How to Manage Risk in Business?
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Introduction to Enterprise Risk Management
The business unit needs to adopt appropriate mechanism for its risk management. In the present era, risk factor highly impact on the growth of organization as it creates difficulties in attainment of their goals and objectives. In order to monitor and access the risk, the Enterprise Risk Management framework is given by COSO. This framework requires entity to take a portfolio view risk. It considers the activities at all level of company such as division, business unit and enterprise level (Olson and Wu, 2008). The COSO ERM framework provides a clear guidance and direction for the management of risk within organization. This technique can help the pharmaceuticals organization GlaxoSmithKline in identification of risk. This framework provides the various control measures that can be use by organization for evaluation and eradication of different risk within the organization. The present research emphasizes on development of risk management plan for GlaxoSmithKline and evaluating strengths and weakness associated with same.
Task 1: Risk Management plan
COSO - Enterprise risk management system is established as an integrated framework in 2004. It assists in defining risk associated with the business unit and formulating strategies to overcome the same. In order to identify and evaluate the risk associated with business operations the organization tends to achieve its long term objectives. The framework helps in providing direction to increase appetite for controlling risks and by way of creating value for its shareholders (Williams and et. al., 2006.). The committee of sponsoring organizations of the tread way commission (COSO) established model that helps in improving internal control systems so to protect the organization from external risks it is exposed to. The framework was framed through combination of eight components and objectives that that is to be served. The components that form part of organization's Enterprise Risk management system are described underneath.
Evaluating internal environment: The component emphasizes on analyzing the organization's risk management philosophy and risk appetite (Agbejule and Jokipii, 2009). It is through evaluation of internal business environment that one gets an idea of manner in which the organization is operating and potential risk.
- Setting objective: It is essential to set up the short term objectives in a manner that the organization's long term goal is achieved efficiently.
- Identification of possible event: The business unit needs to identify event that can be beneficial or incur loss (Dalgleish and Cooper, 2005). The event can either be considered as an opportunity or threat for the organization.
- Assessment of risk: The risk identified is evaluated as per the component so as to generate an idea of its impact on the organization.
- Reaction to risk: In order to achieve operational excellence the business unit needs to implement strategies that help in avoiding risk completely (Burnaby and Hass, 2009).
- Control activities: An adequate control mechanism needs to be implemented so that the risk is minimized.
- Information and communication: All relevant information needs to be identified and properly communicated.
- Monitoring: It is through continuous monitoring of all the activities that the loopholes into system can be identified. This in turn helps in taking appropriate measures to control risk within the organization (Marquardt and Dunlap, 2012).
- Strategic: The organization's policies should be in line with its vision and mission statement.
- Financial reporting: It is essential for the business unit to report its performance in the form of financial statements on annual or semi-annual basis (Root, 2000).
- Operations: The organization is responsible to make optimum utilization of resources available so as to achieve excellence in its operations.
- Compliance: The business unit needs to be abided by all legal rules and regulations so as to conduct its operations with efficiency (Tchankova, 2002).
In the present case; the COSO ERM system needs to be established for GlaxoSmithKline. The company is one of the leading market players in pharmaceutical and health care industry. It has created its presence in around 100 countries across the world and provides employment on large scale (McShane, Nair and Rustambekov, 2011). The implementation of COSO ERM requires analysis of enterprise risks and development of risk management plan as provided below.
Internal environment: The internal environment of organization within which it is operating should be evaluated so as to generate an idea of potential risk. This in turn helps in formulating strategies to achieve long term business strategies. The GlaxoSmithKline (GSK) is prominent business unit that emphasizes on diversifying its portfolio of operations. The company plans to make continuous improvements in business activities. Moreover, being in pharmaceutical sector the business unit is involved in research and development activities on regular basis. The organization highly emphasizes on R&D activities and strives to develop treatments and medicines for upcoming diseases (Burnaby and Hass, 2009). The organization also ensures that medicines are developed in proper environment and laboratories. It is to be ensured that the products satisfy customer requirements in long run. Every medicine is tested and judged on ground of patients' requirements and its effectiveness to cure ailment. This in turn helps in developing tablets that are highly effective in nature and satisfies customer requirements. The business unit can materialize its expertise in the field and develop treatments and medicines that suits to its customer requirements. The organization through its approach to continuously improve its business operations has achieved excellence in its business operations. However, research and development activities are essential since the organization is conducting its operations in pharmaceutical industries (Monahan, 2008).
Setting objectives: GlaxoSmithKline (GSK) is conducting its operations with an objective to provide better life style to people. It aims at supplying medicines for helping individuals to feel better and possesses healthy and long life. Besides, long term objectives the business unit defines some of its strategic objectives to achieve success. It is through short term policies and procedures that the business unit is able to create sufficient value for its stakeholders (McShane, Nair and Rustambekov, 2011). The pharmaceutical unit aims at diversify its operations at global level. The business unit is emphasizing on achieving efficiency in following three areas: Pharmaceuticals, vaccines and consumer healthcare. It is through achievement of short-term objectives that the business unit is able to gain competitive advantage and gain long term success.
Identification of possible event/ Risk identification: In modern era, every business unit is exposed to one or other risks. In order to take appropriate measures it is suggested that the organization should identify risk in advance. The concept of COSO ERM framework emphasizes on identification of risks associated with the organization. The list of risks associated with GSK is described below in brief.
Exchange rate risk: The business unit since has its operations across the world and needs to import raw material from various parts of world. This in turn increases exchange rate risk for the organization. The currency rate fluctuate every fraction of seconds in currency market. However, in order to import raw materials the business unit many-a-times needs to make payments in currency of foreign country (Power and et. al., 2009). GSK henceforth faces major risk in case of significant changes in exchange rates.
Supply chain management: The GSK operations are majorly dependent on raw materials and products supplied from countries like South Africa and Brazil. Changes in market prices of product and country's regulation result in delay in supply. This in turn leads to have negative impact on supply chain of the business unit (Jafari and et. al., 2011.). Henceforth, the organization is responsible to plan its stock in manner that it results in continuous flow of goods and faster conversion of raw materials into finished products.
High Dependency on specific products: GSK is highly dependent on certain areas and products. Moreover, with a view to gain huge return from same high amount of investment is made into them (Gido and Clemens, 2008). The business unit although is achieving sufficient growth in respective fields. It is unable to highly diversify its product portfolio and business operations. The organization in order to achieve competitive edge in present scenario needs to invest in diversified range of fields.
Incapability to manage failed products: There are certain a medicine that does not suits customer requirements and whose acceptance is failed on large scale. The organization is unable to manage and decide suitable course of for drugs that are not accepted at market place. There was a case with medicine named Avandia which was not accepted by consumers' due to risk associated with its consumption. The company was unable to take appropriate decision and prompted the product after reducing the risk that is connected to its consumption. However, as per FDA (2000) the promotion of such drugs was restricted due to harmful effects linked to its consumption
High emphasizes on UK market: The Company conducts its operations with high focus on increasing sales in market of United Kingdom. The business unit has high potential to occupy prominent position at global level. The company has been ranked first for its research and development activities and 5th in context of value addition. The business unit needs to adopt wider approach and strives to achieve efficiency in world market.
High investment for research and development: The Company is conducting operations in pharmaceutical industry that requires lot of research and development activities. The organization hence is involved in R&D activities on regular basis. The business unit needs toy incur huge investment on research. Moreover, development of new treatments and medicines requires lot of investigation (Jasper, 2003). This in turn increases the cost for research and development department. The business unit needs to invest large sum of money into R&D activities. It is responsibility of organization to plan its outcomes for research and development department. In addition, it should be ensured that amount invested for research and development is utilized optimally. The investment made in research activities should generate sufficient return for long-term.
Changes in politics or country's regulations: GSK although is a leading market player is operating in the business segment that requires permission and license for manufacturing and sell of products. Moreover, the organization has its operations in various countries with distinct set of legal rules and regulations. The change in regulatory requirements of any one of the country has huge impact on business operations. GSK needs to import raw materials from different parts of world. Moreover, the organization also exports its products to varied range of countries (Davis and Jarvis, 2007). Henceforth, the changes in regulatory requirements have impact on both supply and demand for the organization. It is responsibility for business unit to keep track of political changes in the countries to which business operations are connected. This in turn helps in planning activities at the organization's end as per the regulatory requirements and legal compliance.
Lack of product acceptance: The organization manufactures and designs medicines for different market segments with specific target market. Many-a-times the products are not accepted by target market due to existing consumers' perceptions or regulatory requirements. This in turn results in inappropriate demand for the products manufactured on part of the company. Thus, the organization always is exposed to risk of acceptability for new products launched in the market (Galorath, 2006). This in turn necessitates the evaluation of trends, culture, perceptions and practices followed within industry in different countries. The in-depth analysis beforehand will assist the organization in designing and manufacturing of medicine that suits all requirement of target market.
Environment pollution: The manufacturing process of medicines or drugs results in emission of harmful gases and substances within the environment. The pollution created by pharmaceutical industry was one of the major concerns for various countries until 1980s. It was in 2010 when CFCs were replaced by hydrofluoroalkanes (HFAs) that helped in reduction in emission of CO2e. GSKs highly emphasize on adoption of process that result in reduction of harmful substances emission (Borghesi and Gaudenzi, 2012). The environmental issues however always tend to be of the concern for the business unit since the government issues its various policies for creation of healthy surroundings.
Assessment of risk: The business unit faces range of risks that are identified in above section. It is essential to evaluate risks that the organization is exposed to since it helps in deciding future course of action effectively. The GlaxoSmithKline has wide spread operations across the world. The dependency of business unit to various countries resulted in majority of risks. These risks include threat of increasing supply chain; exchange rate risks; risks of political changes in various countries and creation of lack of demand for products. In order to take appropriate measures for risks related to product acceptance in varied countries; the business unit needs to evaluate trends at economy, industry and consumer level. There are certain risks as environment pollution and cost for R&D activities are related to company's manufacturing and operating process (Gunn, 2009). The business unit should design the process that suits to business requirement for long term and should be profitable in nature. Another category of risks in related to management decision making that can be improved through its active participation. The business unit faces high degree of exchange rate and product related risks that are to be analyzed in advance so as to minimize its impact.
Reaction to risk: Once all kinds of risk are evaluated and nature of each is identified. The business unit is responsible to create plans for reducing the effect of each of risks. The manner in which organization should plan for different kinds of risk is determined below.
- Exchange rate risk: In order to hedge risk for exchange rate fluctuations the business unit can enter into future and forward contracts in derivative market segment.
- High Dependency on specific products: In order to reduce risks from concentrated portfolio of products; the organization should adopt wider approach and should encompass more range of products into its portfolio.
- Supply chain management: The business unit should ensure sufficient availability of raw materials in advance (Norman, 2011). Moreover, it should plan its stock in manner that unavailability of resources on time does not impact its operating cycle.
- Incapability to manage failed products: In case of products that are failed in market the business unit should not over emphasize on its sales. In fact, it should try to recover loss from other range of products.
- High emphasizes on UK market: The organization since has huge potential to be succeeded in global market place; it should try to materialize the opportunities that existed in different markets (Adedokun, Ogunsemi, Awodele and Dairo., 2013).
- High investment for research and development: The business unit should invest in research and development activities that are capable of generating sufficient returns in long run.
- Changes in politics or country's regulations: It is essential for the organization to keep a watch on changes at national level. This in turn results in making required changes in business operations with modification in government policies.
- Lack of product acceptance: In order to gain high acceptance of all its new products or medicines; the company should conduct market analysis in advance and design drugs accordingly.
- Environment pollution: It is one of the prime responsibilities of the organization to safeguard the environment and surroundings within which it is operating. The business unit needs to design its manufacturing process and operations that does not cause harm to the environment (Davis and Jarvis, 2007.).
Control activities: The adoption of appropriate and strict control mechanism is necessary to achieve organization's short term and long term objectives. The strict control on business operations will result in achievement of targets set by the organization. It is essential for organization to strictly follow guidelines that are set by the respective government. Moreover, the organization needs to implement the strategies developed at business level for success and growth. The control activities emphasizes on achievement of targets set in advance so as to imbibe efficiency in business operations. It should be ensured that policies framed and strategies developed are imbibed with efficiency. The control activities henceforth play an important role in supporting business operations for long term.
Information and communication: The business unit should communicate its objectives and long term plans to its management and employees. A proper communication and information dissemination system is necessary for the business unit to achieve its goals and objectives. It is through two way communication process that the organization is able to satisfy requirements of employees and management (Galorath, 2006). The business unit needs to ensure that information of each of its internal and external stakeholders are satisfied. As per the organization structure; the business unit follows top-down approach for establishing communication.
Monitoring: It is through continuous monitoring of business operations that loopholes into system can be identified. The regular watch will help in identifying variances and taking appropriate measures (Marquardt and Dunlap, 2012). It is through monitoring and administration of activities that the organization is able to conduct its operations efficiently.
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Task 2: Risk assessment process
Strength and Weakness of the Risk Management Planning Process
The risk management planning process assists organization in identification of risk that can impact on the growth and success of business. In this context, GlaxoSmithKline can incorporate different measures in order to reduce or eliminate the risk so as to attain their goals and objectives. The process of risk management will aid company to identify the opportunities in the market that can be gain by firm in future. In addition to this, process will assist company to minimize the impact of risk on the business and to achieve success. The biggest weakness of the risk management planning process is that it always needs to remain update for all actions. Organization should develop effective protection plan in order to control risk (McShane, Nair and Rustambekov, 2011). They needs to keep in mind the intensity of each danger as they arrive with different nature. The process may misguide the organization in identification of risk sometimes. Apart from this, the process involves a lot of risk as it is not an easy task.
In order to identify the risk within organization and to strategic decisions so as to eradicate the risk, GlaxoSmithKline can utilize Gibbs Reflective Cycle. This concept will explore the needs of organization for identification of risk so as to achieve their goals and objectives. The steps of framework that can be adopted by GlaxoSmithKline are enumerated below:
Feelings: GlaxoSmithKline is a big organization and it requires a lot of time in research of every aspect of business. This also creates difficulties to discover risk that can impact on the business of firm and therefore group has decided that information about every department and area of the company will be collected by each member. This makes the process of identification of risk easier as all members were engaged in their area of expertise and knowledge (Olson and Wu, 2008). The group had found that money is also an issue that can impact on the process of risk assessment and therefore lot of funds were utilized by members in arranging resources to effectively accomplish the process and to access the risk that affects the growth of firm (Williams and et. al., 2006). In addition to this, information about the risk and their compiling was also a problem for members of group. The reliable and authentic information is essential for identification of risk that is associated with the functioning of GlaxoSmithKline. The members were engaged in the area of their knowledge which assists them in easy availability of reliable information that helps them in identification of risk. While collecting the information about internal and external environment of organization, members had faced various difficulties (Root, 2000). Hence, the identification of risk for GlaxoSmithKline is very challenging as there was lack of reliable information and money was also an issue.
Evaluation: The group performed the discussion session, after the identification of risk. In this meeting, the discussion has been made on the findings that were identified by each member in their respective workplace. They also discuss on the impact of particular risk on functioning of business and their growth. The work of identification of risk was divided among members as per their expertise and it was found that this concept was beneficial for the activity of group. It was difficult for all members to focus on all areas of workplace and therefore they divided the work among group members which resulted in identification of potential risk that can impact on the success of organization (Power and et. al., 2009). There are various risk that was identified by group members on which discussed was made. The major risk that impact on profitability and growth of GlaxoSmithKline was high focus on UK market, high currency exchange cost, bribery and corruption, poor management of failed medicines and high cost of research and development. These risk highly impact on the attainment of goals and objectives of organization (Burnaby and Hass, 2009).
Apart from this, discussion was also made on the identified above risk as these were serious threat for the business as it increase their cost and reduce profitability. It was found the increase in cost of exchange and high cost of research and development that impact on the development of products as well as their profitability. In addition to this, GlaxoSmithKline can focus on other market as this will provides opportunity to them for expansion of their business operations and will enlarge their market share (Dalgleish and Cooper, 2005). Organization can hire high qualified personnel for effective management of their operations so as to minimize their cost and to generate revenue. Further they can invest in research and development in order to develop new medicines and to successfully survive into competitive business environment.
Analysis: From the above discussion on the process of risk assessment under the group activity it can be analyzed that activity in group is better than individual assessment as it provides the list of suggestions, ideas and thoughts. This helps to identify the risk in an effective manner and will also provides the different ways for improvement as ideas of different members of group will be involved. On the other hand, individual assessment will not provide variety of thoughts and ideas and therefore group activity is better than individual (McShane, Nair and Rustambekov, 2011). The enterprise risk management model of COSO framework assist in exploring of all types of risk at the workplace that can impact on the success of GlaxoSmithKline. This approach assists them in identification of different potential strategies that can be use for reduction or eradication of risk at the workplace.
From the above discussion it can be synthesize that organization have potential to identify the risk effectively and can take corrective measures in order to overcome those risk. They can also take the advantages of the services of consultants and other professionals rather than organizing a group activity (Tchankova, 2002). These people can provide the ideas and suggestions that can be use for further improvement in the functioning of organization and to eradicate the risk that was identified through entrepreneur risk management process.
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