Risk and Value Creation

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RISK AND VALUE MANAGEMENT: A

CASE OF AUTOPLAST LTD.

Department of Built Environment

University of Central Lancashire


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i

TABLE OF CONTENTS

Table of Contents ............................................................................................................................. iList of Tables ................................................................................................................................. iiiList of Figures ................................................................................................................................ iv1. INTRODUCTION ................................................................................................................... 1

1.1. Risk................................................................................................................................... 11.2. Value Management .......................................................................................................... 11.3. Risk and Value Management ........................................................................................... 1

2. THE CASE OF AUTOPLAST ................................................................................................ 32.1. The Risks Faced by the AutoPlast ................................................................................... 3

2.1.1. Political Risks ........................................................................................................... 32.1.1.1. Macro Level Political Risk............................................................................................ 32.1.1.2. Micro Level Political Risk ............................................................................................ 4

2.1.2. Economic Risk .......................................................................................................... 42.1.3. Social Risk ................................................................................................................ 42.1.4. Technological Risk ................................................................................................... 52.1.5. Legal Risk ................................................................................................................. 52.1.6. Environmental Risk .................................................................................................. 62.1.7. Competitive Risk ...................................................................................................... 6

3. Hazards .................................................................................................................................... 83.1. ENVIRONMENTAL HAZARDS ................................................................................... 8

3.1.1. Hazard 1: Waste in the Marine and Terrestrial Environment ................................... 83.1.1.1. Contingency Plan .......................................................................................................... 83.1.1.2. Disaster Plan ................................................................................................................. 8

3.1.2. Hazard 2: Release potential toxic fumes ................................................................. 93.1.2.1. Contingency Plan .......................................................................................................... 93.1.2.2. Disaster plan ................................................................................................................ 10

3.2. Technological hazards .................................................................................................... 103.2.1. Hazard 1 Bad Virus ................................................................................................. 10


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ii

3.2.1.1. Contingency Plan ........................................................................................................ 103.2.1.2. Disaster Plan ............................................................................................................... 11

3.2.2. Hazard 2: Communication failure ........................................................................... 113.2.2.1. Contingency Plan ........................................................................................................ 113.2.2.2. Disaster Response ....................................................................................................... 12

4. VALUE CHAIN ANALYSIS ............................................................................................... 134.1. Primary Activities .......................................................................................................... 13

4.1.1. Operations ............................................................................................................... 134.1.2. Outbound Logistics ................................................................................................. 134.1.3. Marketing and Sales ................................................................................................ 154.1.4. Services ................................................................................................................... 15

4.2.

Support Activities ........................................................................................................... 15

4.2.1. Infrastructure ........................................................................................................... 154.2.2. Human Resource Management ............................................................................... 164.2.3. Technology Development ....................................................................................... 164.2.4. Procurement ............................................................................................................ 16

5. CONCLUSION ..................................................................................................................... 17REFERENCES ............................................................................................................................. 18


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iii

LIST OF TABLES

Table 1. Quantitative Risk Register............................................................................................... 7


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iv

LIST OF FIGURES

Figure 1.Value Chain Model ....................................................................................................... 14


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Risk and Value Management 1

1.INTRODUCTIONThe thrust of technological encroachment and globalization has experienced a significant

progression during the last few decades. The volatility in the business world has increase now.

One after another natural calamity has augmented this situation. This uncertain and risky

situation stipulates to develop effective strategies to manage the risk at all organizational levels

(Honohan & Laeven, 2005).

1.1. RISKThe word risk is derived from an old French word risqu, meaning danger with a

degree of likelihood (Littr, 1863). It is mostly ascribed to the probability of occurrence of some

event (Bruin et al., 2000).

1.2. VALUE MANAGEMENTThere are two schools of thought about the value management process in the

organization. The first school of thought advocates following the state of the art engineering

mechanisms that seeks to achieve the desired outcomes at minimum possible cost (Dell'Isola,

1984). The second school of thought emphasizes upon the strategic interaction of organizations

with the external environment, including clients and other stakeholders (Barton, 1996).

1.3. RISK AND VALUE MANAGEMENTThe recent changes in business environments have posed a great challenge for the

organisation to maximize their value (Gupta, 2011). There must be a strong rationale behind risk


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management activities. If risk management is not worthwhile, then there is no need to be

involved in this practice.


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2.THE CASE OF AUTOPLASTThe AutoPlast Ltd. is a company located in the industrial park of Blumac Town. The

company is involved in the business of manufacturing plastic products for the automobile

industry.

2.1. THE RISKS FACED BY THE AUTOPLASTThe company is currently facing a number of risks that are being explained as under:

2.1.1. Political RisksThe risk that a future outcome may be affected by the political changes in the country is

called political risk (Kennedy, 1988). The AutoPlast Ltd. is also facing this risk. Currently, the

factory site of AutoPlast Ltd. has the immunity. The government may change its decision about

the awarded immunity or the new government may revoke the immunity.

For the purpose of quantification, we may divide the political risk into two categories:

2.1.1.1. Macro Level Pol iti cal Risk

This type of political risk affects all the businesses operating in the country. (Ilan &

McKee, 1999). Apparently, AutoPlast is not facing any kind of macro level political risk.

However, the possibility of such a risk cannot be avoided. Hence, the company must not ignore

this risk while devising their risk management strategies. This risk can be quantified through rate

of the change of governments before their stipulated time.


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2.1.1.2. Micro Level Pol it ical Risk

Micro level political risk is the risk that is limited to different project only. The

companies are required to remain focused on the changes occurring in the relative industry and

local economy where the business is operating (Ilan et al., 2006).

Currently, in case of AutoPlast Ltd., company is facing the micro level risks. The local

authorities are trying that the company must relocate its factory site because of the hazardous

incident that took place in the past. This risk can be quantified by the evaluating the number of

incidents took place because of micro level political risk political risk.

2.1.2. Economic RiskThe economic risk can be referred to the possibility that a downfall in the economy will

negatively affect the business. The economics factors like inflation, changes in interest rates,

changes in GDP and GNP may have potential effects on businesses

AutoPlast Ltd. is operating in a relatively stable economy i.e. UK. However, the changes

in the international economy have potential effects on the economy of UK. Therefore, the

company must have a contingency plan to cope with such an adverse situation resulting from the

economic risk.

2.1.3. Social RiskThe organizations actions that may have adverse effects on the society are referred to the

social risks. Currently, the organization is facing the social risk of unemployment in the society

in case it relocates its site. The local community workers working at the company will be


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unemployed in case the site is relocated. The company must make the administration and

authorities aware about this issue in order to reduce the pressure for relocation of the site.

2.1.4. Technological RiskThe risk associated with technologies including information technology is referred to

technological risk. This risk may include the failure of the technology or the technology become

obsolete.

Presently, AutoPlast Ltd. is not facing any significant technological risk. However, this

risk may exist in two forms.

i) The firm should use the new technologies to ensure that society is saved from thehazardous effects of the incidents like happened in the past.

ii) A new competitor may use some effective technology to gain competitiveadvantage.

2.1.5. Legal RiskLegal risk can be referred to uncertainty of future events because of the legal

environment in which a company is operating. Currently, in case of AutoPlast Ltd. the company

is facing legal risk. The legal risk is about to surface for the organization. Although, presently

companys site has the immunity about relocation, but the pressure exerted by the administration

and society may result in relocation of the company. Moreover, the company may have to face

the penalties from the regulatory bodies.


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2.1.6. Environmental RiskEnvironmental risk is referred to probability of environmental effects resulting from the

organizational activities. This risk includes the adverse outcomes for the living orgasms on the

earth. This is a significant risk in case AutoPlast Ltd. Firstly, as the companys site is located at

the bank of the river; therefore, the floods from the river are a continuous source of danger.

Moreover, in case of fire previously toxic fumes results in many of health issues among the

society.

2.1.7.

Competitive Risk

The competitive risk is referred to probability of adverse outcome because of the changes

in existing competition in the market. The market share is rapidly lost in case the company does

not remain competitive. AutoPlast Ltd. is facing a significant competitive risk. Currently, new

cheaper products those are comparable to AutoPlasts products. Because of this issue the

company is unable to achieve its sales targets during the last 3 years.


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Table 1. Quantitative Risk Register


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3.HAZARDSThere are two types of hazards being discussed here.

3.1. ENVIRONMENTAL HAZARDSPlastic manufacturing companies or in this case AutoPlast Ltd. leads to many problems as

large volumes of waste are created.

3.1.1. Hazard 1: Waste in the Marine and Terrestrial EnvironmentMarine environment has been largely studied. A lot of large amount of plastic product,

debris, are found in Open Ocean, Deep Ocean, coast lines etc. This is not because of dumping in

rivers or oceans but also caused by littering on land, as well as leakages and spillages (Niemeier

& Rice, 1999).

3.1.1.1. Cont ingency Plan

The company is required to devise the strategies to cope with the losses resulting from

floods. Firstly, the company must get insured its all assets in order to avoid the losses resulting

from the flood. Secondly, the company must take care of the issues concerning the marine life.

The AutoPlast Ltd. is required to make such wares houses where the finished goods and the raw

material can be stored safely.

3.1.1.2. Di saster Plan

Although, the water proof compounds can serve better in order to avoid the mixing of

plastic wastes in the water. However, under the sever circumstance this mixing may take place.


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The company should have the setup for shifting of finished goods and raw material to a

temporary facility where the material can be stored safely.

3.1.2. Hazard 2: Release potential toxic fumesRelease of dangerous plastic products to air also effects surrounding environment. The

company has experienced in the past that in case of fire the release of toxic fumes significantly

affected the local community. The following steps must be undertaken in order to avoid the

negative effects of incidents like took place in future:

The company must install fire extinguishers at different place.

The electric appliances must be plugged out when they are not in use in order to avoid theshort circuits.

The fire alarm system and smoke detection systems must be installed to generate promptsignals.

3.1.2.1. Conti ngency Plan

The company must keep some of the hired people that should remain on call. In case of

the failure of above staff the company must call these people to restrict the losses resulting from

such incidents. The company must develop a procedural manual to deal with such an incident,

which should have clear distinction of the roles played by the different organizational

departments and members.


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3.1.2.2. Di saster plan

In case the contingency plan fails and disaster takes place, then the company must have a

disaster plan in place. The proper treatments should be provided to the effected ones by the

company in case of toxic fumes. The company must have the connection with such a companies

and agencies that are trained to deal with such incidents. Under the severe circumstances, the

company must have a backup plan for shifting of human beings from the affected place to a safer

place.

3.2. TECHNOLOGICAL HAZARDSFollowing are the potential technological hazards most likely to faced by AutoPlast Ltd.

3.2.1. Hazard 1 Bad VirusWith the advancement in technology, everything is just one-click away (Willies, 1991).

The viruses affect the data. The virus corrupts the data and cannot be utilized further. In case of

AutoPlast Ltd. as flood has as the flood overflow the factory premises causes lot of damage to

other things also disrupts technological failure. Following steps be adopted to deal with these

hazards:

1. Proper antivirus should be installed.2. Precautions should be taken against important files they must not be saved on internet.3. The security services must be achieved.

3.2.1.1. Cont ingency Plan

The following steps must undertaken regarding the contingency plans:


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Store data in different locations Storing data in multiple formats Safety precautions against potential threats

3.2.1.2. Disaster Plan

In case the destruction takes place as result of the virus attacks, the AutoPlast must have

the setup for the recovery of their important data. The company should be able to develop such a

system that has a strong buffer against the virus attacks.

3.2.2. Hazard 2: Communication failureThe failure of information technology may adversely affect the communication systems.

The organization must develop the following steps:

Installation of new systems in the organization. Different softwares must be periodically updated. The systems should be checked periodically for their proper functioning.

3.2.2.1.Contingency Plan

Following steps should be undertaken as contingency plan:

The company must install different systems for communications, so that the other systemmay be used in case of failure of one system.

The employees must be trained about the proper use of these systems.


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4.VALUE CHAIN ANALYSISThe value chain model is a systematic approach that was developed by M.E. Porter

(1985) in his book on competitive advantage. The tradition value chain model is given in Figure

1. The activities performed by the organization are divided here into two categories:

i) Primary Activitiesii) Support ActivitiesAutoPlast is currently facing reduction in its sales. Therefore, the company needs to

identify the activities that are not creating the value for the company. A detailed proposed

description of all the activities is as follows:

4.1. PRIMARY ACTIVITIESPrimary activities are being explained as follows:

4.1.1. OperationsThe company is involved in manufacturing of plastic parts for automobile industry. The

company is currently not diversified. The company should follow diversification. This will help

to manage the risk associated with the business operations.

4.1.2. Outbound LogisticsThe outbound logistics is a key area of interest for the company. Maintaining the own

fleet of logistics will add in extra costs as compared to the obtained benefits. Therefore, it is

advisable that the company must outsource these services to the logistic companies.


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Figure 1.Value Chain Model

Source: (Porter, 1985)


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4.1.3. Marketing and SalesAutoPlast should follow an effective strategy for sales market. The promotional

campaign should be undertaken in order to make all the customers aware of the products of the

company. The quality aspects of the company products must be highlighted so that the company

may compete with the products coming from Eastern Europe.

4.1.4. ServicesCurrently, the provision of services is quite limited by the company. The company can

produce more value by providing different kind of services to its customers e.g. repair and

maintenance services.

4.2. SUPPORT ACTIVITIESThe value creation process through support activities in AutoPlast Ltd.is being explained

as follows:

4.2.1. InfrastructureAutoPlast Ltd. has still not expanded its infrastructure. The company must undertake the

expansion within its infrastructure. Production facilities must be expanded to the different

geographical regions. This will save a lot of extra cost incurred on handling and logistic, thereby

creating value for the company.


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4.2.2. Human Resource ManagementThe company must maintain a clear hierarchal structure. Moreover, the company must

bring diversification in its staff. This will create a soft image of the company in the market as the

company providing equal opportunities regardless of any kind of discrimination. This

diversification will also help in adding value to the company as the people with different abilities

and skills will provide a rich workforce to the company.

4.2.3. Technology DevelopmentThe company must work on developing innovative technology for the purpose of

production and market. Initially, this development of technology may incur additional costs, but

the company should consider this cost as investment that will yield greater benefits in future.

4.2.4. ProcurementThe company should have developed an effective and efficient procurement system. A

proper procurement department must be developed so that the prompt decision can be

undertaken at the operational levels in order save the time and extra costs associated with the

procurement.


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5.CONCLUSIONThere are rapid changes in the situations where the companies are doing their businesses

now a day. A stagnant strategy cannot produce the desired results. The company must be

reviewing the implemented plans and strategies periodically and adjustments should be made if

required. The flexible strategies and plans can be more beneficial for the company. Moreover,

the company must work on the current issues. The urgent remedical measures must be

undertaken to avoid the disaster situations.


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Risk and Value Creation