Arslan Ahmed

[Type the company name] Enterprise Risk Management Strategic Audit of Tesco PLC Hp [Pick the date] Contents Executive Summary ................................................................................................................... 2 Introduction ................................................................................................................................ 3 Overview of Tesco ..................................................................................................................... 3 Risk Profiling using financial situation analysis ........................................................................ 3 Risk Audit .................................................................................................................................. 4 Internal Risk ........................................................................................................................... 5 External Risk .......................................................................................................................... 6 Risk Assessment ........................................................................................................................ 7 Likelihood Impact matrix and Risk Mapping Grid ................................................................ 7 Shell Model ............................................................................................................................ 8 Risk Mitigation Strategies.......................................................................................................... 9 Internal Risk Strategy ........................................................................................................... 10 Internal Risk Strategy Recommendations ............................................................................ 10 External Risk Strategy.......................................................................................................... 10 Recommendation for External Risk Strategy ....................................................................... 11 Conclusion ............................................................................................................................... 11 Bibliography ............................................................................................................................ 12 Executive Summary This report will inform the management at Tesco PLC about an external risk and an internal risk which Tesco PLC faces currently. First, a situation analysis will be done using financial ratios and their forecasts for the five years ahead. Next, a risk audit will highlight and explain the two risks one external and the other internal which Tesco faces. Next, risk assessment tools will be used to understand the impact and the likelihood of the external risk, Brexit and the internal risk, IT lock-down. Another tool which is used for risk assessment, Risk mapping grid will also be included. Finally, after the explanation of the shell model there will be the explanation of risk mitigating strategies. Introduction This report will begin with a very brief outline of the Tesco PLC. Next, a situation analysis using financial forecasting will be done for Tesco PLC and two of the risks which Tesco faces in depth will be discussed while there will also be an assessment of these two risks using impact and likelihood grid and the risk mapping matrix. Next, briefly the shell model will be discussed. Finally, after the discussion of the risk mitigating strategies, a conclusion and recommendations will end the document. Overview of Tesco Tesco is not only one of the biggest food and grocery retailers in UK but also has a global presence spanning over a little less than 7000 shops in the world. At the end of the year 2016, the total number of colleagues (employees) at Tesco PLC was 476,000. Currently, Tesco’s competitors are ASDA, Sainsbury’s and Morrisons and recently Lidl and Aldi have also become strong competitors, bringing down Tesco’s market share to 28.4 percent in 2016 from 28.7 a year ago. (DENTON, Jane, 2016) Risk Profiling using financial situation analysis Risk profiling is the use of financial tools to assess the current propensity of risk taking the company possesses. Look at Table 1 below which has the key financial ratios as well the projections for the future years. Table 1 Historical Trends Forecast % Key financial figures and ratios % 2013(in change,20 millions) 14 from change 2014 Turnover Net Profit Operating Profit Margin $ 63,406 $ 24 3.76% 1.8% 1025.0% 8.5% ,- from 2013 64,557 $ 270 4.08% -11.8% 2235.6 % 349.7% % chang change,20 e, 16 from 2016 2015 2014 $ change,20 % % 2017 18 from % - 2018 from change,20 19 from 2019 2018 2016 £ 56,925 -£ 5,766 -10.17% -4.4% 98.0% 117.0% £ 54,433 -£ 129 1.73% 1.8% 1.8% £ 55,413 -£ 127 -2.0% 1.70% 7.0% 7.0% -1.0% £ 59,292 -£ 118 1.68% 20.0% 20.0% 2.0% £ 71,150 -£ 94 1.72% Gross profit Margin 6.55% -3.8% 6.31% 263.0% -3.87% 173.9% 5.24% 25.1% 7% 12.5% 8% 11.1% 9% Asset Turnover 7.6% 1.37 -5.9% -3.4% 1.25 3.4% 1.29 8.1% 1.41 18.1% 1.72 Net Profit Margins 0.04% 90.9% 0.42% 104.1% -10.13% -4174.1% -0.24% -3.7% -0.23% -14.8% -0.20% -50.0% -0.13% Current Ratio 5.5% 0.73 -21.7% 0.60 20.0% 0.0% 0.75 0.0% 0.75 0.0% 0.75 1.26 0.69 1.29 0.75 Assumptions for projections for future:  As company is in a turnaround phase, its emphasis will be on gradually increasing revenues and cutting down costs. The figures are calculated above to show that the revenue figure will raise slightly 2016 onward but not enough to give net profits. Net losses will continue but will keep on decreasing at a very slow rate. The reason for this slow decline is the negative effects of Brexit.  The net current ratio will keep at a constant rate as there will be no significant change in current assets and current liabilities. Overall, the financial predictions show that the company will be in an improved position but will have to keep on enduring losses, the volume of which will gradually decrease. The reason for the continuing losses is Brexit. This brings us to consider Brexit’s effects in detail. Risk Audit The risk audit process at Tesco involves various boards, the audit committee, the executive members and the CEO in finding out the most relevant risks the company could face in future. The leaders of the different business units explain through questionnaires and interviews the risks that they consider the most relevant. The various boards try to see that the process for identification is fair and transparent and sensible. (TESCO PLC) Some of the internal and external risks identified by the company as well as their mitigating strategies are shown in figure below: Figure 1 Major Risks and their mitigating strategies, Source: The Annual Report, Tesco plc 2016 Major Risks: 1.Failure to respond to customers 2.Increased competition 3. Technological failures 4. Decreased liquidity 5.Workplace Safety Mitigating Strategies: 1.Segmenting and targeting specific customers by learning gained through customer analytics division of Tesco,dunhumby 2.perform competitive analyses and look at the competitors strategies. 3.Increase spending in ensuring technological failures should not happen. 4. A pool of money to counter liquidity risk. 5.Strict conformance to Group safety policies Internal Risk According to Tesco PLC’s 2016 annual report, the internal risk of technological failure is expected to increase in magnitude in future. It is one such risk that can affect many areas of Tesco’s work and hamper its priorities of being competitive, protecting its assets and revenues and making sure that the customers are satisfied at all times. (TESCO PLC, 2016) The impact of this risk is quite high as it can seriously derail Tesco’s business, cutting off its links with its suppliers as well as customers and also quite possibly making the company lose its precious data. Technological failure can be of many forms but here most important is any kind of failure in the IT system that connects the whole organization’s worldwide operations, maintains a record of accounts and inventory and links the suppliers. An example here can be how Royal Bank of Scotland had to suffer losses worth GBP 125m due to a failure of a software update which left its customers unable to access their accounts and make transactions for nearly two weeks. (COMPUTER BUSINESS REVIEW, 2014) External Risk One external risk which Tesco faces is the risk of Brexit. Brexit can seriously hamper a lot of businesses as it will decrease the number of people who can be the potential customers of Tesco PLC and other retailers, making the competition increase even further as the retailers will have to fight over reduced customer bases. Many economists are uncertain about what Brexit could entail. However, in the short term it is predicted that Brexit will have negative effects with a declined sterling, decreased GDP and lesser revenues. (THE ECONOMIST, 2016) Kantar as part of a study on effects of Brexit on UK retailers found that Brexit could seriously derail the British businesses as postBrexit they will not be able to import easily and cheaply from EU partners due to devalued Pound against the Euro. Brexit will also affect Tesco’s ability in particular to invest in European Union markets and reduce its business. (KANTAR RETAIL) Another analyst claims that the devalued pound has increased the price of the imported goods as a result of which the retail sales are already down in the UK. (WORSTALL, Tim, 2017) Risk Assessment Likelihood Impact matrix and Risk Mapping Grid Figure 2 Likelihood Impact Matrix High Close Requires monitoring Monitoring required Management Risk may and Management be Management accepted,but Likelihoo Intensive Management recommended required Risk acceptable, Low requires management regulation required Medium requires d monitoring Acceptable Risk Lo w Low Medium High Impact Source: Pinterest, URL: https://www.pinterest.com/pin/-/ Table 2 Risk Mapping Grid Source of Risk Internal Type of Risk Business Aspect Probability Affected Occurrence Impact Technological-IT Inventory Medium High system Failure Management Customer Management Sales Business Data of Severity of Operations Supply chain External Negative of Brexit effects Overall business High affected, High in particular revenues and profits and ability to do further business and to expand business The above figure and table show that the probability of an IT systems failure is medium as there are many companies that do face IT system breakdowns and hence try to manage this risk actively. However, the impact is high as the results of an IT systems failure can result in huge losses and dents in the reputation of a company. In order to counter against the downsides of this risk, it is necessary to have active management. They also show that the external risk, Brexit, has both high occurrence rate as well as high severity of its impact meaning that it is a risk that should be managed intensively. In order to manage it, it is important to recognize in full its possible impact on the revenues and the profits in future as was done in the situation analysis and also to come up with strategies to diminish the probability of occurrence of this risk. Shell Model The shell in shell model is an acronym for Software, Hardware, Environment and Live ware. These four components are regulated through the factor, live ware, to form software-live ware, hardware-live ware, environment-live ware and live ware-live ware to provide a framework for risk assessment and mitigation. The software-live ware interaction for instance shows that the software in a company meaning the rules and regulations, policies and procedures, codes of conduct as well as the character and personality of the organization along with the reputation and culture, is in direct contact with the live ware, meaning the workers, the management as well as the stakeholders outside the company, to produce a framework in which risk assessment and risk mitigation can occur. S •Software H •Hardware E •Environment L •Live Ware HardwareLive ware SoftwareLive ware EnvironmentLive ware Liveware-live ware L Figure 3 Shell Model Risk Mitigation Strategies There are seven main risk Management or mitigation strategies as shown in the diagram below: Figure 4 Risk Mitigating strategies Risk Transfer Loss Reduction Risk Control Avoidance Spreading Risk Backup Plans Risks Self funding Avoidance is the most effective but can be difficult to implement as risks are always going to be there and cannot ever be avoided fully. Risk control is a more sensible approach as it aims to control the risks in order that they may not occur and if they do they should have the least impact. Risk transfer uses insurance policies and contracts to regulate the risks. Loss reduction tries to lessen the impact once a risk occurs through countering strategies. Spreading risk can be likened to the practice of having a portfolio of investments in order to balance out the impact of losses against the gains. Backup plans devise strategies to have a plan B in case a risk does occur. Self funding tries to lessen the costs (insurance premiums for instance) of risk mitigation incurred in risk transfer strategies by having organizational funds to counter against risks. (OSBIE) Internal Risk Strategy For technological risks, the company is currently using a mixture of risk control, self funding and avoidance strategies. As given in the Annual report the main mitigating strategies for Tesco are (TESCO PLC, 2016):  Control the risks through the use of a companywide technology strategy and policies and procedures.  A funded development plan to increase investment in IT in order to cover the ill effects of the downsides of the risks to the systems.  Performance of assessments on a regular basis to ensure that the areas of improvement can be found which can help in avoiding risks altogether. Internal Risk Strategy Recommendations The company should also include the strategies of Risk transfer and Risk spread by combining them as mentioned below: 1. Including the supply chain partners in setting up a singular technology strategy across the whole supply chain so that the risk can be transferred as well as spread. 2. To have an insurance policy to cover the losses that may incur in case some risk of high probability does occur. External Risk Strategy For external risk strategy, the company needs to have a plan. Currently, a focused plan is not in place that could counter the ill-effects of the Brexit. The company needs to undertake itself on the path to change which will require a lot of initiatives for cost cutting and profitability along with all the seven risk management strategies. Recommendation for External Risk Strategy The company should combine avoidance, risk control and risk self funding to come up with cost cutting measures, introduction of innovative new products for targeted markets and setting up of a risk fund. Cost cutting will make sure that the products get as low priced as possible so that customers who are buying less due to increased prices because of a devalued pound get back to buying. It will also improve profits. Innovative new products for specific target markets will ensure that company targets those customers that are overlooked by the competitors in order to avoid the risk of running low on revenues following the Brexit. Meanwhile, setting up of a risk fund will make sure that postBrexit if any losses occur they can be recovered through these emergency reserves. Conclusion To conclude it can be said Tesco’s situation analysis shows that in future it will struggle with finding a foothold and will see a gradual rise in its revenues and a slight decrease in its net losses over the years. Brexit will contribute negatively to this situation more so once the Brexit is done. The risk assessment tools found that the internal risk of technological failure has low possibility of occurrence but can be countered through active management of a moderate degree. Meanwhile, the external risk of the downsides of the Brexit needs a companywide plan of cost cutting, innovation and setting up of a fund to lessen the impact of the Brexit effects. Bibliography Computer Business Review. 5 of the worst IT system failures. 14 January- . Denton, Jane. Major supermarkets see sales rise by a sliver but Tesco, Asda and Morrisons still lose market share while Aldi and Lidl draw in even more shoppers. 8 3 2016. . Kantar Retail. Brexit's Impact on the British FMCG Retail Landscape- . OSBIE. Identify Risk Management Strategies- . Tesco PLC. "Annual Report and Financial Statements 2016." 2016. Tesco Plc. Tesco Annual statments and report-. The Economist. Brexit Brief: The economic consequences. 9 April- . Worstall, Tim. "UK inflation Up Post-Brexit, Retail Sales Down." Forbes 17 Feb 2017.