RMI EXAM 2

Relationship btwn Chipotle's business model and supply chain risks

- 6 outbreaks of food-borne illness (E. Coli, norovirus, Salmonella) - Stock drops 40%, sales down 30%, 44% drop in profits Numerous lawsuits - Couldn't identify source of outbreak Chipotle's Business Model - Fresh Produce (network of 100s of farmers) - Meat w/o antibiotics - Local + Food w/ integrity - Fresh (not frozen/ centrally cooked) Problems - Hard to manage - Local cooking: more variation 2000 locations, adding 200 per year - Gets harder, not easier as volume increases Real Tradeoffs - Instead of efficiency v redundancy - Centralized freezing/cooking, quality control v local, fresh ; never frozen quality ingredients

3 elements to loss exposure

- Asset exposed to a loss - Cause of loss - Financial consequence of the loss

Less developed countries role in addressing poverty

- Communism v Capitalism - Planned v unplanned economy - Involvement in education -Bright futures scholarships - Infrastructure - Highways. power , water, TV - Attract FDI (foreign direct investment) -Getting other countries to invest

BP Case themes

- Corporate Strategy - Workplace Safety - Process Management - Regulation

BP Corporate Strategy

- Environmentally friendly oil company - Health, safety + environmental performance - Growth through Mergers + Acquisitions - Green Company: Climate Change talk in 2002 - Alternative fuels - Solar - "Do more with less" - Cost cutting - Cost conscious

Capital Assets Pricing Model (CAPM)

- Formula; argues that only risk I should be compensated for is how I move with the market, what my beta is - Because all the other risks that my investors take, they can get away from, by choosing to diversify

Developed countries role in addressing poverty

- Humanitarian aid - World bank / loans -Downside; burdens the country with debt -Partnerships / cooperation - Outsourcing

risk of schedule II drugs

- Insomnia, weight loss, jitteriness, decreased appetite - Increased risk of heart probs - Exacerbate depression, psychosis, anxiety - Potentially addictive - Decreased performance over time Paranoia, aggression, irritability

Harley-Davidson strategy

- Involves taking "OPPORTUNISTIC RISKS" - Understanding, monitoring, + managing the risk is imperative - 16 strategic risks @ harley davidson - BRAND EQUITY - Roar, engine, they value their brand - Don't have a young market - What do you think of when you think of harley davidson?

how derivatives generate risk + reward

- Legitimate hedging function: they're a RM tool - Amplify (leverage) returns (both good and bad) - They amplify reward but they also amplify risk - Help make money move faster + work harder

Incorporating Corporate Purpose in Strategy

- Maximizing Shareholder value is a result, not a strategy - Stability - Growth - Employees

How does government/society measure risk?

- Measuring reward to society is difficult (reward of national parks?) - We don't have a great model of gov decision making - Whats the value of having a national park? National science foundation? Disaster relief? The trillions of $ for COVID relief? - Hard to measure the value - On the risk side, they're the only ones who can do it - Who else has the abilities/resources to do it?

Experience Bias

- Natural disasters, car accident, plane crash - Low probability, high consequence - If you live through it, you overestimate it happening again - If you've never experienced it, you underestimate it happening again

how to manage the risks of data-driven decision-making

- Oversight / regulation - Laws - Auditors - Embedded morality Data models are inputs to decision makers, not decision-makers

Strategic Risks examples

- Product mix - Supplier choice - Financing options Many decisions fall under "strategy", if any of them are wrong/ faulty —> strategic risk

Problems in US healthcare

- Quick diagnosis - Ability to manipulate / fake symptoms - Quick to medicate - Doctor shopping - Not sure how all pharmaceuticals interact

Haverty's Strategy

- Selling furniture driven by disposable income - Recent recession really hurt - More sophisticated means of tracking economy - They worry about generic economic trends; pandemic hurt them bc one of the first thing people put off buying is furniture when they have other things to worry about - Track the economy (evaluate 30 economic variables) to predict future sales

Media Bias

- Social media and mainstream media - so much misinformation in social media today; huge bias - Media downplays day-to-day risks and emphasizes the rare ones

problems with regulating derivatives

- Speculators help make markets work; people should be allowed to speculate - Very complex - How could an external regulator see the risk? - Derivatives are a global product; who would regulate?

Molson Coors strategy

- Strategy group produces: short-term, medium-term + long-term strategies - RM: what risks threaten thwarting those goals Ex. taxation and international regulation (would cause people to stop drinking beer) -Selling alc: country + state level regulations -Sin taxes + implications

Incorporating Risk in Strategy

- Strategy must reflect risk, can't ignore it - Risk is real; systemic / systematic risk : can have domino effect - Must build contingencies into strategy to deal with risk - Tradeoff between efficiency, doing things cheapest way possible + also being able to have backups in place, capacity in place, redundancy in place if something were to go wrong

Bias

- The way you apply your subjective probabilities to kin of risks or decision making different from the objective Subjective view of risk - If I asked you "what are the chances of having a hurricane make landfall in Tallahasee?" and you say "that never happens here, 0" ; very subjective - Many sources - Alters decision making - Problem when it ends up being significantly different from the model

Incorporating Environment in Strategy

- What type of growth is sustainable? - Demographic trends We're an aging population; consider healthchare - Consumption trends People no longer want VHS, DVDs, Blockbuster

Types of Biases

- age - culture - media - gender - experience

yield curve

- shows how long you're gonna invest - longer you're investing, higher rate of return you have to pay

Uses of derivatives

1. As a hedge 2. To speculate

4 benefits of modeling supply chain risks

1. Identifies hidden exposures (Helps reveal things they overlooked) 2. Avoids the need for predictions about rare events 3. Reveals supply chain dependencies and bottlenecks 4. Promotes discussion and learning within the organization

4 areas strategy should incorporate

1. Risk 2. Boundaries 3. Corporate Purpose 4. Environment

CAPM tells 2 important things:

1. certain types of risk are rewarded - Systemic risk (market risk) 2. Certain types of risk aren't rewarded - Diversifiable risks

Black swan

An extreme outlier: high impact, hard-to-predict, rare events that people generally don't expect - Can be good or bad - Disruptors to industries; uber, airbnb

Loss Exposure

Any condition / situation that presents a possibility of loss, regardless of whether that loss actually occurs

Black Swan examples

Bernie madoff, mortgage crisis, internet, sharknados, 9/11, the eagles winning superbowl

Categories of Organizational Risk

Business Operational Hazard Financial Strategic

Culture Bias

Different cultures view financial risk much differently

Using a derivative to speculate

Enter into a derivatives contract that creates risk / reward for me

Gender Bias

Fading away, women are taking more risks

Hazard Risk Examples

Fire, auto accident, tornado, earthquake - used in insurance industry

organizations project _____ from investment/opportunities

Future cash flows

Examples of Derivatives

Futures contracts, forward contracts, options, swaps, warrants

Efficient Frontier

Graphical representation of risk v reward ; want to be on the frontier

Law of unintended consequences

I can incentivize you to do something, but I can't figure out exactly what my incentives are going to actually cause - People always try to cheat the system; never know how things are going to be used

Using a derivative as a hedge

Ie: offset a risk you already face ex. Delta; remove price risk hedging; offset that position in the derivatives market -They can enter into a forward / futures contract to buy aviation fuel

reward of schedule II drugs

Improved performance on learning tasks such as memorization, especially for longer term memory

financial risk examples

Losses due to exchange rate, investment losses, credit risks, liquidity risks

BP process management

Make sure things don't happen incorrectly during the process of working with oil or other dangerous chemicals

Operational Risk Examples

Manufacturing processes Fraud Mismanagement Employee mistakes

effect that politics has on expected value calculations

Political Incentives - Short term v long term planning - Bigger the discount rate, the less money the future cashflows are worth - Discount rate - Small discount rate means cash values are worth a lot of money in the future - Political incentives increase the discount rate and emphasize short-term cash flows over long-term cash flows - Big problem when you want the government to think long-term - We're trillion dollars in debt

causes of poverty

Quality of the labor force -Maybe not educated enough Stock of capital / capital accumulation -Don't have the right resources to produce what you want to Technology Efficiency - Not good enough; competitor does it better Population - Not enough/ too many people

Risk/reward trade-offs in the BP case

Reward: profitability Risk: putting workers at risk Sacrificing safety for profitability upside of cost-cutting: Saves you money, makes you more profitable

Big Data

We create so much data today, how can organizations use it? - Data mining - Buying trends - Targeted marketing - Mitigate risky business practices, employee fraud (operational risk) + black swans

What effect does corporate strategy have on corporate culture? In turn on workplace safety? Process management?

Workplace safety: protect the workers Process management: lets make sure nothing goes wrong that could even threaten the workers BP focus on entrepreneurial culture

Age Bias

Younger people are willing to take more risks

Capital

all nonhuman ingredients, not just money

hedge

an investment that helps limit your financial risk

Common underlying derivative instruments:

bonds, commodities, currencies, interest rates, market indexes, stocks

ways to calculate risk / reward

charts, bonds, formulas yield curve CAPM Efficient frontier

Derivative

contract between 2+ parties whose value is based on an agreed-upon underlying financial asset, index, or security

Premature death

death with financial responsibilities remaining

Business Risk

deviations in profitability; risk caused by operational, hazard, strategic or financial risks - Caused by prices, regulation, competition - Very broad category

Labor

effects of the mind + muscle that can be used in the production process

How do individuals measure risk?

expected utility; risk-averse

____ _______ reflects risk, not risk aversion

expected value

How do organizations measure risk?

expected value; no natural risk aversion

study of economics is the study of _____ systems

incentive

organizations look at _____

opportunity cost ; cost of capital

Strategic Risks

potential losses (variation) from poor business decisions

Operational Risk

potential losses from internal resources

Hazard Risk

potential losses that only have a down side (pure risks)

financial risk

potential variation due to financial causes

cost of capital corresponds with :

riskiness of firm

Diversifiable risks

risks that an organization can get away with by diversifying their portfolio

Who faces the biggest risk in a premature death?

single person with dependents

Incentives

things that motivate individuals to perform an action - Can be at the individual, societal, or organizational level

Biases are the _____ ______ ;

unknown unkowns; the things we don't know that we don't know

Systemic risk (market risk)

what is the expected return?