What is risk management?

This is the question that many people ask themselves when approaching
the world of financial markets. Whether you are an investor, an entrepreneur or an aspiring one, you
have found yourself in the position of having to understand exactly what risk management is and what
the right techniques are to avoid the loss of your capital.
Risk management is the continuous process of identifying, analysing, evaluating, and managing
exposures to losses and controlling risk and financial resources to minimize the negative effects of a
loss. The main function of the set of risk management techniques is to maximize profits, trying to
reduce the risk of losses. The losses that the individual seeks to minimize with risk management can
come from:
Types of Risks:
- financial risks
- operational risks
- political and environmental risks
- strategic risks
Here we will be discussing the FINANCIAL RISKS in particular.
What is a financial risk?
Financial risk is the possibility of losing money on an investment or business venture. ... Financial
markets face financial risk due to various macroeconomic forces, changes to the market interest rate,
and the possibility of default by sectors or large corporations.
Let’s discuss the financial risk situations of one of the best companies of the world.
1. UNILIVER:
Unilevers is one of the oldest multinational giants in the Fast Moving Consumer Goods (FMCG)
industry; its operations span more than 190 countries. The compamy owns over 400 brands which
include popular/prominent brands such as Axe, Dove, Knorr and Sunsilk.
Risk Management Analysis:
1. Unilever has been carefully monitoring economic indexs and consumer behaviour in different
countries through extended and professional research in order to react rapidly and take new and
flexible steps to run into the altering demand of clients.

2. In order to cover with the issue of fiscal instability. the company has been doing attempts to acquire
entree to planetary debt markets through assorted ways such as short-run or long-run debt plans.
Unilever attaches great importance to the fluctuation of involvement rate. seeking to hold different
types of fiscal services and equilibrate the hazards between drifting and fixed rate involvement after a
professional anticipation and appraisal of the involvement rate ; Sing to the foreign exchange rate.
Unilever sets a policy which limits the operating companies’ fiscal foreign exchange exposures so as
to minimise such hazard. 3. Unilever has made a series of criterions and policies for the process of
design. industry. and distribution of merchandises to guarantee the high criterions of products’
quality.
Unilever besides has a “Sustainable Development Group” which is comprised of five external
specializers. prosecuting in the company’s development of the scheme. Unilever besides has specific
policy concerning merchandises recall in instance there’s merchandises choice incident. 4. Unilever
has set complete and effectual eventuality steps and system to guarantee the material supply or to
portion the production undertaking between different production sites or to utilize utility stuffs in
instance of the deficiency of the stuff. The company besides calculates the cost of transit and
distribution from clip to clip and to set the policy and service quickly to optimise the cost. These steps
enable the company to run good. 5. Unilever needs to happen a manner to pull. develop. train and
retain qualified employees.

The company has an look up toing human resource system. It has established Resource Committees to
place employees’ accomplishment and capableness. specify employees’ calling waies. It besides
provides legion chances for employees to better their accomplishments. leading abilities through
preparation and coaching. Meanwhile. Unilever shall take steps to heighten employee’s hazard
direction ability. Ballou and Heiger ( 2005 ) suggest “shifting the employee’s attitudes about hazard
direction to include monitoring. measurement. and commanding certain hazards while sharing.
avoiding. and accepting that other hazards will non happen efficaciously in a short period of time” .

6. Unilever has set policies to do certain employees follow policies and abide by local Torahs and
ordinances in all relevant facets refering its concern and activities. Sing those important issues and
activities. the anterior legal cheque and consent are needed in the company. In a word. Unilever has
been doing great attempts to construct effectual. sensible and operable schemes for hazard direction.
The boards have overall duty for Unilever’s hazard direction and the company has a Code of Business
Principles which stipulates the criterions of concern operation and requires employees to stay by the
codification. The above schemes enable Unilever to run its concern good in the planetary market.

2. Nestle
Nestle Risk Management Centre was created in 2001 to coordinate activities related to risk
management in Quality, Security, Treasury, Compliance, Operations, and IT etc. Overall objective of
risk management process at Nestle is appropriate management of risks, which could have a material
impact on Nestle business.
Nestlé Brand Enforcement strategy based on 3 three building blocks:
• 1st building block - Counterfeiting prevention framework
– Cooperation with customers
– Market knowledge
– Monitoring and reporting
– Security features (packaging, waste disposal)
• 2nd building block - Investigations
– Counterfeits affecting one Market
– Complex trafficking of counterfeits
• 3rd building block - Enforcement operations
– Inspections
– Raids
– Legal actions.
Literature Review on Nestle’s Risk Management Expansion:
According to Bell and Shelman (2009), Nestlé’s sales expanded rapidly across Europe a few years
after its inception. The company started developing an international reputation, and in 1905 it took the
strategic decision of acquiring its main competitor, the Anglo-Swiss Condensed milk company (Bell
and Shelman, 2009). The Federal Trade Commission refers to this as a horizontal merger where a firm
acquires a former competitor allowing for a consolidation of companies in the same industry (Barney,
2011). As a result, Nestle in the early 1900s began positioning itself as a powdered milk, and infant
food company. Furthermore, the combined companies through the Nestle brand name continued to
grow through product and market extension mergers.
Barney (2011) describes a product extension merger as one which adopts a complementary product
through an acquisition, as seen in the case of Nestle which aligned product adoption in categories such
as sugar, milk, cocoa and coffee. Nestlé further undertook market extension mergers which involve
gaining entry into complementary markets through acquisitions (Barney, 2011); whereby Nestle
entered the confectionary, coffees, cereals, soft drinks, ice cream, water and prepared foods markets
(See Ansoff Matrix below).
Ansoff (1965) would argue that Nestlé uses four different approaches to grow its products and
markets. To explain the reasoning behind Nestlé’s past M&As they can be assigned into these
categories of growth which include: market penetration, product development, market development
and diversification (See Ansoff Matrix above).
During the 1920’s, Nestle diversified its portfolio from infant formula to include Milo. This was its
first powdered drink not created for infants. Spanning from 1938 to 1948, Nestlé made the decision to
enter into coffee and tea sector with the launch of Nescafe and Nestea. Nestle also diversified into the
confectionary market, prepared foods, water, pet foods, energy bar and weight loss markets with the
acquisitions of Peter, Cailler, Kohler Swiss Chocolate Company, Maggi, Vittel, Friskies, Powerbar
and Jenny Craig respectively. Diversification outside the food and drink industry to enter
pharmaceuticals and cosmetics was executed in the 1970’s when it became a minority shareholder of
L’Oreal (25%) and later acquired Alcon Laboratories. Barney (2011) highlights that acquiring new
companies leads to reduction in production or distribution costs through economies of scale and
vertical integration.

3. Microsoft:
Microsoft Corporation is an American multinational technology company with headquarters
in Redmond, Washington. It develops, manufactures, licenses, supports, and sells computer
software, consumer electronics, personal computers, and related services.

Structured Risk Management Assessment:

Microsoft advocates the use of a structured approach toward risk management where
possible. For software development and deployment projects, use of risk classification
during the risk identification step is a helpful way to provide a consistent, reproducible,
measurable approach. Risk classification provides a basis for standardized risk
terminology needed for reporting and tracking and is critical in creating and maintaining
enterprise or industry risk knowledge bases. Within the risk identification step, risk
classification lists help the team be comprehensive in their thinking about project risk
by providing a ready-made, list of project areas to consider from a risk perspective that
 is derived from previous similar projects or industry experience. Risk statement
formulation is the main technique used within MSF for evaluating a specific project and
for guiding prioritization and development of specific risk plans.

Risk classification
At Microsoft Risk classifications, or risk categories, sometimes called risk taxonomies, serve
multiple
purposes for a project team. During risk identification they can be used to stimulate
thinking about risks arising within different areas of the project. During brainstorming
risk classifications can also ease the complexities of working with large numbers of
risks by providing a convenient way for grouping similar risks together. Risk
classifications also may be used to provide a common terminology for the team to use to
monitor and report risk status throughout the project. Finally, risk classifications are
critical for establishing working industry and enterprise risk knowledge bases because
they provide the basis for indexing new contributions and searching and retrieving
existing work. The following table illustrates a high-level classification for sources of
project risk.

4. Facebook:
Facebook has revolutionized the way people (End-users) communicate with peers and close
relatives, these users share personal information with Facebook. The platform, in turn, uses
these users’ information to match them with other users who share similarities in information
through algorithms.

Risk Management Assessment:

At its start, Facebook’s strategy was aimed at getting as many users as possible, especially in
the U.S and Canada. The company embarked on a charm offensive and managed to lure as
many campus students as there were. This strategy was implemented by enhancing direct
collaboration with colleges. Previously, college administrators had a negative opinion about
Facebook and saw it as a nuisance. The company set a target to market itself to college
administrators (Sarachan, & Reinson 2011).
The company would provide organizational services, which included class registration,
promotion of clubs and activities. With the cooperation and support from the colleges, the
company was able to bring in new users, for instance, by advising freshmen to check the
school Facebook groups (Helvie-Mason 2011).
Students will thus be compelled to open accounts. The company will then offer many services
to keep these customers dedicated to the website. Another strategy involved balancing the
entry of new users with advertisement.
"Given the number of controversies facing the company at this time, it seems reasonable for
the company to consider what steps could be taken to improve its risk assessment and
management process more broadly," ISS stated in a proxy-guidance report published this past
Tuesday. "However, at this time, there is not sufficient evidence suggesting that the Audit
Committee has outright failed in its risk oversight duty."

5. Apple:
Coronavirus has suddenly emerged as a critical risk factor for businesses around the world.
Companies like Apple computers are especially vulnerable because of their large customer
base in China and the dependence of their supply chain on Chinese manufacturers. No wonder
 Tim Cook cited the impact of Coronavirus as a significant source of uncertainty in the
company’s recently concluded quarterly earnings call. However, a big silver lining at this
worrisome time for the company is its $200 billion pile of cash. Cash balance is the best
vaccine against unpredictable events such as the spread of Coronavirus. In fact, cash is the
best hedge against any risk that cannot be identified or quantified ahead of time.

Apple’s enormous cash balance has been a subject of hot debate for more than five years now.
Activist shareholders such as David Einhorn and Carl Icahn have often argued that Apple has
too much cash, and paying it out via share buyback or some other means will unlock
shareholder value. A quick look at Apple’s balance sheet makes it clear that the company
does indeed have a lot of cash for its size, perhaps too much cash than it needs. But today it is
in a much better position to weather this storm precisely because of this balance. If the firm
wants, it can shift its supply chain to other countries, thanks to its cash balance. To be sure,
any disruption in the supply chain is going to be costly to the firm, but it is unlikely to be
catastrophic because of its ability to move things around. If the firm experiences a significant
drop in its global sales, it will still be far away from any realistic threat of financial distress,
thanks again to its cash balance. And if production costs go up due to these disruptions, it can
still remain competitive in the market, thanks again to its cash balance.

It is unlikely that Apple’s cash management strategy was designed with a focus on fighting
such uncertain events. Most likely, Tim Cook and his team have built up this balance to be
able to make quick acquisitions or to engage in R&D projects. In hindsight, this also looks
like a reasonable risk-management strategy from which other CFOs can learn a bit.

Conclusion and Recommendation

In conclusion, financial risk management has played an important role in enhancing the success of the
operation of various financial organizations. However, challenges abound when the instruments of
risk management are not applied correctly. Proponents of financial risk management note that it
promotes deregulation and enhances globalization. The argument is that since it promotes supervision
of banks, only banks that meet set capital thresholds are registered to offer certain services. In
addition, banks need to note that the roles have changed as well. Therefore, they can now offer
services characteristic of insurance institutions and vice versa. Those who do not support the
postulations put forward for financial risk management argue that it has led to work crises and
increased both operational and business risks. Nevertheless, the positive contributions of financial risk
management cannot be underestimated because they have been helpful to financial organizations.
Therefore, financial service providers should continue to apply them.