Identifying and Balancing Risk and Reward Name one of the biggest strategic risks and one of the biggest financial risks that you face in your business or industry, and briefly ex
Week 2 DiscussionCOLLAPSE
Identifying and Balancing Risk and Reward
Name one of the biggest strategic risks and one of the biggest financial risks that you face in your business or industry, and briefly explain how each of these can impact your business. For one of these, provide your ideas on the steps your company should take to significantly mitigate these risks.
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates' initial posts by Sunday, midnight of your time zone.
!st person to respond to
Csherri Sims RE: Week 2 DiscussionCOLLAPSE
Identifying and Balancing Risk and Reward
Name one of the biggest strategic risks and one of the biggest financial risks that you face in your business or industry, and briefly explain how each of these can impact your business. For one of these, provide your ideas on the steps your company should take to significantly mitigate these risks.
Last quarter in my JWI 540: Strategy class, our assignments were based on the company we work for or a company or business in our industry. I work in the school bus transportation industry, so I chose Blue Bird Corporation as the company I would use. In Assignment 2, I had to develop a game-winning strategy to gain the competitive advantage in my industry. My game-winning move was a merger with Traton Group/Navistar/IC Bus, the second-largest school bus manufacturer in North America, a company owned by Volvo that has a very lucrative international presence, and a company that has already partnered with another company to manufacture and successfully market a self-driving truck. The move would have been a game-changing move that would create a sustainable competitive advantage and would generate financially attractive growth.
A significant financial risk the company may encounter is a school district defaulting on a credit sale of a fleet of school buses. I have not come across information about a district doing so, but what if it happens? What if a district that purchased a fleet of 100 propane or electric buses, priced at $200,000+ each, failed to submit the necessary paperwork to qualify for federal funding of alternative fuel buses and defaults on the credit purchase? It is obvious a situation as this would not put the company in a favorable financial position. Of course, the buses could be returned, but at how much of a loss? Districts tend to custom-build their school buses to what their particular district’s needs are, and, depending on the design, the cost could be substantial to reconfigure the buses for resale.
One of the most significant risks involved in this merger is ensuring the required investments are executed efficiently because many mergers have failed due to the lack of doing so. One significant investment that would be required to implement this move is merging the technologies used on the buses of both manufacturers and ensuring those innovations are merged seamlessly on all school buses. It would not be necessary to hire more people because both manufacturers would retain their current employees, but it would be necessary to ensure all employees are trained to know the logistics of both types of buses. All mechanics would also have to be retrained to work on the various types these buses manufactured by both companies. It would also not be necessary to build new manufacturing plants, but expansions may be necessary for some areas. In the past, mergers have failed for many reasons including not knowing the motivations of the buyers and sellers, unrealistic expectations, hidden debt and financial instability, inaccurate financials, lack of communication, poor representation, and putting all eggs in one basket. In order to significantly mitigate these risks, Blue Bird Corporation would have to ensure to make the required investments mentioned prior and learn from the previous mistakes of other failed mergers to ensure those same mistakes are not made.
References
- Csherri Sims. 2022. JWI 540 Assignment 2
- https://www.blue-bird.com/
- https://salientvalue.com/9-reasons-why-mergers-fail-and-how-to-avoid-them/#:~:text=Basic%20reasons%20frequently%20cited%20for,of%20the%20M%2BA%20process.
2nd person to respond to
Thiago Andrade
Hello Professor JP and Classmates,
Name one of the biggest strategic risks and one of the biggest financial risks that you face in your business or industry, and briefly explain how each of these can impact your business. For one of these, provide your ideas on the steps your company should take to significantly mitigate these risks.
Halliburton is a multinational oil and gas service company with operations in more than 80 countries with different government regulations, political systems, and laws. As such, business and management worldwide are pretty complex. One of the most significant strategic risks ever taken by Halliburton was in 2014 when they decided to have a substantial acquisition to buy one of its largest competitors, Bake Hughes, the transaction valued at $34.6 billion. Unfortunately, after two years of negotiation with the department of justice, Halliburton failed and abandoned the deal. Moreover, Halliburton had to pay Baker Hughes a $3.5 billion breakup fee due to the agreement falling apart. I also experienced a major financial risk and failure back in 213 when I was working for Halliburton Brazil. Our department won the biggest contract in the globe ever seen, brought attention from many parts, and spread in the news, a milestone many people celebrated. Then, Halliburton started with massive investment and resources, hiring people and building new facilities and assets. In the end, it turned out that the customer changed its position and was no longer interested in drilling the number of wells claimed in the contract. It was a massive loss, downturn, and layoffs, almost shutting the doors. As part of any business, risks are present and will always occur eventually. The critical factor is how the manager deals with the risk, which means risk management practice. Risk must be identified, clarified, ranked, and monitored aggressively enough to ensure that management can take action within a reasonable period of time (1). Jack stated that assessing risk is challenging for every manager, and the risk-reward is pattern recognition (2). That all being said, Halliburton made wrong decisions and learned from its mistakes which matter most, being able to keep growing its revenue and stay competitive in the market.
Sincerely
Thiago Andrade
References:
- Bragg, Steven M. 2020. The CFO Guidebook, Fourth Edition.
- JWI 521. Week 2. Experts of Practice Videos.
- https://www.justice.gov/opa/pr/halliburton-and-baker-hughes-abandon-merger-after-department-justice-sued-block-deal#:~:text=May%201%2C%202016-,Halliburton%20and%20Baker%20Hughes%20Abandon%20Merger%20After%20Department%20of%20Justice,originally%20valued%20at%20%2434%20billion.
- https://www.cnbc.com/2016/05/01/halliburton-baker-hughes-set-to-terminate-35b-deal-source.html
- https://www.businesswire.com/news/home/20141117005433/en/Halliburton-and-Baker-Hughes-Reach-Agreement-to-Combine-in-Stock-and-Cash-Transaction-Valued-at-34.6-Billion
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JWI 531 (1202) Page 1 of 8
JWI 531: Financial Management II
Week Two Lecture Notes
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JWI 531 (1202) Page 2 of 8
DEFENDING YOUR CASTLE What It Means Risk management is the practice of identifying, quantifying, ranking, and planning for risks. These tasks most often fall within the responsibilities of senior financial leaders, including the CFO. Because businesses face a wide range of risks, including those that are a normal part of operating in a competitive market, as well as economic and environmental crises, risk managers must work closely with operators and other leaders to locate these risks and build plans to protect the organization as much as possible. Why It Matters
• There is no risk-free business. Your competitors want to attack your castle and take your customers. Finance leaders must help strategy leaders to quantify the impact of potential game- changing moves from competitors, and develop and fund the defenses needed to protect against these attacks.
• Without sufficient protections in place, the occurrence of even a single high-impact risk event could topple the entire organization.
• The risk management model has to be financially viable, balancing the cost of risk protection
against other business expenses. It also has to allow the company to operate and take appropriate risks without unduly limiting its ability to compete.
“Risk comes from not knowing what you’re doing.”
Warren Buffett
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JWI 531 (1202) Page 3 of 8
THE CHALLENGE AND OPPORTUNITY FOR MANAGERS
One of the biggest challenges managers face is not being sufficiently prepared to deal with the downside impact when risk events occur. If only we knew what troubles were on the way and when they would strike, it would be so much easier to run our businesses. Think about it. If we could accurately predict how much the company will sell and what the costs are to produce and deliver our products, then we would simply need to do the math to figure out if we have a viable business model. The reality, of course, is quite different. A lot can go wrong in any business, including economic collapse, one of your key suppliers or customers going out of business, unfavorable currency fluctuations, changes in regulations, and the rise of a new competitor. In Jack’s 5-step strategy framework, these are the focus of step #4 – the threats lurking around the corner that keep you up at night. Of course, the opportunities come from moving beyond the fear of a risk event. It’s the willingness to face the risks that could upset the business, and balance those against the rewards that await if the business succeeds. If you’re not willing to take any risks, then you might as well close up shop now. Winning businesses build defenses. Just like castles of olden times were built with strong walls and deep moats to keep out attackers, businesses must assess the threats they face and make plans for how they can protect against them. To develop strong defenses, finance leaders help their colleagues quantify risks. In doing so, they must address four interconnected questions:
1. What are the types of risk that my business faces?
2. How serious would the impact be if the risk event were to actually occur?
3. What is the likelihood that the risk event will occur?
4. If the risk event does occur, what safeguards can be put in place, and at what cost, to mitigate the negative impact?
The role of the CFO and senior finance leaders is not to fear the risk, but to plan for the risk in ways that protect the company without being unduly restrictive to those operating the business.
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JWI 531 (1202) Page 4 of 8
YOUR STARTING POINT
1. If someone asked you about the risks your company faces, what would you say? Could you list
all the risks, and explain both the likelihood of them occurring as well as the steps being taken to mitigate those risks?
2. What are the risks you face from your competitors?
3. What are the risks you face from economic or environmental factors?
4. What are the top three threats to your company?
5. How much risk does your company need to take in order to win?
6. How could you reduce one or more risk factors in a meaningful way?
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JWI 531 (1202) Page 5 of 8
RISK AND CONTROL It’s Impossible to Grow without Taking Risks When it comes to risk management, Jack says, “The only time you should take risks is when risk is needed to win, but if you want a company that embraces (sensible) risk you have to build a culture that rewards it.” Our readings for this week present an excellent overview of risk from both the external forces (chapter 4) and the internal forces (chapter 5). In introducing this topic, Bragg presents a synopsis of the relationship between the CEO and CFO:
“The CEO is typically more concerned with expanding the business and building competitive advantages. This means that the CFO may be left with an ongoing analysis of the downside – what could go wrong with the business…This does not mean that the CFO should be the corporate doomsayer. On the contrary, consider the reverse – identifying risks so well that the company can launch initiatives in new areas that competitors might consider excessively risky.”
The CFO Guidebook, p. 15 Risk Categories and Activities A risk can be defined as an event that interferes with the ability of the business to achieve its objectives. While risks fall into many categories, they typically include hazard risks, such as floods and other natural disasters, operational risks, such as supply chain disruptions, and financial risks, such as exchange rate fluctuations and defaults (pp. 22-23).
“The types of risks to which a business is subjected will vary considerably by company, since risk is based on such factors as geography, industry, product type, employee relations, and so forth. Thus, the risk mix is unique to every business.”
The CFO Guidebook, p. 23 But the biggest risk that companies face is something that’s nearly always the same.
“The most dangerous type of risk is strategic risk, which interferes with a company’s business model. A strategic risk undermines the value proposition which attracts customers and generates profits. For example, if a company’s business model is to be the low-cost provider of a product and a competitor from a low-wage country suddenly enters the market, the company will find that its value proposition has been destroyed.”
The CFO Guidebook, p. 23
Bragg summarizes the following activities (pp. 24-29) as the primary stages in risk management. Taken together, these create the foundation for risk planning.
• Risk Identification – which risks are most applicable to your business? • Risk Quantification – what is the downside cost if the risk event occurs? • Risk Ranking – what is the frequency and severity of the risk event? • Risk Profile – how can the main risks be categorized to focus attention on particular types of risk?
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JWI 531 (1202) Page 6 of 8
Risk Planning Business leaders, leveraging all of the above, must make decisions about the threats the risk poses and how they should plan. Regardless of the type of risk, the options fall into three categories (p. 30):
1. Mitigate the risk – take proactive steps to minimize the likelihood of the risk event occurring and the impact if it does occur
2. Accept the risk – recognize that this is part of doing business, and the upside potential is worth the downside costs
3. Transfer the risk – purchase insurance to offset all or most of the anticipated cost of the risk event Toward the end of chapter 3, Bragg presents an overview of some of the most common types of risks businesses face. You don’t have to digest every detail of this, but do take a look. It not only provides a sampling of real risks that real companies face all the time. It also presents options for how these risks can be managed. Internal Risk and Control It’s easy to think about risk as a purely external force. Indeed, this is what the vast majority of business leaders think about when they discuss risk. They use tools like SWOT and PESTEL to categorize those risks and to attempt to build strong economic moats to defend against them. But as Bragg explains in chapter 4, there are risks that can come from inside the camp. Sometimes, these risks are threats from willful and malicious activity such as fraud, but this is rare. Much more common are the risks that come from lack of control. This includes budgets that aren’t adhered to, lack of oversight on quality that leads to runaway expenses, and poor management of financial resources. As you read this chapter, think about the controls that your organization has to ensure that internal operations have the appropriate oversight they need. Key Takeaways In closing the chapter (pp. 62-63), Bragg presents us with a succinct set of guidelines and themes for managing risk. These are:
ü Help every employee develop a deep knowledge of the business so they can spot anomalies and red flags.
ü Embed controls into the infrastructure of the business to catch mistakes and overly aggressive moves that could be reckless.
ü Set boundaries on activities that limit what managers and operators are authorized to do. ü Establish reasonable performance targets that drive growth, but do not tempt employees to
engage in risky behaviors in order to meet excessive goals.
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JWI 531 (1202) Page 7 of 8
SUCCEEDING BEYOND THE COURSE
As you read the materials and participate in class activities, stay focused on the key learning outcomes for the week and how they can be applied to your job.
• Explore the role of risk management in business Start reading the Risk section in the 10-K reports of companies you are interested in following and perhaps even investing in. How do they describe the risks they face and the steps they are taking to mitigate those risks?
• Identify the most common risks that businesses face and how these impact growth and stability How do managers and business leaders in your own organization manage risk? Where are the biggest threats coming from? Are they internal or external? How do these impact your organization’s growth? If you participate in strategy and planning meetings with your team, how are risk issues presented? If they’re not, ask a few questions about risk. If you phrase it properly, this should not be seen as a focus on the negative, but a healthy reality check. Remember, for every risk your organization faces, it’s very likely your competitors are facing similar risks. These can be opportunities for you to take market share away from them. Remember, risk management is a strategic tool. Embrace it. Discuss it. Leverage it.
• Examine the risk-management tools that CFOs and other finance leaders use to mitigate risk and maximize growth Review the course materials and especially the chapters on Risk (chapter 3) and Control (chapter 4) from the textbook. If you have been able to build a connection with a senior financial manager in your organization, ask them to explain:
o The risk events they worry about most o The tools they use to mitigate risk o The level of risk tolerance that is acceptable for the business to compete and win
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JWI 531 (1202) Page 8 of 8
ACTION PLAN To apply what I have learned this week in my course to my job, I will…
Action Item(s) Resources and Tools Needed (from this course and in my workplace) Timeline and Milestones Success Metrics
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