Risk is an integral part of today’s business environment. Risk may create losses and also may create opportunities for making gains. A good risk management system can help company’s long term existence and can create shareholder value at the same time. Risk management is;
- An important component of good corporate governance.
- All decision making levels, including board, has clearly defined roles and responsibilities
- Covers all business process of a company.
- Internal audit and internal control has a critical role in managing risk.
- It should be aligned and done according to company’s strategy.
- Procedures, data collection, data analysis, transparency in the organization and reporting are the musts of the process.
- Risk appetite of the company determines the operating principals of risk management system.
The objectives of risk management, according to Paul Hopkin, Fundamentals of Risk Management, 2012, are;
Compliance; It ensures the compliance of operations with regulations and rules
Assurance; The processes in the company has been performed according to predetermined procedures
Decision Making; Required risk related information should be available, this information should support and used in decision making.
Efficient Operations, Effective Processes, Efficacious Strategy; The system will assist to get best available outcome with reduced volatility.
Risk cannot be totally eliminated but it can be reduced to limit the losses by reducing the effect of volatility.
We as ARGE will help our customers to establish their risk management system based on below methodology.
The system must be open to improvements and reviewed regularly to update risk inventory and measures to manage risks. Information sharing, cooperation, team work, procedures, clearly defined responsibility and accountability is key to run the system. Awareness must be raised in employees. The system, the purposes, goals should be aligned with strategy to get the best results.
Sustainability is a very important strategic issue in today’s business environment. A constant state of change is a reality. Sustainable organizations formulate their strategies considering this constant state of change. Adaptation is key to survival. Sustainability is to have long ter view while adapting and achieving their short term targets.
Sustainability issues are strategically important, since rules related to sustainability creates barriers in entering markets. Some of these barriers have been created by changing the regulations, some of them have been adapted by markets itself like eco labeling.
There are some issues that makes sustainability critical for institutions and drives them in formulating their strategies;
- Resources will be very scarce and cost of raw material will increase. Therefore efficiency in resource use, recycling, product design, process design, technology become very important for institutions’ existence in the long term. Most of the firms concentarte on energy and water efficiency solutions. This will create a cost advantage in the short term.
- World population is increasing. Most of the people are moving to urban areas. The population increase and urbanization will create opportunities and problems for institutions.
- Intellectual property becomes more and more important. Institutions which can attract and keep best talented people would be able to differentiate themselves from others by new products and service designs. This capability would give them a competitive advantage which would last as long as they promote this business model.
- Our current system uses quarterly earnings as the base for investments. However cash flow is more critical than earnings. The companies do not bankrupt due to earnings/losses but cash flow. Cash flow can be managed with a future looking perspective. Sustainable thinking is future looking perspective with foresight, flexibility, adaptability, profit orientation, competitive advantage looking.
- Business environment becomes more and more chaotic. Firms should have flexibility and coordinated infrastructure. Silo type of management does not producing desired results. Coordination, collaboration becomes very important to deal with issues, create synergies and flexibility to deal with external uncontrollable situations.
- Transparency is key to survival. Information should be shared with all stakeholders. Companies should be transparent for their whole value chain. Nike’s bad experience with child labor shows the importance of transparency and control on the value chain. Nike lost a big chunk of market share and sales after it has been learned that its subcontractors using child labor to create cost efficiency.
- Technology development becomes very important, but the cost of R&D also becomes very high. Therefore collaboration between competitors would be an important tool to develop new technologies, new products and create cost efficient solutions. A good example; Steel producers all around the world (more than 50 companies Arcelor Mittal one of them) has formed a union to make R&D on high strength low weight steel for automotive industry. This new steel will decrease the weight of the cars and will decrease carbon emissions.
- An institutions lives with their environment and stakeholders. If the institutions do not consider the wellbeing of society and the expectations of stakeholders they will not be able to survive.
When sustainability implemented fully; it drives a bottomline strategy to save costs, a top line strategy to reach a new customer base, a talent strategy to get, keep and develop employees, customers and community. The goal of sustainability is to increase long-term shareholder and social value, while decreasing industry’s use of materials and reducing negative impacts on the environment.
ARGE has an important expertise on strategy development. This experience will be a key success factor in designing sustainability strategies for its customers. Sustainability should be an integral part of company’s core strategy and should be embedded to strategy.
Our services include;
- Formulating sustainability strategy, KPI setting balanced score card design
- Integrating sustainability strategy to business strategy, KPI setting balanced score card design
- Life Cycle Assessment and strategy development for value chain
Formulating Sustainability Strategy
We use the below road map to formulate a sustainability strategy. This type of project has been done for companies which has no sustainability approach in their current business activities.
Future scenario, political legal environment (now and future), business implications are analysed in Analysis of Business Context phase.
Company’s current operations, policies, have been reviewed in As is Analysis phase.
A benchmark study has been performed in Benchmark Phase.
Mission and vision has been developed with company. Based on those mission and vision statements, goals have been decided and strategy has been developed. Critical Success Factors and Key Performance Indicators have been determined in Strategy Development Phase.
Based on As is Analysis and Strategy Development Phase results, gaps have been determined and action plans have prepared. A management system has been designed for the organization in Action Plan Phase.
A communication strategy and plan have been developed in Communication Phase.
Integrating Sustainability Actions to Strategy
Some institutions already started to act on sustainability issues but these actions are not a part of their strategy. These actions are separate and not coordinated. Therefore we review these actions and formulate a new coordinated action plan with inclusion of new actions which are all integrated to company strategy.
Current actions and their link to strategy and purpose of actions have been analyzed in the first phase.
A benchmark study has been performed in Benchmark Phase.
Mission and vision has been revisited with company. Based on those mission and vision statements, goals have been decided and strategy has been developed. Critical Success Factors and Key Performance Indicators have been determined in Strategy Development Phase.
Based on previous phases results, gaps have been determined and new action plans have prepared. These actions has been linked to company strategy. A management system has been designed for the organization in Action Plan Phase.
5 Stage Model of Sustainability
We use 5 stage model in positioning our customers. We use also to determine where the company would like to be in developing strategy.
If a firm is in compliance stage, it tries to comply with regulations and does nothing more than that.
If a firm is in operational stage, It focuses on efficiency issues in addition to compliance issues. It is still a short term looking phase. Some good examples to that stage are; energy efficiency projects, water efficiency projects, home office systems, remanufacturing, reusing equipment.
If a firm moves in to strategic stage, sustainability is embedded to business strategy now firm has a long term view and all actions have been realized according to predetermined goals. There are KPI and a scorecard for sustainability concerns a becomes a systematical tool of management. Some good examples are; detergents performing in cold water which creates energy efficiency in consumer side and creates a new market opportunity for introducing company.
If a firm moves in differentiating stage, Sustainability is not only embedded in to the strategy but become a part of everyday decision making. Each action have been analyzed with a sustainability view. Company develops new products, new technologies, new business models it can enter new markets. The importance of innovation is understood at this stage.
When firm moves in to paradigm shifter stage, it has great experience, view and reputation regarding sustainability. It is a trustworthy institution. It will be able to create behavioral changes with new business models, it could be effective formulating new regulations. Innovation is critical at this stage, it can take steps that others do not have the courage for. A good example for that stage is smart grid systems, cloud data warehousing.
Life Cycle Assessment (LCA)
Life cycle assessment is a tool to analyze, the inputs, the outputs of a product during its whole life cycle. It analyzes the environmental footprint, social and economic impacts of the product. It is a strategically important tool since a company can determine where will be the important impact and direct necessary resources to create a beneficial outcome.
Whole life cycle of a product has been reviewed as the first step of analysis.
Logistics is an integral part of each stage of LCA.
LCA makes a company to understand the whole process for a product and create competitive advantage by improving efficiencies in different stages of life.
One of the important impact of LCA is a cradle to cradle design strategy, which was introduced by Bill McDonough and Michael Braungart in 2002. Companies design their product in such a way that the waste and recycling stages have been considered in R&D and design stage of product. Most of the products have been designed without consideration of end of life stage and it created lot of problems.
We as ARGE make LCA analysis for our customers and design an LCA strategy for them to be more efficient with small environmental footprint, to create a good social impact and reputation.