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Introduction of Enterprize Risk Management
Risk Management is a process which requires the management of business enterprises to apply varied policies and practices in a systematic manner. With the assistance of these procedures the company is enabled to identify, assess, monitor, treat and effectively communicate the element of risk among different layers of business. The present report is an attempt to illustrate the risk management process being applied in Tesco Plc. In pursuance to the same a critical analysis of the existing level of risks shall be undertaken and an effective risk audit shall be conducted. Lastly, the report shall discuss the risk mitigating strategies and the its appropriateness in context of both internal and external risks.
1.1 Brief Overview
Tesco Plc is a retail entity engaged in merchandise as well as is operating grocery stores in more than 12 nations of Asia and Europe. The company is considered as third largest retailing company in the global market and enjoys a market share of about 28.4% in the UK alone. Apart from the mentioned primary business the enterprise is also involved in other operations. One of the major issues which are being faced by the entity are that there was a fall of 1.5% in the sales figure after the famous promotional sale ended in November, 2016 (Tesco – About Us, 2017). This trend continued for significant portion of year, which also led to decline in the share prices by 28.3%. another potential crisis situation which corporate was about to face in relation to over-statement of profits by £250 in the first half of the year. The reason behind this is being stated as overestimation of the money to be received from the suppliers. In pursuance to the same the company has suspended around four of its senior managers. Further it has also been reported that the company has also fallen out with one of the major suppliers and the effect of which could be seen on the sales figure in future (Arena, Arnaboldi and Azzone, 2010).
1.2 Risk Audit
The company has undertaken a robust and systematic assessment of the risks which have the potential to affect the performance of the company in any manner. The risk management process of the entity is undertaken throughout the hierarchy by maintaining a Group Risk Register. All the separate units of the business are required to undertake a regular assessment of the risks which have the potential to affect the operations and other pertinent or local risks which are prevailing in the respective market. This assures a consistent and holistic approach towards ascertainment of risks at every level of business. In order to enhance this existing process the management has introduced a new practice of aligning the principal risks with the priorities. The risks being assessed includes both internal as well as external risks.
With the assistance of this risk process the liquidity risk has been considered as one of the principal risks and is characterized as a separate financial risk (Principle Risks and uncertainties, 2016.). Some of the other principal risks identified by the company are:
1.Customer Proposition Risk.
2.Transformation of economic model.
4.Changing Competitive Landscape Risk.
5.Data Security and privacy Risk.
1.3 Situation Analysis and Risk Profiling
Situation Analysis is the process of systematic collection and assessment of varied data from economic, social, political and technological background. The primary aim of this analysis is ascertainment of forces which have the potential to influence the performance as well as nature of strategies being formulated (Larson and Gray, 2011.). In addition, it also includes the SWOT and PEST analysis of the concerned company, so as to understand the precise position in the overall market.
While risk profiling is another process which primarily aims to determine the investment risk at an optimal level, in respect to the risk consideration of client, risk tolerance and capacity (Merna and Al-Thani, 2011).
Risk Threshold Probability
|Principal Risks||Risk Mitigating Strategies||Likelihood||Impact||Risk Rating||Assessment of strategies|
|Customer Proposition - It has been observed that Tesco is not able to respond to the needs of customers. In result of the same it is unable to retain customers for a longer time and build loyalty.||Strategic plan has been developed to understand needs of customer and in pursuance to the same customer-focused products are being developed. Further, to enhance the experience of customers in the stores, the employees are being made to undergo training for improving customer service.||4||4||16||The ascertained strategy can be considered as an effective one as through this manner the front -line employees shall be able to serve to the specific needs of customers with standard quality. This shall enhance the satisfaction level of customers.|
|Liquidity Risk – Enough cash is not being delivered through the current performance and the||The key elements of funding plan in the form of debt issuance, cash flow forecasting||3||3||9||It is believed that these strategies shall enable the company to revive its liquidity position and reduce the varied forms of risk. However.|
The ascertained risks are categorized on the basis of likelihood and impact grid and it has been ascertained that the strategies developed for managing the risks resulting from transformational economic model as the approach so adopted is not holistic in nature. However, it has been further observed that the mitigating strategies developed for addressing the risks resulting from customer proposition is almost certain as the it ought to have a major impact on the manner the operations of the company are being managed.
1.4 Critical Evaluation of Internal and External Risk
The element of risk is a consequence of uncertainties which a business organization faces in different aspects. Risk can be either in the form of internal or external in nature. Tesco is currently facing varied forms of risks from which certain risks can be characterized as principal in nature and the others as less material (McNeil, Frey and Embrechts, 2015). The two principal risks which the company is currently facing is in relation to Changing Competitive Landscape Risk which is external in nature and the other risk which is in relation to Liquidity Risk, which is an internal risk.
Changing Competitive Landscape Risk –
This is an external risk which is result of internal weakness of the company. With the assistance of risk management process of the company it has been determined that the recent fall in sales can be credited to inability of Tesco to be able to fight the competition in an effective manner. It is important to note that the company has maintained its position as third largest retailer in the world and its promotional strategy of offering yearly sale has proved to be a success. However, for the first time it was recorded that the sale fell from a figure of 1.5% in November, 2016. The management has credited this trend to the ineffectiveness with which the company has been responding to the changing market conditions as well as the strategies of competitors. If Tesco is not able to address this risk on an instant basis it is most likely that it may lose a significant portion of its market share. In addition, it has also been observed that the business enterprise is facing rice pressure from various sources in the market. This risk can be considered as highly critical, as it may have a considerable impact on the profitability of the company if not sorted out by the management.
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Liquidity Risk –
This is purely an internal risk and is a direct result of the manner in which business is performing in the current year. It has been observed that the present business operations are not able to deliver profits or cash as the management had expected. One of the primary reasons is that annual accounts of the present year were over estimated by a significant amount and in result of which the company’s share prices fell. Apart from this the corporate has also failed to manage the operational liquidity and has also lost access to funding facilities available in the market (Satish, 2011). The company is facing such a situation for the first time in hundred years, and it is highly crucial for them to find an appropriate strategy to mitigate this risk. In the event of failure of the same from the end of management, a direct impact shall be made on the operations of the company.
- Considering the current level of operations and the risks being faced by Tesco, the following recommendations shall be considered by the management for mitigating the risks and enhancing their operations to increase the sales. Considering the overall risks which are being faced by Tesco it is recommended that:
- They shall adopt a standardized recruitment policy, in pursuance to which consistent processes and strategies shall be followed to recruit employees who are highly skilled (Christoffersen, 2012). Moreover, it shall be assured by the authorities that event the senior managers are under scrutiny of certain executives so as to assure that the current issues are not repeated in future.
- The marketing department shall also be made responsible to undertake market scanning and competitor analysis so as to gain timely insight on the ongoing trends and movements in the market.
- In respect to the finances it shall be assured that the funding plan is directly under the supervision of the top executives and under goes constant review to be updated with the changes in the market.
- Lastly, it is highly recommended that the management shall install an effective mechanism to gather information in respect to the needs and demands of the customers (Chapman, 2011). Hence, with the assistance of this information the products shall be developed specifically catering to the requirements of the customers.
It is highly imperative for the business enterprises to install effective risk management processes in the organization. Tesco in pursuance to the same has promoted maintenance of group risk register at all levels and in all the business units. Hence, each of these units are under an obligation to assess the risks on a regular basis and report all the principal risks which they are facing or existing in the market. This is an ongoing process with which the company has identified the principal risks which the business is currently facing – Liquidity risk, customer perception risk, changing competitions in the market and so on. It has been also found that the management is currently not capable to address these issues and hence have developed certain strategies in order to mitigate them. It can be stated that though some of the risk management strategies are highly effective, the others are unlikely to make an impact on the operations of the business.
- Arena, M., Arnaboldi, M. and Azzone, G., 2010. The organizational dynamics of enterprise risk management. Accounting, Organizations and Society. 35 (7). pp. 659-675.
- Chapman, R. J., 2011. Simple tools and techniques for enterprise risk management. John Wiley & Sons.
- Christoffersen, P. F., 2012. Elements of financial risk management. Academic Press.
- Larson, E. W. and Gray, C. F., 2011. Project management: The managerial process.
- McNeil, A. J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts, techniques and tools. Princeton university press.
- Merna, T. and Al-Thani, F. F., 2011. Corporate risk management. John Wiley & Sons.
- Satish, S., Symantec Corporation, 2011. Risk profiling. U.S. Patent 7. p. 895, 448.