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Identifying Strategic Risk - ch.12

5 Pages
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Department
Financial Accounting
Course Code
MGAD40H3
Professor
Prof.Jan Klakurka

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MGTD54 Week 10 March 24, 2011
Ch. 12 Identifying Strategic Risk (p.255-274)
Strategic Risk: unexpected event or set of conditions that significantly 9reduces the
ability of managers to implement their intended business strategy
3 sources of strategic risk:
1.Operations risk
2.Asset impairment risk
3.Competitive risk
Operations Risk
-Breakdown in core operating, manufacturing, or processing capability
-Impedes flow of high-quality products and services
-Critical product, process failures
-Basic business strategy affect firm exposure to operations risk
-Consequences triggered by employee error
Applying Inputs -> Process -> Outputs Model
-Technology failure lead to inefficiencies and breakdowns
-Key process standardized and controlled to assure safety and quality
-Use in critical parts of value chain to identify points where system errors damage
key operations or impair important assets
-Use TQM based on best practice, benchmarking, engineering studies
Asset Impairment Risk
-Resource owned to generate future cash flows
-Losing significant portion of current value
-Reduction in likelihood of receiving future cash flows
-Strategic risk if deterioration in financial value, intellectual property rights,
physical condition
Financial Impairment
-Decline in MV of B/S asset help for resale or collateral
-Future cash flows no longer sufficient to support B/S valuation
-Credit risk: when creditor insolvent and unable to pay contractual obligations
-Balance risk and reward when granting credit (sales vs. default)
-Sovereign risk: risk at national level when foreign govt unable to pay debts
www.notesolution.com
-Counterparty risk: other party to agreement unable to honor contractual obligation
due to insolvency or inability to deliver what is promised
-Unpredictable chgs in fin. mkt variables
-Willful actions of employees to reach performance targets and cover up losses
-Excess cash invested in short-term financial assets by manufacturing and service
firms
Impairment of Intellectual Property Rights
- More valuable than tangible assets on B/S
-i.e. software and Internet companies
-unauthorized use of intellectual property by competitors
-unauthorized disclosure of trade secrets to competitor or third party
-failure to reinvest in intellectual capital as asset quality deteriorates
Competitive Risk
-impair business ability to create value and differentiate its g/s
Examples:
-competitors develop superior g/s
-changes in regulation and public policy
-shift in customer tastes or desires
-changes in supplier pricing and policies
Five Forces Analysis (ch.2)
intense rivalry from existing customers
demanding customers switch suppliers
suppliers limit availability or increase cost of inputs
new competitors enter industry with new technologies and products
substitute g/s with better costs or attributes
-can be created by employee actions to max short-term profit
Employee Actions to:
Customers-providing services to competitor of
large and important client severs
relationship
Suppliers-poor service and relationship with
supplier, losing distribution rights
Substitute Products-push obsolete products that are
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Description
MGTD54 Week 10 March 24, 2011 Ch. 12 Identifying Strategic Risk (p.255-274) Strategic Risk: unexpected event or set of conditions that significantly 9reduces the ability of managers to implement their intended business strategy 3 sources of strategic risk: 1. Operations risk 2. Asset impairment risk 3. Competitive risk Operations Risk - Breakdown in core operating, manufacturing, or processing capability - Impedes flow of high-quality products and services - Critical product, process failures - Basic business strategy affect firm exposure to operations risk - Consequences triggered by employee error Applying Inputs -> Process -> Outputs Model - Technology failure lead to inefficiencies and breakdowns - Key process standardized and controlled to assure safety and quality - Use in critical parts of value chain to identify points where system errors damage key operations or impair important assets - Use TQM based on best practice, benchmarking, engineering studies Asset Impairment Risk - Resource owned to generate future cash flows - Losing significant portion of current value - Reduction in likelihood of receiving future cash flows - Strategic risk if deterioration in financial value, intellectual property rights, physical condition Financial Impairment - Decline in MV of BS asset help for resale or collateral - Future cash flows no longer sufficient to support BS valuation - Credit risk: when creditor insolvent and unable to pay contractual obligations - Balance risk and reward when granting credit (sales vs. default) - Sovereign risk: risk at national level when foreign govt unable to pay debts www.notesolution.com
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