According to the text, what are the four reasons that often drive the need to im

Question

According to the text, what are the four reasons that often drive the need to implement ERM? Briefly describe each one.

Using the brief Jetblue case study in the text, which of the above four reasons should have driven them to improve their approach to risk? Be specific and support your answer.

Referring to the GM case study, which of the above four reasons did they fail to consider that led them into the situation they now faced? Be specific and support your answer.

According to the text, ERM has contributed seven factors to better manage risk. Briefly describe each one and how it brings value to the risk management effort.

Enterprise risk management (ERM) emerged in the early 1990s as an extension of hazard risk management. It argues that an organization should manage enterprise risks in a single, comprehensive program.

RISK VERSUS UNCERTAINTY

ERM raises issues about risk tolerance. How much risk are we willing to take? Which risks are we managing? Which risks are unbearable? Which are important? Which are unimportant? ERM became an organizational priority to identify and manage new exposures. ERM became a buzzword on the lips of CEOs, CFOs, members of boards of directors, and shareholders. Everybody understood that ERM was important. The question confronting organizations was how to get it right.

By 2005, ERM had bogged down. Still, many risk observers pushed a strong ERM agenda. They recognized the logic of coordinating the management of risk. So why did ERM implementation stall? The answer starts with several definitions of ERM.

ERM Defined

Enterprise risk management is a broad and complex concept that reaches into every major area of an organization. As such, it is not surprising that many definitions of ERM have been offered. These definitions fall into three categories. A strategic definition focuses on results, as ERM is expressed in terms of organizational objectives. A functionaldefinition describes ERM in terms of activities that reduce risk. A process definition focuses on actions undertaken by managers to manage risk. A consensus definition might look something like this:

GENERAL MOTORS INVENTORY

As organizations reach maturity, they can no longer depend on a rapidly growing market for goods and the continuation of the business that made them successful. They must seek new approaches to operations to increase their success in managing life cycle risk. The following discussion involves Bo Andersson and his experience at General Motors Corporation. It provides a good story about modern risk management.

In 2001, Bo Andersson became the top purchasing manager at GM. When he arrived, he realized that GM was spending $85 billion on car parts each year, purchased from 3,200 suppliers. He also learned that GM had separate engineering for almost every type of vehicle it produced. Vehicles did not share common parts. Seat frames were an example of a particularly interesting subculture feature. They were expensive, partly because GM had 26 different seat frames. Toyota had only two.

A similar situation existed with V6 engines. Once again, GM had high costs because it had 12 V6 engines, whereas Toyota and Honda had two each. What about fuel pumps? GM had 12. Toyota and Nissan had two.

Moving on, Bo Andersson addressed the rather simple topic of door hinges. He learned that they could be made out of three pieces instead of five. Making the change would save $100 million annually. He had a subculture response. Engineers and designers debated the change for more than three months. Then they reluctantly began a lengthy process of design and testing for the new door hinges.

After studying the situation to be sure he understood it, Bo Andersson identified the design and purchasing problems and brought them to the attention of the engineers who worked in manufacturing. His arguments were carefully framed, but they were not well received. The different units did not support changes, arguing that a change in one component would have ripple effects throughout the entire line of automobiles. In the end, change came slowly over the period from 2001 to 2006 (BusinessWeek, July 31, 2006).

Lessons Learned: GM lacked a modern risk management approach to internal manufacturing. Production efficiency lagged badly while GM failed to make desperately needed changes to be competitive. GM needed ERM. One additional note: The GM situation is also a failure of leadership risk. This is covered in Chapter 14.

Enterprise risk management is the process of identifying major risks that confront an organization, forecasting the significance of those risks in business processes, addressing the risks in a systematic and coordinated plan, implementing the plan, and holding key individuals responsible for managing critical risks within the scope of their responsibilities.

The Need for ERM

Why do we need to manage risk and pursue opportunity in a single coordinated program?

A few quick answers:

As we move past the definitions and need for ERM, some heavy hitters have joined the discussion.

TOWERS PERRIN ON ERM

Towers, a professional services consulting firm, was an early advocate, believing that ERM is essential to achieve operating stability, build organizational resilience, and increase economic value. As shown in Figure 2-1, Towers Perrin developed a six-stage ERM Road Map to create a customized ERM program.

MOODY’S ON ERM

Moody’s was also an early advocate of ERM, using the tool to assess banks. In 2004, the company deployed Risk Management Assessments (RMA) to help it understand exposures facing nonfinancial companies. An RMA is built on four pillars, as shown in Figure 2-2.

STANDARD & POOR’S AND ERM

S&P uses ERM in rating financial securities for nonfinancial companies. It acknowledges management’s overall capabilities, quality of strategies, and adaptability to changing conditions. It believes companies with superior ERM should have great stability of earnings and a high likelihood of repaying debt obligations.

FIGURE 2-1. TOWERS PERRIN’S ERM ROAD MAP.

FIGURE 2-2. MOODY’S PILLARS OF RISK MANAGEMENT ASSESSMENT.

JETBLUE AIRWAYS

Standard & Poor’s proposed a unique approach to ERM in 2008. Instead of a specific formula or checklist, S&P believes managing enterprise risk depends largely on the quality of management. Still, even a high-quality management team can stumble if it does not use ERM.

An example came on February 14, 2007, when New York City’s Kennedy Airport was hit by a nasty ice storm. JetBlue Airways, the largest airline at Kennedy, used the airport as the hub of its entire network but was not prepared. Thousands of passengers were trapped in planes on runways for up to eight hours. Aircraft ran out of food. Toilets overflowed. The airline canceled more than 1,000 flights and required six days to get the backlog cleared.

Now suppose JetBlue had had an ERM program that had identified the possibility of such an occurrence. Let us follow this through:

Lesson Learned: An ERM program with constant scanning and sharing of risks might have avoided losses that exceeded $30 million. As former JetBlue customers purchase future tickets on other airlines, we will never know the true extent of the loss to JetBlue.

Conclusion

The scope of ERM is broad. Therefore, it is important to simplify risk and to get it right in a complex world. We will continue to tell stories of how to do it right and wrong.

APPENDIX 2

GM, FORD, AND THE CHRYSLER BAILOUT

In late 2008, General Motors, Ford, and Chrysler asked the federal government to help them survive a liquidity crisis resulting from the global financial meltdown. The following is a modern risk management analysis of the situation.

The Problems

The Big Three were struggling with a number of issues.

The Solutions

The companies examined the strategies to fix the problems.

Companies could streamline salaried positions, cut back on hourly workers, and reduce other manufacturing and sales costs.

Risk Assessment

Now the discussion gets really interesting. The companies apparently had two options to make changes. Negotiations with other parties for concessions could do the job. Alternatively, the companies could reorganize under the U.S. bankruptcy code. Such a filing allows a court to enforce changes that allow a company either to resume viable operations or close down.

Verifying the Choice

Any good risk analysis looks for opposing views. These are opinions expressed at the time of the crisis.

Decision Time

Our work is almost done. Are we ready to choose? Bankruptcy reorganization would have negative effects, offset by the possibility of fixing high costs, reducing legacy costs and excessive dealerships, and breaking burdensome contractual commitments. It would be a way to fix the system. Here is what happened.

Explanation / Answer

The four reaons that drive the need to implement ERM are:

- Survival- Risks are always involved in any business. Sudden risk that strike the growing business can bring a situation to close it down if not handled properly. Hence, ERM is required to identify the risk and manage risks and even avoid them beforehand so that survival in the corporate world does not become a difficult task.

- Stability- The business trends should be stable and not fluctuate too often. Risk can make this difficult hence proper management should be planned to to maintain a stability in the business.

- Meeting responsibilities- the ERM management helps in taking up and handling different responsibilities towards the management, shareholders, employees and customers.

- Managing ethical behaviours- ERM supports in maintaining healthy relations with the outside groups that deal with the company like the customers, suppliers, debtors and creditors etc.

Using the reasons mentioned above the ERM policy should have been used by the Jetblue airways for risk that occur when the business is at boon but the company isn't ready for the disaster which is to come and thus it makes it difficult for the survival of the business. The business could run with a stability if ERM was implied to it. A successfully running business can face a fall due to the lack of management of risks in its policies, this example can be seen in the Jetblue airways case study. Also giving a unique service in their sector and gaining the trust of the customers made it their responsibility to have been prepared for the risks of any kind. The management of risk and providance of facilities to the customers as required at the moment of crises was the responsibility of the company.

According to the GM case study, they did not manage the risk of new approaches developing in the market and adapt new ways of processing and increasing production. The production was done in traditional ways that was costly and time taking. To introduce new measures in the company, the manager could not get a positive response from the in-house production team. Hence it failed to meet the responsibilities bythe management of the employees.

According to the study the seven factors that can help in managing the risks are:

- To eradicate the problem of lagging sales, the companies can become smaller in operations and production which will help them in focussing on quality more.

- To solve the problem of high costs, it can work on cost cutting, reducing salaries and distributing work in a cost effecient manner, Getting new ways to increase production in low costs.

- The costs of legacy could be removed or lessened to lessen costing and making the position survivable.

- closing dealerships with outside suppliers and companies will reduce costs and risks so it is an essential step

Contracts made that increase risks will have to be closed.

management and personal will have to be changes at all levels according to the demand of the current growth of business.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.