April 18, 2010 at 1:47 am
I am confused by question 1 part b of Dec.08 (Swan Hill Company)
BPP text book defines “strategic risk” as “a potential volatility of profit caused by the nature and type of the business operations”. Based on this definition, I built my answer to analyze why the “sink method” could be a source of causing “volatility of profit” to SHC. My answer stressed on the followings:
1- Interest rate risk would change due to borrowings’ affection and changing in gearing ratio. This could increase interest expenses to the SHC
2- Cost of production changed could lead to the change of product life cycle: cost reduction would lead to the pricing reduction, more products would be consumed, more profit would be gained, hence the growth stage would be lengthier
3- This method could help to increase the SHC competitive capability, hence could create more profit in the future.
However, the examiner defined “strategic risk” as “a risk arises from the overall strategic positioning of company in its environment”. Therefore, the examiner analyzed and stressed on the change of business environment, PESTEL factors, competitors.
And I found that there are little same points between my answer and the examiner’s. Of course the examiner always is correct. But I am difficult to clarify why I am wrong in my answer. Could you show this for me?
Any help will be appreciated.
Thanks and Regards,April 18, 2010 at 6:28 am
hi Bin and good morning. I do not have the said question with me here but I think Strategic Risk generally affects the whole organisation and its long term objectives. so its right to look at it as a hinderance which is preventing the organisation from achieving its strategic objective(s). Consequently, its more focus on environmental factors as u have noted than on profit volatility which to me is more routine and short-term in nature though having a repercusion in the long runApril 20, 2010 at 10:03 am
Thanks for ur helpApril 20, 2010 at 11:08 am
but the explanation meet your aspirations vis-a-vis the doubts or question Binhminhquang? if not then others could help tooApril 20, 2010 at 7:59 pm
alkemist CA, ACCAModerator
Please note, for P1 do not stress a model. More than one approach may be taken to answering a question. As long as your points are valid and in the spirit of the question then there should be no cause for alarm. The same will be said of P3, so do not worry about your answer not matching those suggested by the examiner. As a matter of fact, the examiner has stressed that he is not looking for right answers, just the right approach.April 21, 2010 at 2:08 pm
[/b][/i]strategic risks arises from consequences of strategic decisions & positioning of company in its environment. it is identify & assessed at management level & is manage by risk management strategy.
operational risks are losses arising from business operations due to inadequate or failed internal controls. identify at operational level & manage by internnal control systems.
don’t confuse strategic with operaional risk.
thank you!!!April 23, 2010 at 5:04 am
The definitions of BPP and the examiner are essentially the same. “A potential volatility of profit” (BPP) means “a risk” (the examiner) in statistical sense. On the other hand, “the nature and type of the business operations” (BPP) defines “the overall strategic positioning of company in its environment” (the examiner). Specifically, “a potential volatility of profit (effect)” is the consequence of “the nature and type of business operation (cause)”.
Your underlying problem is to wrongly put the focus on the effect (volatility of profit), which may be a result of both operational and strategic issues. All your reasons are operational ones because they are internal to the organisation. Strategic issues must be something that govern the success or failure of an organisation, which should be determined by how far the organisation can mobilise its internal capability to meet the external environment. You would lean it clearly in P3. PESTEL and Michael Porter’s 5-force analysis are the two foremost models in diagnosing the environment faced by an organisation.
The purpose of the first part of Q1(b) was to test your understanding on the differences between strategic and operational risks. Your answer apparently shows that you could not differentiate them because you emphasise on the internal operation. Rather than telling interest rate and cost of production, you should replace it with economic and competitive risks respectively.
To get marks on the second part, you should demonstrate your ability to identify the PESTEL (e.g. legal risk, etc) and competitive (e.g. customer and competitor, etc) implications of the secrecy option.
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