Countering the biggest risk of all

Group 3
 Background
• In the early 1990s, the industry rocked by the Latin American debt crisis, a
major real estate bust, and economic recession suffered massive loan losses,
and the highest rate of bank failures since the Depression.
• A decade later, as much of the economy reeled from the dot-com bust and
another recession, banks were generally flourishing
• The turnaround occurred in large part because banks were able to develop
new tools and techniques to counter risk, in the process giving birth to an
entirely new discipline of financial risk management
• We cite this example because the risks that plagued banks 15 years ago are
emblematic of the challenges that companies across all industries
increasingly face today.
 Broadening the focus
• Corporate treasurers and chief financial officers have become adept at
quantifying and managing a wide range of risks:

Financial
Yet, Most managers have not yet systematically
addressed the strategic risks that can be a
Hazard much more serious cause of value destruction

Operational
 An Array of Risks and Countermeasures
• Strategy risk is categorized into seven major classes
1 • Industry
2 • Technology
3 • Brand
4 • Competitor
5 • Customer
6 • Project
7 • Stagnation
 Preventive Measures to strategy risks
1) Industry margin squeeze:
Causes: High R&D expenses, powerful suppliers, overcapacity, profit
margin erosion

Countermeasure: Shift from competition to collaboration

e.g. : Visa and MasterCard allow member financial institutions to share

payment-processing that are much more efficient than any bank could create.
 Preventive Measures to strategy risks
2) Technology Shift:
Causes: Outdated manufacturing process, patent protection loss,
product/service getting obsolete

Countermeasure: Double bet i.e.: Invest in multiple versions of

product/service

e.g. : Intel’s double bet on RISC and CISC architectures,

Nokia’s focus only on high end smartphones leading its failure
 Preventive Measures to strategy risks
3) Brand Erosion:
Causes: Product defects or a failure to develop appealing new offerings
endangers your brand

Countermeasure: Redefine “brand investment” as more than a marketing

issue and Reallocate brand investments based on early signs of weakness

e.g. : American Express reduced merchant fees, Membership miles, rewards, etc.
when its market share began reducing helping regain its growth
 Preventive Measures to strategy risks
4) One of a kind competitor:
Causes: A company’s competitors, existing and potential, clearly are one of
the main sources of business risk. It can be New product or low cost structure

Countermeasure: Create a new, non-overlapping business design

e.g. : Discount retailer Target, in the early 1990s, identified the need to offer a
unique product selection to compete with Walmart’s. In response, it re-crafted
itself from a conventional discounter to a low-price but style-conscious retailer
that appeals to a different customer set than Wal-Mart’
 Preventive Measures to strategy risks
5) Customer Priority Shift:
Causes: Customers’ preferences shift suddenly and dramatically—or gradually and
invisibly

Countermeasure: Gather and analyze proprietary information to detect potential

shifts
Conduct fast, cheap experiments to identify attractive offerings
for different customer micro segments.

e.g.: Coach retained its traditional fans and attracted new customers by conducting
customer in-store product tests and market experiments to gauge impact and then
create new product lines
 Preventive Measures to strategy risks
6) New Project Failure:
Causes: Failure to attract, competitors might copy, slow growth and very
high investment costs

Countermeasure: Pre-evaluation, Smart sequencing, developing excess

options, stepping-stone method

e.g. : Toyota took stepping stone method to roll out vehicle

 Preventive Measures to strategy risks
7) Market Stagnation:

Causes: Growth slows in a mature market. Or prices fall, producing weak

earnings.

Countermeasure: Expand the value you offer customers—by helping them

reduce their costs, cycle time, or risks

e.g. : Industrial-gas supplier Air Liquide developed technology that enabled customers
to establish small gas production facilities on-site rather than rely on large centralized
plants and tanker shipments for their energy. Air Liquide identified other customer
needs it could address. By offering a new set of services, the company expanded its
potential markets, captured more of its customers’ spending, and improved customer
profitability and loyalty.
 Mitigating the risks
• Identify and assess your risks
- Severity, Probability, Timing and Changing probability over time
• Map your risks
• Quantify your risks
• Identifying the upside potential of risks
• Develop risk mitigation action plan
• Adjusting capital decisions accordingly