Description
strategy risk management with the help of example of continental airlines and infosys
Strategic Risk Management: Agenda
? Strategic Risk Management: Three Steps to Design a
low risk strategy
? Strategic Risk Management: By Prof. Damodaran ? Risk management in Infosys (Source: Annual Report)
Three Steps to Design a Low Risk Strategy
Three Types of Risk
? Demand Risk ? Competitive Risk ? Capability Risk
STEP 1: Broad Competitive Objectives must Deliver Core Customer Outcomes
Case In Point: SOUTHWEST AIRLINES
? Short Haul, Low Price Airline ? Flexible Employees ? Only One Type of Aircraft- BOEING 737 ? In-House Maintenance and service ? Favors Secondary Airports ? Many Tradeoffs
? Identify Customer Outcomes
(Low Prices, Ability to Fly whenever they Choose, On-Time Arrival)
? Broad Objectives
(Increased CASM ?Have a Low Cost Structure, Have Fuller and More Frequent Flights)
FACTORS WORKING AGAINST SOUTHWEST
? MUCH OLDER FLEET OF BOEING 737 COMPARED
TO OTHER AIRLINES: HIGHER MAINTENANCE COSTS
? COST OF FLYING SHORT HAULS > COST OF
FLYING LONG HAULS
CORE CUSTOMER OUTCOMES
Travel Any Time
On Time
Price
Many Flights
Low CASM Increased Asset Utilization
Full Flights
BROAD COMPETITIVE OBJECTIVES
Step 2: Identify Core Objectives that CANNOT be Imitated by Competitors
? Business Model ? Fuller and Frequent Flights ? These are not the engines of Business Model ? Identify Exact performance parameters, or critical
outputs of firm’s capabilities
CORE OBJECTIVES: Specific and Measurable
? Maximize the number of flights through fewer
Airplanes
? Breakdown and Identify what causes delay of Flights:
? Delay at the gate ? Delay during Takeoff and Landing
? During actual flight itself
CORE OBJECTIVES: Leading or Contemporaneous Indicators
? Return On Investment, Profit Margins, Market Share
etc. don’t track the risks in Business
? They are Lagging Indicators: Of what has already
happened in the company
? Core objective: A precise metric, that alerts the firm
of failure before it shows up on broader measures (profitability)
Maximize Asset Utilization
Maximize Flights
Full Flights
Route selection
Quick Turnaround
No Takeoff/ Landing Delays
Metric: 5 Round Trips Possible
Metric: 18 Minutes
No more than 10 Mins from Approach
SUGGESTED CORE OBJECTIVES
Step 3: Using Core Objectives to Reduce Capability Risks
? Capability Set: The many Interdependent activities
and resources needed to Deliver a Core Objective
? Important to identify Capability set, and tradeoffs that
can lead to increasing efficiency of the capabilities
? Invest in Capabilities: Accept the risk of failure
Capability Maps: Leads to Clarity
? Prepare a capability map: Complete clarity on what
needs to be done to deliver core objective
? Feasibility of Business Model can be known through
functional level employees
? E.g. Gate Operations of SOUTHWEST
Capability Maps Provide a shared Framework for Making Business decision
? Single Minded Objective of Quick Turnaround ? In-House maintenance ? Same Planes- Allows seamless Transfer of passengers, any pilot can fly any plane
SHARED OBJECTIVES help reduce risk in 4 ways: ? Every one knows what to do- Exactly ? Motivation ? Experiment Within Boundaries ? Take Preventive Measures
Activities: What we NEED to DO
Planes Available on short Notice Standardize Boarding Flight Operations: Pilots can fly all planes
Own Maintenance
All 737
Flexible Employees
Resources: Infra that ALLOWS US to carry out Activities
CONTINENAL AIRLINES
? Focus on the Broader objectives (instead of core
objectives)
? Focus on Marketing (promoting price and frequency)
rather than Operations (Turnaround)
? Mistakes: ? Executive Hiring and Firing Decision ? 16 types of planes ? Maintenance issues
Review of the Three Steps
? Develop Broad Competitive Objectives, an align it with customer outcomes
? Develop Core Objectives that are
1.
2.
Specific and measurable Leading or contemporaneous indicators, Not lagging indicators
? Develop capability maps that
? Provide clarity in what needs to be done ? Provides shared framework for making Business decisions
STRATEGIC RISK MANAGEMENT: BY PROF. DAMODARAN
Payoff to risk
Discounted Cash Flow Model
? • • • •
The value of firm is derived from four fundamentals: Cash flows from existing investments. Growth rate in these cash flows over a high growth period. Length of this high growth period. Cost of capital for existing and new investments.
Real Options Framework
? Risk taking should take characteristics of call option. ? Increase your share of good risk – upside risk ? Restrict your exposure of bad risk – downside risk
Exploiting Risk
1) Better and more timely information
Develop early warning information systems to trigger timely alerts.
Firms should identify how much and what type of information is needed and invest in hardware & software accordingly.
Superior information can be obtained through: • Invest in information networks. • Test the reliability of intelligence network. • Protect the network from competitors.
2) Speed of response
The speed with which companies respond when faced with crises.
Factors that determine speed of response: •Quality of information
•Recognizing potential short term and long term consequences. •Understanding the constituencies for whom response is being provided.
3) Past Experiences With Similar Crises
Though no two crises are exactly similar, having experienced similar crises can give firms an advantage. Three ways for firms to acquire this experience: •Entering new and unfamiliar markets.
•Acquire firms in unfamiliar markets.
•Hiring personnel from organizations that have experience with specific risks.
4) The Resource Advantage
Having resources during times of crises gives a company significant advantage over its competitors. Companies should have foresight to accumulate cash balances and liquid assets before crises.
Human capital is also an important resource which companies can draw on during times of crises.
How firms can have a capital advantage: •Private businesses can become publicly traded. •Publicly traded firms can expand their investor base to include foreign investors and expanding their debt.
Operational and Financial Flexibility
Operational flexibilities include having flexible production systems to alter the production as and when required.
Building A Risk Taking Organization
Key elements that successful risk taking organizations have in common are:
1) Corporate Governance
Aligning interests of decision makers with owners of business.
2) Personnel
Select right people for the task; some individuals respond to risk better than others.
3) Reward/Punishment Mechanisms 4) Organization Size, Structure And Culture
Risk Management At Infosys
Enterprise Risk Management (ERM)
Identification, assessment, monitoring and mitigation of various risks to business objectives. Risk Management is integral to business model : PSPD (Predictable, Sustainable, Profitable, De-risked) Risk management practices enhance the long term competitive advantage of the company.
Risk Management Structure (1/2)
Board of Directors
• • Corporate Governance Reviewing performance of Risk Management Committee
Risk Management Committee (Comprises of four
independent directors) • Monitoring and reviewing risk management practices of the company. • Reviewing and approving risk related disclosures.
Risk Council (Comprises the CEO, the COO and the CFO )
• • Formulation and deployment of risk management policies. Reviewing enterprise risks, initiating mitigation actions.
Risk Management Structure (2/2)
Office of Risk Management (ORM) ( Comprises risk
managers from units led by Chief Risk Officer - CRO) • Working closely with owners of risk in deploying mitigation measures and monitoring their effectiveness. • Providing updates to RC and RMC on top risks and their mitigation.
Unit Heads
• • Managing functions as per company risk management philosophy. Manage risk at unit level in consultation with the RC
The Infoscion
• • Adhering to risk management policies and procedures. Reporting risk events and incidents in a timely manner.
Risk Categories
•Strategy •Industry
•Counterparty
•Resources
•Operations
•Regulations and Compliance
Key Risk Management Practices
Risk identification and assessment – Risks are identified
and prioritized through risk surveys, business risk environment scanning and focused discussion in RC and RMC.
Risk measurement, mitigation and monitoring –
Dashboards track external and internal indicators for risk, so as to indicate risk level.
Risk Reporting – Top risks report is discussed in RC and RMC
in periodic basis. Risk update is also provided to the board.
Integration with strategy and business planning –
Identified risks are used as one of the key inputs for development of strategy and annual business plan.
THANK YOU
(for your patience, No Pun Intended)
doc_484783567.pptx
strategy risk management with the help of example of continental airlines and infosys
Strategic Risk Management: Agenda
? Strategic Risk Management: Three Steps to Design a
low risk strategy
? Strategic Risk Management: By Prof. Damodaran ? Risk management in Infosys (Source: Annual Report)
Three Steps to Design a Low Risk Strategy
Three Types of Risk
? Demand Risk ? Competitive Risk ? Capability Risk
STEP 1: Broad Competitive Objectives must Deliver Core Customer Outcomes
Case In Point: SOUTHWEST AIRLINES
? Short Haul, Low Price Airline ? Flexible Employees ? Only One Type of Aircraft- BOEING 737 ? In-House Maintenance and service ? Favors Secondary Airports ? Many Tradeoffs
? Identify Customer Outcomes
(Low Prices, Ability to Fly whenever they Choose, On-Time Arrival)
? Broad Objectives
(Increased CASM ?Have a Low Cost Structure, Have Fuller and More Frequent Flights)
FACTORS WORKING AGAINST SOUTHWEST
? MUCH OLDER FLEET OF BOEING 737 COMPARED
TO OTHER AIRLINES: HIGHER MAINTENANCE COSTS
? COST OF FLYING SHORT HAULS > COST OF
FLYING LONG HAULS
CORE CUSTOMER OUTCOMES
Travel Any Time
On Time
Price
Many Flights
Low CASM Increased Asset Utilization
Full Flights
BROAD COMPETITIVE OBJECTIVES
Step 2: Identify Core Objectives that CANNOT be Imitated by Competitors
? Business Model ? Fuller and Frequent Flights ? These are not the engines of Business Model ? Identify Exact performance parameters, or critical
outputs of firm’s capabilities
CORE OBJECTIVES: Specific and Measurable
? Maximize the number of flights through fewer
Airplanes
? Breakdown and Identify what causes delay of Flights:
? Delay at the gate ? Delay during Takeoff and Landing
? During actual flight itself
CORE OBJECTIVES: Leading or Contemporaneous Indicators
? Return On Investment, Profit Margins, Market Share
etc. don’t track the risks in Business
? They are Lagging Indicators: Of what has already
happened in the company
? Core objective: A precise metric, that alerts the firm
of failure before it shows up on broader measures (profitability)
Maximize Asset Utilization
Maximize Flights
Full Flights
Route selection
Quick Turnaround
No Takeoff/ Landing Delays
Metric: 5 Round Trips Possible
Metric: 18 Minutes
No more than 10 Mins from Approach
SUGGESTED CORE OBJECTIVES
Step 3: Using Core Objectives to Reduce Capability Risks
? Capability Set: The many Interdependent activities
and resources needed to Deliver a Core Objective
? Important to identify Capability set, and tradeoffs that
can lead to increasing efficiency of the capabilities
? Invest in Capabilities: Accept the risk of failure
Capability Maps: Leads to Clarity
? Prepare a capability map: Complete clarity on what
needs to be done to deliver core objective
? Feasibility of Business Model can be known through
functional level employees
? E.g. Gate Operations of SOUTHWEST
Capability Maps Provide a shared Framework for Making Business decision
? Single Minded Objective of Quick Turnaround ? In-House maintenance ? Same Planes- Allows seamless Transfer of passengers, any pilot can fly any plane
SHARED OBJECTIVES help reduce risk in 4 ways: ? Every one knows what to do- Exactly ? Motivation ? Experiment Within Boundaries ? Take Preventive Measures
Activities: What we NEED to DO
Planes Available on short Notice Standardize Boarding Flight Operations: Pilots can fly all planes
Own Maintenance
All 737
Flexible Employees
Resources: Infra that ALLOWS US to carry out Activities
CONTINENAL AIRLINES
? Focus on the Broader objectives (instead of core
objectives)
? Focus on Marketing (promoting price and frequency)
rather than Operations (Turnaround)
? Mistakes: ? Executive Hiring and Firing Decision ? 16 types of planes ? Maintenance issues
Review of the Three Steps
? Develop Broad Competitive Objectives, an align it with customer outcomes
? Develop Core Objectives that are
1.
2.
Specific and measurable Leading or contemporaneous indicators, Not lagging indicators
? Develop capability maps that
? Provide clarity in what needs to be done ? Provides shared framework for making Business decisions
STRATEGIC RISK MANAGEMENT: BY PROF. DAMODARAN
Payoff to risk
Discounted Cash Flow Model
? • • • •
The value of firm is derived from four fundamentals: Cash flows from existing investments. Growth rate in these cash flows over a high growth period. Length of this high growth period. Cost of capital for existing and new investments.
Real Options Framework
? Risk taking should take characteristics of call option. ? Increase your share of good risk – upside risk ? Restrict your exposure of bad risk – downside risk
Exploiting Risk
1) Better and more timely information
Develop early warning information systems to trigger timely alerts.
Firms should identify how much and what type of information is needed and invest in hardware & software accordingly.
Superior information can be obtained through: • Invest in information networks. • Test the reliability of intelligence network. • Protect the network from competitors.
2) Speed of response
The speed with which companies respond when faced with crises.
Factors that determine speed of response: •Quality of information
•Recognizing potential short term and long term consequences. •Understanding the constituencies for whom response is being provided.
3) Past Experiences With Similar Crises
Though no two crises are exactly similar, having experienced similar crises can give firms an advantage. Three ways for firms to acquire this experience: •Entering new and unfamiliar markets.
•Acquire firms in unfamiliar markets.
•Hiring personnel from organizations that have experience with specific risks.
4) The Resource Advantage
Having resources during times of crises gives a company significant advantage over its competitors. Companies should have foresight to accumulate cash balances and liquid assets before crises.
Human capital is also an important resource which companies can draw on during times of crises.
How firms can have a capital advantage: •Private businesses can become publicly traded. •Publicly traded firms can expand their investor base to include foreign investors and expanding their debt.
Operational and Financial Flexibility
Operational flexibilities include having flexible production systems to alter the production as and when required.
Building A Risk Taking Organization
Key elements that successful risk taking organizations have in common are:
1) Corporate Governance
Aligning interests of decision makers with owners of business.
2) Personnel
Select right people for the task; some individuals respond to risk better than others.
3) Reward/Punishment Mechanisms 4) Organization Size, Structure And Culture
Risk Management At Infosys
Enterprise Risk Management (ERM)
Identification, assessment, monitoring and mitigation of various risks to business objectives. Risk Management is integral to business model : PSPD (Predictable, Sustainable, Profitable, De-risked) Risk management practices enhance the long term competitive advantage of the company.
Risk Management Structure (1/2)
Board of Directors
• • Corporate Governance Reviewing performance of Risk Management Committee
Risk Management Committee (Comprises of four
independent directors) • Monitoring and reviewing risk management practices of the company. • Reviewing and approving risk related disclosures.
Risk Council (Comprises the CEO, the COO and the CFO )
• • Formulation and deployment of risk management policies. Reviewing enterprise risks, initiating mitigation actions.
Risk Management Structure (2/2)
Office of Risk Management (ORM) ( Comprises risk
managers from units led by Chief Risk Officer - CRO) • Working closely with owners of risk in deploying mitigation measures and monitoring their effectiveness. • Providing updates to RC and RMC on top risks and their mitigation.
Unit Heads
• • Managing functions as per company risk management philosophy. Manage risk at unit level in consultation with the RC
The Infoscion
• • Adhering to risk management policies and procedures. Reporting risk events and incidents in a timely manner.
Risk Categories
•Strategy •Industry
•Counterparty
•Resources
•Operations
•Regulations and Compliance
Key Risk Management Practices
Risk identification and assessment – Risks are identified
and prioritized through risk surveys, business risk environment scanning and focused discussion in RC and RMC.
Risk measurement, mitigation and monitoring –
Dashboards track external and internal indicators for risk, so as to indicate risk level.
Risk Reporting – Top risks report is discussed in RC and RMC
in periodic basis. Risk update is also provided to the board.
Integration with strategy and business planning –
Identified risks are used as one of the key inputs for development of strategy and annual business plan.
THANK YOU
(for your patience, No Pun Intended)
doc_484783567.pptx