects from the customers’ angle. Also, the effective use of CRM techniques and statistical analysis of the historical data with regard to risk management with probability theories would enable the management to reorient its strategies based on the findings or pitfalls which in the normal course remain hidden. For instance Infixion Media (2010) states “Sainsburys is to overhaul labeling on its products this month to ensure goods such as meat carry clearer country-of-origin information on the packaging” which is necessary to avoid risks because certain diseases affect cattle in a region due to epidemic or other factors at some time and import/consumption of its meat could be detrimental to health. Processes to Address Immediate Unforeseen Risks When the risk is identified or expected to be triggered, the person monitoring the risk or the line manager need to notify the fact to the risk manager who will work out a mitigation strategy and provide resources. The risk manager needs to assess the level of risk and assign risk factor E, H, M or L as the case may be and reports to the higher authorities. The documentation procedure is very important and it should be consistent and in proper format with details such as options available, cost estimates, time required and persons responsible for mitigation, reporting authority, impact on performance and similar previous incidents if any with relevant information. Consistency in documentation facilitates analysis over the period of time with reference to the causes, impacts, cost, time-frame and so on. Conclusion Constant review of the systems/processes, educating the consumers and training to the employees with an aim to minimize the risks will improve the service and play a major role in customer loyalty which leads to customer retention in a competitive market. The low risk area might be closely related to excellence in performance and thereby associated with the business risk in the long run. Recycling of waste, use of renewable energy, low-carbon strategy and reduction in food miles in grocery retail have great potential to reduce the risks foreseen from the environmental as well as statutory perspectives in future. McDermott (2009) states that UK supermarket chain Tesco can stick a feather in its waste-reduction cap: Its 2,300-odd stores have managed to divert 100% of their waste going into landfills nearly six months ahead of schedule - a decidedly good thing. Word count: 3320 - Excluding the topic and references References BBC News (2001), Sainsbury’s trumpets continued revival, 24 October 2001, http://news.bbc.co.uk/2/hi/business/1616822.stm McDermott, M. (2009). Tesco Diverts 100% of Its Waste From the Landfill... By Turning Meat into Electricity! Treehugger, 8 July 2009. http://www.treehugger.com/files/2009/08/tesco-diverts-all-waste-from-landfill-by-turning-meat-into-electricity.php Finamore, B. (2009), Natural Resources Defense Council, 27 November 2009, Greening China, Solving Global Warming, http://switchboard.nrdc.org/blogs/bfinamore/chinas_carbon_intensity_target.html Gapper, J. (2010) The world of the instantaneous corporate scandal, Financial Times, January 7, 2010. http://blogs.ft.com/gapperblog/2010/01/the-world-of-the-instantaneous-corporate-scandal/ Grijp, N.M.V. and Hond, F.D. 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