Corporate and Enterprise Risk Management, Coursework Example

Introduction

 According to Moshe Hagigi and Kumar Sivakumar of the Orebro University School of Business in Orebro, Sweden, the idea of risk has always been a major concern for businesses worldwide and continues to be so in 2015. As might be suspected, there does exist a number of elements associated with risk, especially related to the financial health of a corporate or global conglomerate. As noted by Hagigi and Sivakumar, these risks come in two basic forms–exogenous or those that lie outside of the organization, and endogenous or those that lie within the parameters of an organization or company. As a result of globalization, exogenous risks have “increased both in number and complexity,” not to mention the continuing blurring of national and international elements of risk, due in part to the perpetual “integration across geographical borders of markets, institutions, finances, and operational systems” (2009, p. 286).

In addition, it has long been the practice of national and international corporations and institutions, many of whom are multinational, to pay express attention to exogenous risks while ignoring endogenous risks which almost always lurk within the shadows of any given corporation. But fortunately, Hagigi and Sivakumar have recently offered a rather simple and straightforward solution for this dilemma–namely, that both forms of risks need to be fully integrated and considered as a whole. As they put it,

“While there is an increasing body of research examining risk, there is a need to   examine exogenous risk elements as systems of risk rather than as independent elements and integrate endogenous elements, including behavioral and incentive-related aspects, with the systems of exogenous risks” (2009, p. 286).

Corporate Risk Management 

In basic terms, corporate risk management refers to business practices that help to  optimize risk-taking in  relation to a given market and the financial aspects related to that market. It also refers to methodologies that are utilized by a business or corporation like Apple to help lower financial losses, especially those that are endogenous or internally-based. As noted by Hagigi and Sivakumar, the full integration of both exogenous and endogenous risks will help to deal with various types of threats, especially a company’s financial health, with one of the most prominent being the financial market which today continues to fluctuate as a result of the economic downturn of 2008-2009 (2009, pp. 286-287).

For Apple, one of the largest multinational business organizations in today’s world of business, the internal and external situations that affect corporate risk management vary enormously but are usually based upon factors like corporate size (i.e., the number of subsidiaries and employees); the particular industry involved, in this case computer software, computer design, and computer retail sales; the diversity of the business lines (i.e., the types of products offered by Apple), and sources of capital, such as funding through state and federal agencies or through private/corporate ownership (Corporate Risk Management, 2015).

Enterprise Risk Management

As defined by Margaret Rouse, enterprise risk management or ERM involves the “process of strategic planning, organizing, leading, and controlling the activities and hazards of an organization in order to minimize the effects of risk” related to a company’s working capital and earnings or profits. Although endogenous circumstances do indeed play major roles in ERM, exogenous factors have “fueled a heightened interest by organizations in ERM” in relation to domestic and foreign industry and government regulatory bodies, and the reluctance of investors and stakeholders who have only recently begun to scrutinize the enterprise risk management policies and procedures of multinational companies like Apple and its nearest competitor Microsoft (Enterprise Risk Management, 2015).

In response to these and other factors, an ever-growing number of industry officials and their Boards of Directors have begun to “review and report on the adequacy of enterprise risk management processes practiced within the companies in which they act as administrators. Rouse adds that because financial institutions are obsessed with risk, they serve as “good examples of companies that can benefit from effective ERM” while knowing full well that the success of a given multinational like Apple “depends on striking a balance between enhancing profits and managing risk (Enterprise Risk Management, 2015).

Apple: Case Study on Corporate and Enterprise Risk Management

According to Dennis Barry of the Canadian Institute of Actuaries, for some multi-national corporations like Apple, risk has always been seen as an opportunity rather than as an obstacle. If this is true, then both enterprise risk management and its cousin corporate risk management are “unclouded in their applications,” especially when in the very capable hands of late Apple founder Steve Jobs. Barry also notes that it has long been known that Mr. Jobs considered enterprise risk management as a lower case problem and that it should be viewed as an “effort to optimize risk acceptance and avoidance for the betterment of the business and its stakeholders” in relation to Apple’s financial well-being (2013).

In addition, it seems that Mr. Jobs viewed both corporate and enterprise risk management as dual entities that are inseparable from one another and that he felt that self-judgment was more appropriate than corporate brainstorming. In other words, someone in the corporate world of Apple dared to challenge the status quo of the business world just as if corporate and enterprise risk management did not exist. In essence, current “demonstrable facts have led to the conclusion that Apple” was a multinational corporation of unparalleled success before and during time of its incorporation and that it appears to be on a similar road for 2015 (Barry, 2013). However, like all multi-nationals, Apple. has experienced (and will experience in the future) a number of serious problems related to its continuing maverick approach to corporate and enterprise risk management.

It should also be noted that Apple’s approach to enterprise risk management has always been geared toward effectively dealing with financial uncertainty in the global marketplace and efficiently handling associated risks and opportunities by “enhancing the capacity to build financial value” into its myriad collection of electronic products currently available to the general public. As Apple’s risk management team once declared in the early 1990’s before the advent of hand-held electronic mobile devices, the financial value of a given company like Apple is “maximized when management creates and adheres to strategies and objectives aimed at creating an optimal balance between financial growth and financial return in an environment where global competition is  extremely stiff (Barry, 2013).

Overall then, Apple has long held to a number of important financial objectives related to enterprise risk management, such as 1), aligning risk appetite and strategy via the evaluation of strategic alternatives, the creation of objectives, and the development of specific business mechanisms to help manage enterprise management risks; 2), enhancing enterprise risk response decisions by introducing “management rigor to help identify and select among alternative risk responses” like risk avoidance, risk reduction, risk sharing, and risk acceptance; 3), reducing operational surprises and losses by identifying any and all potential hazards and threats related to financial growth and financial returns in the form of profits; and 4), identifying what Mr. Jobs once referred to as “multiple and cross-enterprise risks,” meaning that all multinationals like Apple must confront “a myriad of enterprise risks that affect different parts of the organization” simultaneously. Therefore, organizational teams with the responsibility to identify enterprise risks must be able to create effective and often immediate responses to these simultaneous risks through the process of what is now known as multitasking (Barry, 2013).

Lastly, as previously pointed out, Mr. Jobs always viewed internal and external corporate and enterprise management risks as opportunities rather than as challenges to the health and well-being of Apple. In other words, by seizing opportunities and understanding that events and situations possess a full range of potential outcomes, enterprise risk management teams were and continue to be in a position to “identify and proactively realize opportunities” as chances for financial growth and expansion despite any and all foreseeable risks (Barry, 2013).

As might be suspected, Apple, Incorporated has been forced to deal with a number of corporate and enterprise risks since its earliest days as a multinational company. First of all, the most prominent are the corporate risks associated with aggressive competition, especially related to the use of mobile communication and media devices, personal computers (think Microsoft), and other digital electronic devices. The main risk here is financial via other companies like Microsoft that aggressively lower their prices in order to maintain a global market share. Certainly, Apple’s financial risks are doubly complicated by this competition, not tot mention its operating costs related to product design.

Secondly, global economic conditions in mostly Europe and Asia continue to negatively affect Apple’s financial risks. This is most closely related to Apple’s consumers who experience problems obtaining credit and continually see decreases in their job prospects and the value of their individual assets. But fortunately, all is not as bleak as it might appear, due to the fact that Apple’s designers and engineers are currently several steps ahead of their competitors in regards to new product lines. For instance, Hagigi and Sivakumar note that Apple’s new CEO Timothy Cook is quite excited about several new products, such as the Apple Watch, the company’s first wearable technical product; the iPad Pro/iPad Plus with a screen size over 12 inches; the MacBook Air with Retina display based on innovative Intel Core M processors for higher screen resolutions; the iPhone 6 Plus with a larger display screen; and finally, an Apple “UltraHDTV” that is set for introduction in late 2016 (2009, p. 290).

One of the inherited enterprise management risks associated with these electronic devices is Apple’s ability to obtain components in sufficient quantities required to produce items like the Apple Watch or the components required to create Intel Core M Processors. The main enterprise risk involved here is the availability of significant supplies and their associated costs. From a financial standpoint, many of the required components are only available from specific sources (mostly lying outside of U.S. geographical boundaries), and are unfortunately prone to global shortages and the fluctuations in the value of foreign currencies. Thus, the enterprise risk here is that economic conditions in nations that supply raw materials like tin, copper, gold, and chromium negatively affect Apple’s desire to keep the costs of their new products as low as possible without affecting their profit margins. In essence then, Apple continues to face a number of enterprise risks associated with its financial operations. It should be kept in mind that one specific enterprise risk continues to threaten the very existence of Apple–namely, political instability which holds the potential to bring the entire corporation to its knees because of the lack of skilled workers, logistical services, and the existence of sky-high commodity pricing.

Conclusion

Since enterprise risk management appears to be the most important aspect of today’s modern Apple as a multinational company, Keith Baxter provides some excellent suggestions related to the benefits of ERM as they apply to profitability and operational performance. First of all, Apple must strive to improve its operational effectiveness by adopting new types of systematic and structured enterprise approaches; secondly, Apple must continue to build solid business relationships with stakeholders and both old and new clients and consumers; and perhaps most importantly, Apple must devise new ways to anticipate global market trends, rather than being dependent upon assumptions that once were valid. And lastly, as previously pointed out by Hagigi and Sivakumar, Apple must dutifully attempt to integrate corporate and enterprise risk management approaches and be openly prepared to “recognize and discriminate between good quality estimates and guesswork” (2012).

References

Barry, D. (2013). Enterprise risk, enterprise risk reward. Canadian Institute of Actuaries. Retrieved from https://www.casact.org/community/sections/rms/2013-Essays/Barry-essay.pdf

Baxter, K. (2012). Enterprise risk management: Science fiction or reality? Retrieved from http://www.de-risk.com/blog/article/enterprise-risk-management—science-fiction-or-reality-35

Enterprise risk management. (2004). Retrieved from http://www.coso.org/documents/coso_erm_executivesummary.pdf

Hagigi, M., and Sivakumar, K. (2009). Managing diverse risks: An integrative framework. Journal of International Management (15)3: 286-295. Retrieved from http://econpapers.repec.org/article/eeeintman/v_3a15_3ay_3a2009_3ai_3a3_3ap_3a286-295.htm

Rouse, M. (2015). Enterprise risk management. Retrieved from http://searchcio.techtarget.com/definition/enterprise-risk-management