Question

Case 3 – Corporate Risk Management

1. A manufacturing company of consumer products that is based in Japan is considering entering new market in a Latin American country by exporting its products for sale there. Explain various risks it faces from expanding its market! Provide an example of each risk explained (10%)
2. Hellenistic Cruise is purchasing three new cruise ships to build sequentially. The first ship will commence construction today and take one year to build. The second will then be started. Hellenistic Cruise can cancel order for a given cruise ship at any time before construction begins for a small fee. Explain the real options should be considered in this situation! (10%)
3. Explain how a company manage its risk to face a global pandemic, such as Covid19, currently! (15%)update

Answer 1

Answer A

When considering a new market or a reassessment of an existing one, it's essential to examine what risks may arise that threaten your expected investment return. These run the gamut and can include strategic risks (unwise market entry execution), political risks (discrimination, retaliation, asset expropriation), operational risks (regulatory or tax noncompliance), financial risks (currency devaluation and capital controls, contract repudiation, and collection risk), cultural risks (failing to respect norms of business and employment customs and negotiation styles), and reputational risks (running afoul of anti-corruption or other laws and the public disclosure of that fact).

“Failure of national governance”, “unemployment” and “fiscal crises” – all prominently cited as risks by Latin American and Caribbean (LAC) business executives. As in previous years, the Global Risks Report 2017 uses data from the Executive Opinion Survey, which asks LAC executives about the risks of highest concern for doing business. The findings shed some light on the anxieties of business people throughout the region and how these differ from those of their counterparts in other parts of the world.

The major risks while operating or considering operating in Latin America are:

1. Failure of national governance.

2. Unemployment or underemployment

3. Fiscal crises.

4. Profound social instability.

5. Failure of critical infrastructure.

6. Illicit trade.

7. Energy price shock.

1. Failure of national governance- Recent events in the region go some way to explaining the reasons for this concern: Brazil’s numerous political and business corruption scandals; corporate governance issues in Mexico; and the seemingly complete breakdown of national governance in Venezuela. There are plenty of examples of national and regional environments that present as high-risk scenarios for doing business across the region.

This high level of concern about national governance is unique to LAC: 44% of all executives in the region named the failure of national governance in their top five risks, while in all other parts of the world less than one in three executives felt this way.

The extent and vigour of governance across LAC may fall short of optimal standards, but there is almost certainly a role for business in promoting open and democratic systems. Through lobbying government, sponsoring civil society spaces and shining a light on corruption, business can hold government to account and deliver positive change for societies and business ecosystems.

2. Unemployment or underemployment- Only sub-Saharan African executives were more concerned than those in LAC about the impact that unemployment or underemployment might have on doing business in their region.

While LAC executives understandably desire the ability to operate in vibrant and thriving economies, unemployment (particularly among young people) saw a sharp increase in 2016, despite the narrative of a growing and upwardly-mobile middle class. The International Labour Organisation (ILO) placed the official unemployment rate across the region above 8% in 2016 - the highest level in a decade - and among 16-24-year-olds the figure sits at 14%.

The consequences for business are far reaching. Growing unemployment increases the prominence and structural importance of shadow economies (jobs without contractual or social security), which both undermines social security and demotivates the next working generation.

3. Fiscal crises- Many business leaders in LAC will have first-hand experience of the devastating impact that the 1980s Latin American debt crisis had on business and development in the region. The so-called Lost Decade had damning implications for the growth of the region and it is unsurprising that businesses today are wary of history repeating. At a time when the fiscal regulatory environment in LAC is complex and volatile it is unsurprising that just over a third of all respondents cited fiscal crises as a top five risk – only Eurasia (45%) had a higher figure.

The direction and quality of fiscal policy within LAC is also strongly linked to the question of national governance, where legal, economic, and political aspects of the state can work together to deliver a strong, robust environment in which business can operate. Indeed, if the region is to reduce structural rigidity and improve business confidence, fiscal results must be stabilized

4. Profound social instability- As one of the pillars in traditional PESTLE (political, economic, social, technological, legal and environmental) analysis, negative social factors represent fundamental risks to a successful and fully-functioning operating environment for business. With an ageing population, reduced but still significant levels of social inequality, and a growing, vulnerable lower-middle class, there is much for LAC businesses to be concerned about.

It’s also important to understand that although LAC countries share historical, social and demographic similarities, such as language and religion, the region is very diverse and unique. There are often several differences within individual countries, for example, the big cities frequently have a completely different landscape from the interior and more rural parts of the same country.

5. Failure of Critical Infrastucture- For a manufacturing company having the right infrastructure is one of the most important factors to ensure optimal level of production. The Japanese way of focusing on high quality levels and lack of critical infrastucture in Latin-America are factors which are complete polar opposites. Therefore, this might also pose as a serious problem while expanding operations in Latin-America.

Answer B

The key things to be considered are:

1. Construction Organization- The organization which is undertaking the contract of construction should be carefully studied and analyzed with respect to its history of contracts and reputation. Options regarding which organization should be finalized has to be given a lot of thought.

2. Terms & Conditions of the contract- Term & Conditions of the contracts must be carefully laid out regarding the bearing of manufacturing cost, quality checks and various other issues.

3. Terms of Cancellation- The terms of cancellation must be completely transparent. There should be a periodic quality check and go ahead should be given only if the quality is found satisfactory. Also, the specific amount which is the cancellation fee should be clearly mentioned i.e., whether it is going to be a percentage of the work done or if its going to be a certain fixed amount.

4. Special Circumstances- It should be considered what will be the cancellation fee structure and situation if case the contract had be cancelled after the construction already began.

Answer C

How companies are managing risk to face global pandemic

1. Create a coronavirus crisis management plan-

In order to handle the coronavirus crisis properly, employers need to have a clear plan and strategy around it. Here are a few pieces of advice for developing an efficient plan. The companies must:

a. Ensure that the plan is flexible.

b. Involve your employees in developing, managing and reviewing your plan.

c. Frequently evaluate your plan to find out ahead of time whether the plan has gaps or issues that need to be fixed.

d. Share the plan with the entire workplace and explain what human resources policies, workplace and leave flexibilities as well as pay and benefits will be available to them.

2. Appoint a designated crisis management team

Not all companies have designated crisis management teams. Now is the time to form one! It is very important to appoint the right people who will be responsible for managing the situation in the workplace during coronavirus.

These people, before everything else, need to understand the seriousness of the situation and they need to be good communicators in order to keep the workplace aligned and safe.

3. Keep employees informed (with accurate and updated information)

Yes, coronavirus has shocked us all. It is scary, but the role of crisis management teams as well as internal communicators is to keep employees calm and try keeping stress levels at the very minimum.

This is why you need to communicate with your employees openly and frequently. Give them regular updates, tips and tricks on how to stay safe. Here is a short COVID-19 overview by the European Agency for Safety and Health at Work.