The following briefly explains the entries in the previous risk map:
IT System Breakdown = Risk of IT systems breakdown, this would have huge Implications considering the dependence on suppliers.
Failed launch of the = The risk that the Porsche ‘Panamera’ will not be a success
‘Panamera’
‘Negative’ perception of = The risk that Porsche will lose its brand value the Porsche brand
Supplier problems = The risk that suppliers cannot or will not deliver. Also the risk that their bargaining position becomes too big.
Import tariffs = The risk that big markets, like the US, will set import quotas or tariffs, since almost everything is produced in
Germany.
Economic downturn = Since Porsche delivers products in the premium
segment, an economic downturn of the economy would probably decrease the demand.
Hostile takeover = The risk that Porsche gets acquired by another
(main concern is that Porsche will lose its identity)101. Rise in raw material prices = The risk that, for example, steel prices rise.
Exchange rate risk = The risk of losing money, because of exchange rate movements.
Unionized labour = The risk of the high bargaining power of labour unions Missing out on a technology
shift = The risk of missing a new technology
Interest rate risk = The risk that liabilities become more expensive, or investments lose money.
Environmental legislation = The risk that legislation makes Porsche’s cars too expensive or even forbids high performance cars.
Oil prices = The risk that oil prices get so high that clients do not want to drive fuel consuming cars anymore.
= Means that Porsche already has some control in place for this risk.
101 Result of analysis and information available as of 2008
The following is an analysis of what risks are most important for Porsche to control at present.
Although Porsche has an extensive hedging program in place with financial derivatives, more natural hedges are required to eliminate the big exchange rate risk with the US Dollar. As seen over the last several years, the dollar is quite volatile. Based on this argument, moving a part of production to the US may be a good idea, in order to eliminate exposure to USD fluctuation. It would also decrease the lead times and transportation costs significantly. The US market is quite large (35% of total units sold) to be supplied solely from Germany. Furthermore, the risk of import tariffs/quotas can be decreased by producing in the US. On the other hand, by moving the production overseas, Porsche would lose the exclusivity of German craftsmanship.
Therefore, this would be a strategic decision to decide whether trading off the ‘German craftsmanship’ would be worth decreasing exposure to U.S Dollar fluctuation.
Another major risk Porsche should take care of is the negative perception of the Porsche brand/Brand erosion. Much attention needs to be paid to the long-term implications of the brand extension strategy for the SUV-Cayenne and the four door sedan Panamera. This could, in the long run, make the Porsche brand less extraordinary and less attractive, because it will change from a niche sport-car producer into a more ‘general’ car producer. At present, Porsche customers are mainly looking for that specific ‘niche’ sport-car brand. Also, the strategic partnership with Volkswagen to develop the SUV can have serious negative implications on the brand. Therefore, Porsche needs to consider whether it would be better, for the future of the company, to focus on the ‘niche’. The long term consequences could greatly outweigh the short term revenue generation of these new models.
Finally, Porsche needs to seriously consider environmental issues. Although short term implications are limited, because environmental issues will not greatly affect demand in the short run, long term consequences could be devastating. If Porsche remains as environmentally unfriendly it currently is, it risks large fines and even the risk of its cars becoming illegal in major European markets. By developing environmentally friendlier engines that are still high performance, Porsche can decrease three important risks: environmental legislation, rising oil prices and missing out on technological shifts.
Conclusion
Due to increased liberalization, companies are able to sell and source more internationally.
Multinational companies often use their wide network of affiliates in order to exploit substantial cost advantages resulting in higher profits. This is, of course, part of their well thought out strategies which wouldn’t have been developed if management was averse to taking risks.
Hence, nowadays it is important not to consider risk as a negative part of the business world, but to be able to look at it as a contributor to value creation. Not all risks are the same. One of major difference surrounds their quantification. Some are easily quantifiable, but others are more difficult and therefore their impact on the overall business is hardly measurable. This is considered as strategic risk i.e. risks that not only destroy value but can also generate growth opportunities creating even higher profit and strengthening market position. Hence, effectively managing strategic risks creates higher stakeholder value.
Strategic risk management is a structured and disciplined approach which aligns processes, people, technology and knowledge, with the main purpose of evaluating and managing the uncertainties that the enterprise faces as it creates value. The goal of strategic risk management is to create, protect and enhance shareholders’ value by managing uncertainties that could either negatively or positively influence the achievement of an organization’s objectives. It encompasses strategic risks, operation risks, economic risks and hazards.
When managing risks that create value for an organization, it is very important to focus upon all possible risks at once as opposed to one at a time, and to evaluate their interdependencies. This type of risk management, where the focus is upon risks throughout the whole firm is called Enterprise-wide Risk Management. This is a new approach to risk management with the emphasis placed upon corporate strategy with enterprise-wide implications.
Understanding of each risk implication in combination with other possible negative impacts is crucial for business success. This only confirms what Warren Buffet says: “Risk comes from not knowing what you're doing”
Porsche AG Conclusion
After identifying the risks that Porsche faces, looking at the controls put in place, and analysing key risks, one can conclude that at present the company is focusing upon certain strategic risks, but is forgetting some very important ones (based on research and available information).
Porsche’s main focus is upon financial risks, operational risks and hazards. However, focus on strategic risks is not very visible.
It is difficult to prove this conclusion since it is not easy to find out how risk evaluation inside Porsche works. One case scenario is that Porsche has indeed identified risks such as brand erosion and environmental risk, but has internally evaluated them as less important. A different risk map would result in different observable controls. Another explanation may be that Porsche is internally dealing with these risks, but with a certain level of confidentiality.
Considering financial and operational risk management, Porsche’s risk management is well integrated. Also, different ways of controlling risks (for example, financial risks are controlled with both natural hedges and financial derivatives) shows that cross references are well thought out.
In spite of a couple of downfalls, Porsche’s risk management is generally on a higher level than its competitors. Porsche already covers most of its financial and operational risks. The financial risks are hedged well according to their revenues. Operational risks, such as problems with suppliers, are being mitigated by the creation of stronger relationships and the adoption of common standards and processes by Porsche’s supplying companies. At present, Porsche has not considered strategic risks in their risk management process. Hence, Porsche should include strategic risks in their management evaluation and show this to the public, so that stakeholders could feel more confident about Porsche’s future. Strategic risks faced by Porsche could have a major impact on the company in the future, and therefore should be included in the risk management process.
Sources
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Classes:
COPENHAGEN BUSINESS SCHOOL:
CERM Strategic Risk Management – Torben Juul Andersen and Peter Schroeder, February 5th-April 27th 2008
Managing in Creative Economy- Robert D. Austin, associate professor in the Technology and Operations Management unit at Harvard Business School,
March 31st – May 26th 2008
CEMS Business Project with Falck Denmark: Falck Health Care Consulting; summer 2008
List of Tables
Table 1: Example of industry riskiness ... 11
Table 2: Various probability distribution chart... 12
Table 3: Organizational risks ... 13
Table 4: Risk Exposure in Multinational Environment... 13
Table 5: General risk classification... 15
Table 6: Low and High quality stocks development... 20
Table 7: The Views of Risk Managers and CFO's 1995 - 2004 ... 21
Table 8: Reputation risk- key stakeholders and their interests ... 22
Table 9: Failure to double bet early allows start-ups to seize market position... 26
Table 10: Wall-Mart's Expansion ... 29
Table 11: Growth in Hybrid Market ... 34
Table 12: Strategic Risk Management, ERM and Risk Management covering ... 1
Table 13: Risk Management processes ... 38
Table 14: Porter's five forces ... 1
Table 15: Risk evaluation matrix ... 1
Table 16: Likelihood description ... 43
Table 17: Impacts description... 43
Table 18: Likelihood defined by Saxo Bank A/S ... 44
Table 19: Impact rating criteria defined by Saxo Bank A/S... 44
Table 20: Example of an influence matrix ... 45
Table 21: Risk control framework ... 1
Table 23: Risk Map - avoidance ... 47
Table 22: Risk treatment... 1
Table 24: Risk Map - reduction ... 48
Table 25: Risk Map - prevention ... 49
Table 26: Risk Map - Segregation ... 50
Table 27: Risk Map - Transfer... 50
Table 28: Revenues and Profits table ... 55
Table 29: Automobile market segmentation... 1
Table 31: Vehicle deliveries (in units) ... 59
Table 30: Revenues (in million EUR) per region ... 1
Table 32: Location of the production ... 1
Table 33: Risk radar of the automotive industry... 62
Table 34: Porsche's SWOT analysis... 63
Table 35: Porsche panamera, four door sedan ... 64
Table 36: Regression Analysis outcome ... 67
Table 37: Risk map based on the risk identification ... 1
Appendices
Appendix 1:Zero Risk Culture
Appendix 2: Economic Exposure and Corporate Risk Management Appendix 3: Major Risk classes in uncertainty and unknowability Matrix Appendix 4: An Expanded Risk Spectrum
Appendix 5: FERMA Key Risk Drivers
Appendix 6: Categorization of Organizational Risk and Risk Responses Appendix 7: Top 10 strategic business risks
Appendix 8: Top 10 Risks across major industries
Appendix 9: Impact of Strategic Risks on a business design Appendix 10: FERMA Risk Management Process
Appendix 11: AS/NZ 4360:2004 Detailed Risk Management Process Appendix 12: COSO ERM Integrated Framework
Appendix 13: Shareholders structure Volkswagen as of June 2008 Appendix 14: A Psychographic Profile of the Porsche Buyer
Appendix 1: Zero Risk Culture
Source: The Failure-Tolerant Leader, Harvard Business Review. August 2002
Appendix 2: Economic Exposure and Corporate Risk Management
Risk category Relative
emphasis
Coverage Coverage
STRATEGIC OPERATIONAL FINANCIAL HAZARDS Importance
Importance
Source: Andersen, T.J., Schroder, P.; Economic Exposures and Corporate Risk Management, Strategic risk Management: Session 2, Copenhagen Business School (12.2.2008)
Appendix 3: Major Risk classes in uncertainty and unknowability Matrix
Source: Andersen, T.J. & Schroder, P.; Aspects of Risk Management Practice Copenhagen business school;
Strategic risk Management: Session 8 - (25.3.2008)
Appendix 4: An Expanded Risk Spectrum
Source: Oliver Wyman, Mercer Management Journal, Number 17 (2004)
Appendix 5: FERMA Key Risk Drivers
Source: Federation of European Risk Management Association, A Risk Management Standard, (2002)
Appendix 6: Categorization of Organizational Risk and Risk Responses
Source: Andersen, T.J. and Schroder, P.; Economic Exposures and Corporate Risk Management, Strategic risk Management: Session 2, Copenhagen business school (12.2.2008)
- 93 -
Appendix 7: Top 10 strategic business risks
Source: The 2008 Ernst & Young business risk report, Top 10 risks for Global Business, Ernst &Young, 2008
Appendix 8: Top 10 Risks across major industries
Source: The 2008 Ernst & Young business risk report
- 94 -
Appendix 9: Impact of Strategic Risks on a business design
Source: Finding the Upside in Strategic Risk, Oliver Wyman (2007)
Appendix 10: FERMA Risk Management Process
Source: Federation of European Risk Management Association, A Risk Management Standard, (2002)
- 95 -
Appendix 11: AS/NZ 4360:2004 Detailed Risk Management Process
Source: AS/NZS 4360:2004 Risk Management
- 96 -
Appendix 12: COSO ERM Integrated Framework
Source: COSO - Committee of Sponsoring Organizations of the Treadway Commission, ERM integrated framework
- 97 -
Appendix 13: Shareholders structure Volkswagen as of June 2008
Source: http://www.wikipedia.org (7.6.2008) – content verified