Turning Risk into Advantage (KPMG’s Evolving World of Risk Management)
The company competed against a number of technology companies that it regarded as insignificant. But as the technology evolved, these “insignificant” companies became more formidable competitors, and the market-leading company began to suffer competitive erosion. Analyzing why the company had not identified this as a top risk after the fact revealed several critical weaknesses in how it traditionally identified, assessed, and managed risk:
• Lack of holistic risk awareness
• Lack of coherent
• Lack of accountability
A new strategy and new risks Upon implementing its new strategy, the company faced the risks associated with adopting a new technology and managing its reputation. First, it had to create new products based on a new-to-them technology and launch these products into the marketplace as quickly as possible in order to earn a return on investment and take market share away from its competitors. Second, the company had to monitor its reputation in the marketplace to make sure it was not losing any former or current clients by taking a new direction. A key question that was asked during this process was: Which risks do we mitigate and which do we optimize to boost our return? The company created risk appetite statements for specific risks such as earnings volatility, liquidity and cash flow, product quality, and regulatory compliance. When developing the statements, the company followed leading practice and created a worded statement for each risk appetite. The intention was to create a guiding principle that should not change in the short term.

To support the risk appetite statement, the company developed tolerances to provide a range within which acceptable deviations from the norm could be identified versus those deviations, either positive or negative, that would require management’s attention. Since new products using the new technology were a cornerstone of the turnaround, the company developed its quality risk appetite statement containing its view on:
• Quality—products launched had to meet an internal level of quality and a certain level of quality as perceived by the customer.
• Time-to-market—the company had to develop products within the time periods set.
• Cost of development of new products—budget constraints had to be met. The company then identified a couple of metrics for each element of the risk appetite statement, including:
• Quality—number of defects, failure rats, customer satisfaction.
• Time-to-market—which key milestones per their product development methodology had to be met, i.e. level 3 and 4 milestones.
• Cost of development of new products—percentage overruns and dollar limits on additional funding. Management then reviewed all current information related to new products to determine what metrics existed and which existing processes it could leverage to build the early warning system for the risk. The management team finally debated which of the three criteria for new products was the most important. In their case, quality came first, followed by time and budget. Conclusion Unlike many companies that stumbled and fell during the recession, the company made some critical mistakes and then saw the light, learning how to manage its risks while implementing a new strategy. During its turnaround, the company learned several lessons that ultimately contributed to its renaissance, including:
• Risk management needs to be embedded into the business
• Companies need to make risk management everyone’s responsibility as part of the overall management process
• Leadership teams (e.g. risk management committees) should collaboratively identify and discuss new risks and ways the company can address them.

Answer the following questions
(1) Outline the reasons why the company’s failure to anticipate the risk. (20 marks)
(2) Explain why the management changes its focus on risk management. (20 marks)
(3) Determine the risk appetite in a new strategy associated with new products. (20 marks)
(4) Illustrate which risk do the company mitigate and how the company optimize to boost their return. (20 marks)
(5) Justify whether are there clear roles and responsibilities for ownership of the risks in relation to the company strategy. (20 marks) [Total: 100 marks]