Risky Business

7 common reasons given for a merger

Mergers and acquisitions are likely to be the biggest capital investment for a firm. For the acquired, stock prices typically rise significantly, but for the buyer, they typically fall. So what are the main reasons given for a merger or acquisition? In a recent Risk Series session hosted by The Risk Institute, Isil Erel discussed these and more during her talk.

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July summer session takes deep dive into critical work-force challenges

The U.S. work-force is at a turning point, with change swirling everywhere: Millennials are now the largest generation in the workplace. Baby boomers – and their decades of institutional knowledge – are nearing retirement after putting it off during last decade’s recession. Constant technological leaps are rewriting the rules for the skill sets that matter.

What does this mean for organizations trying to attract and hire today’s talent? How does this change the game for their ongoing efforts to build culture and develop their existing employees?

The Center for Operational Excellence is teaming up with three other centers for a pair of summer sessions focused on today’s greatest business challenges. The first, “Human Capital and Talent Management,” tackles these vital work-force development issues and on the morning of Tuesday, July 18, at the Fawcett Center.

At this session, gain insights on this issue from three compelling angles:

  • M. Gootman, Brookings Institution

    The Big Picture: Brookings Institution Fellow Marek Gootman will be unveiling results of a new work-force survey conducted in conjunction with the National Center for the Middle Market. The survey, set to be released in late June, looks at how middle-market companies – the fastest-growing segment of the economy – are responding to large-scale shifts in work-force dynamics to hire and retain workers.

  • The Ground War: Join talent management VPs Maura Stevenson (Wendy’s) and Kelly Wilson (Cardinal Health), and Kathy Smith, AVP Executive Succession and Development at Nationwide Insurance, for a moderated panel and audience Q&A session on how their organizations are responding to these work-force trends.
  • The Pipeline: Jamie Mathews-Mead, senior director of graduate career management at Fisher closes out the session with a look at how the college is preparing students to best meet companies’ rapidly evolving needs.

After the presentations, enjoy a networking lunch with members of other Fisher and Ohio State centers. Registration is set to open in June, with limited seating available for members and partners of each center.

The second summer session, set for Wednesday, Aug. 16, focuses on the explosion of data and digital disruption companies face and features a keynote from Jeremy Aston, senior director at communication tech giant Cisco. More details will be announced next month.

The One with The Risk Institute: SMF Student’s Success Story on Graduation and Employment

I landed in the U.S. less than a year ago. During this brief period, I completed my master’s degree (phew!) and got a job. Before joining Fisher’s Specialized Master’s in Finance program, all I knew was that I was interested in working in risk management. Ten months hence and I now know I am “passionate” about working in risk management. The SMF was an intensive course, but the professor’s class diversity and student consulting projects made it worthwhile. I chose Risk Management and Corporate Finance as my specialization tracks. As part of the Risk Management track, I signed up for Enterprise Risk Management 1 and 2. It was during ERM 2 that we did our first student consulting project for Abbott Nutrition. The Risk Institute, in collaboration with Abbott Nutrition and Prof. Daniel Oglevee, gave my class the opportunity to work on 3 risk-based projects for Abbott.

All 3 projects were focused on quality assurance. The teams worked on creating a risk model for enabling decision-making, a survey to better understand and improve the risk culture within the company, and risk-based market research. Welcome to the real world! We had learned VAR’s, derivatives and all other academics needed to complete the risk track, but now was the time to use them. The projects we did for Abbott gave us a unique perspective on how risk management was much more than what we learned inside the classroom. During all this, The Risk Institute, especially Executive Director, Philip Renaud, was a huge resource for insights regarding these projects.

During the time we were working with Abbott, we were also working with Vantiv, a partner of the Risk Institute, as part of SMF’s capstone project. For Vantiv, my teammates and I created a risk framework for their M&A activities. This framework added a risk-based dimension to the evaluation of a target for acquisition. It is a unique framework in that it disrupts the traditional valuation methods. I am big on disruptive innovation. I believe we are at a stage where simple innovation no longer gives you the upper hand. I gained an immense amount of experience from working these two projects, and hopefully, we were able to deliver results that were productive for the companies.

During this project, with help from Philip Renaud of The Risk Institute, I was able to connect with a recruiter from Vantiv. That connection went a long way to help me get a job at Vantiv on their lean Enterprise Risk Management team. I plan on staying in touch with The Risk Institute and furthering the work we did for Vantiv. Plus, it always feels good to be back on campus (GO BUCKS!!). I would like to thank Philip Renaud and Denita Strietelmeier for helping me during my year at Fisher and in my job search.

It is a good time to be in Risk management.

Executive Education Session Next Week: ERM for Nonfinancial Institutions

Photo by Jay LaPrete
©2016 Jay LaPrete

In an environment of continuing economic uncertainty, attention to risk at the Enterprise Level is important. On May 23, 2017, The Risk Institute at The Ohio State University Fisher College of Business will be presenting, as part of its Executive Education series, the topic “Enterprise Risk Management (ERM) for Nonfinancial Institutions”.

Whether you are just getting started with ERM, or trying to manage the myriad of economic and business disruptions, or want to learn how you may improve your current process, this session is for you. The political and economic spheres have ushered in disruptions across the business environment landscape. There is no better time than the present to develop or enhance an enterprise risk management process.

The session will raise conversation with regard to the Enterprise Risk Management processes, but will also look at risk mitigants that businesses can take.  Our session will bring together thought leadership from academia, consulting and corporations to discuss the latest ideas and trends within ERM.

Session leaders, Professor Bernadette Minton, Chair, Fisher College of Business Department of Finance, The Ohio State University; Tammy Izzo, EY Central Region Government and Public Services Leader; Nick Kaufman, Director of Risk Management, Battelle Memorial Institute, Columbus, Ohio and; Ray Roshek, Director of Risk Management and Employee Benefits, Lancaster Colony Corporation will collaborate to provide insight into:

  • ERM and the Current Environment
  • Targeted Risk Management for the Current Political Climate
  • Leveraging Risks and Values
  • Investing in ERM: Motivating your Company

The session will emphasize how to proactively use risk management to balance the risks related to Enterprise Risk Management in order to meet business goals and enhance business performance.

The session will provide thought provoking ideas and advance The Risk Institute’s unique role in uniting industry thought leaders, academics and highly respected practitioners in an ongoing dialog to advance the understanding and evolution of risk management. The Risk Institute’s conversation about risk management is open and collaborative with its relevance across all industries and its potential for competitiveness and growth.

 

 

Absorptive Capacity: Achieving the Ultimate Balance for Effective Knowledge Utilization

Rapid changes in industry and technology are making it increasingly daunting for companies to develop new products internally. Often times, firms cannot generate the knowledge they need from internal sources alone. The essential question facing these firms is how can they most effectively assimilate new knowledge from external sources?

To answer this question we must first look at limits on absorptive capacity, the ability to absorb new knowledge, and how those limits can constrain the benefits of seeking alliances according to the study “Unpacking absorptive capacity: A study of Knowledge Utilization from Alliance Portfolios” by Jaideep Anand at The Ohio State University and Gurneeta Vasudeva at the University of Minnesota. The researchers studied data on alliances between firms engaged in fuel cell technology development. They studied the variations in alliance portfolios and the associated knowledge utilization outcomes among 120 publicly traded and private firms in 11 countries.

The study unpacks absorptive capacity into two parts: latitudinal and longitudinal absorptive capacity. Latitudinal absorptive capacity focuses on how companies process and use diverse knowledge, while longitudinal absorptive capacity focuses on distant or unfamiliar knowledge. Anand and Vasudeva found that a moderate burden on firms’ latitudinal absorptive capacity, corresponding to medium diversity in their portfolios, contributes to optimal knowledge utilization. However, increasing the demand on firms’ longitudinal absorptive capacity negatively affects this relationship.

Let’s take a closer look at latitudinal absorptive capacity and how it allows firms to use diverse knowledge to develop technological innovations. According to the study, an alliance between a company that concentrates on automotive technologies and a company that has technological capabilities in hydrogen conversion and storage technologies will aid the automotive company by providing a research alternative for automotive fuel technologies.

In contrast, longitudinal absorptive capacity is utilized by firms seeking knowledge distant from their primary technology. For example, an alliance between a firm that develops a phosphoric acid-based electrolyte and a firm that focuses on a hydrogen storage technology. This alliance provides the knowledge necessary to innovate and compete successfully outside of the firm’s area of expertise.

There are important trade-offs between the extent of learning related to the two types of absorptive capacity. The study found that knowledge utilization is optimized when the demands on firms’ latitudinal absorptive capacity are neither too high nor too low. It also finds that as firms venture into less familiar technological domains, their longitudinal absorptive capacity constraints inhibit knowledge utilization. Consequently, the level of latitudinal absorptive capacity constraint at which knowledge use peaks varies according to the demands on longitudinal absorptive capacity.

In conclusion, a firm’s knowledge can only be effectively expanded within the limits of their absorptive capacity. View the original research below to learn more of the implications of firms’ external knowledge and discover how external alliance portfolio-based capabilities can interact with firms’ absorptive capacity to determine their knowledge utilization.

Unpacking Absorptive Capacity: A study of Knowledge Utilization from Alliance Portfolios

The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.

The Risk Institute Provides Research and Tools for OSU Student Project with Abbott Nutrition

During my junior year I was enrolled in the Healthcare Industry Cluster at the Fisher College of Business. As part of this program I was assigned to a group that would work on a semester long project with Abbott Nutrition. Our project scope was very broad. We were tasked with finding the best tools and practices in the healthcare industry for identifying, mitigating and communicating operational risk. My teammates, Alex and John, and I had very limited exposure to risk management. Alex was taking a Risk Management class during that semester, John was the risk officer for his fraternity, and I had done projects in sovereign risk management in a previous internship. We felt pretty under-qualified for the task at hand.

From the very beginning of this program our instructor told us that the network each of us had developed at Ohio State would be of value to the companies we worked with. With this in mind, we decided to begin our research at The Risk Institute at OSU. Our approach was simple, Abbott wanted us to find the best software that other companies were using to assess risk. So we would meet with The Risk Institute, ask them for some software recommendations and walk out with a list of tools to show our Abbott project leaders. We were surprised to find that conversations about culture would shape our research and project much more than conversations about technical tools. Phil and Denita, of The Risk Institute, shared with us the results of their annual survey and it was evident that integrated Risk Management had become a necessary tool for growth, not just a reactionary strategy. It was through our conversations with The Risk Institute that we first learned that an advanced risk software is ineffective if the inputs are flawed or shaped by a culture that doesn’t value risk management.

The expertise and vast amount of research housed within The Risk Institute allowed us to learn from other cases of poor and effective risk management cultures. It also validated our arguments when we went back to the Abbott team and told them that we should be focusing more on risk culture. It’s difficult to quantify cultural risk and easy to dismiss it as just “buzz words” so it was important to us that we had The Risk Institute’s research to back us up.

In the end of the semester we were able to offer Abbott a recommendation for a software that we thought would meet their desire for an automated, streamlined tool to analyze risk. We also focused on tools and strategies that would allow them to take a deeper look into aspects of their culture that were perhaps enabling risky behavior to go without mitigation. The Risk Institute directed us towards a group called the Barrett Values Centre who sells a product called the Cultural Values Assessment. This tool identifies gaps between employees’ personal values, their perceived company values, and their optimal company values. We recommend this to the Abbott team and they agreed that it seemed like a great tool to quantify their cultural risk. Driven by what we learned with The Risk Institute, we also encouraged them to engage in more cross-functional benchmarking across Abbott. Our project was within the Quality team at Abbott. At one of our presentations there was an employee from a different department. We were discussing a specific risk analysis tool that our team in Quality thought was brand new. However, according to that outsider who attended the meeting, that tool was already being used elsewhere in the company. Through this experience, we identified that Abbott has a somewhat “silo’ed” structured and could really benefit from more cross functional integration. We are confident that our partnership with The Risk Institute throughout that semester enabled us to elevate the discourse on cultural risk to the forefront of risk discussions at Abbott Nutrition.

Unprecedented volatility adds new urgency and complexity to old risks, reports Aon’s 2017 Global Risk Management Survey

Aon, a founding member of The Risk Institute, released their 2017 Global Risk Management Survey today. Conducted in the fourth quarter of 2016, the bi-annual survey gathered input from 1,843 respondents at public and private companies around the world. It finds that trends in economics, demographics and geopolitics, as well as technology advancements, are transforming traditional risks and adding new urgency and complexity to old challenges.

Top discussion points of the survey include:

  • damage to reputation/brand as a top concern
  • political risk/uncertainties entering the top 10 risk list
  • Cyber Crime ranking the number one risk to North American businesses
  • disruptive technologies/innovation predicted to rise in risk
  • risk preparedness at its lowest level since 2007

Damage to reputation/brand is consistently the top-ranked risk by businesses. Companies have become vulnerable due to the amplified negative impact social media has on cases of defective products, fraudulent business practices, and corruption.

Cyber Crime is now the top concern among businesses in North America, jumping from number nine to number five on the top risk list. Cyber breaches are increasing and incident response plans have become more complex, making Cyber Crime a costly business interruption.

Political risk/uncertainties have recently re-entered the top 10 risk list at number nine. The survey finds that developed nations that were traditionally associated with political stability are becoming new sources of volatility and uncertainty. Additionally, according to Aon’s latest 2017 Risk Maps, trade protectionism is on the rise while terrorism and political violence ratings are the highest they have been since 2013.

“We are living in a challenging new reality for companies of all sizes around the world. There are many emerging influences that are creating opportunity, but at the same time, creating risks that need to be managed,” said Rory Moloney, chief executive officer for Aon Global Risk Consulting. “As the risk landscape for commerce evolves, businesses can no longer rely solely on traditional risk mitigation or risk transfer tactics. They must take a cross-functional approach to risk management and explore different ways to cope with these new complexities.”

Disruptive technologies/innovation is a concerning risk emerging for the future. It is currently ranked number twenty but is expected to jump to the top ten within a few years. New technologies such as drones, driverless cars, and advanced robotics have caused an increased awareness of impacts for businesses.

The top 10 risks are:

  1. Damage to reputation/brand
  2. Economic slowdown/slow recovery
  3. Increasing competition
  4. Regulatory/legislative changes
  5. Cyber crime/hacking/viruses/malicious codes
  6. Failure to innovate/meet customer needs
  7. Failure to attract or retain top talent
  8. Business interruption
  9. Political risk/uncertainties
  10. Third party liability (including E&O)

The full report can be accessed at www.aon.com/2017GlobalRisk.

 

Post Executive Education Series, “Identify, Plan, Protect: Using Cyber to Your Advantage”

On April 19,2017,  The Risk Institute at The Ohio State University, Fisher College of Business held an engaging conversation, as part of its Executive Education series, on the topic, “identify, Plan Protect: Using Cyber to your Advantage”.

As we see on an almost daily basis, Cyber Risk and Crime has become a part of our lives. During the first few weeks of 2017, we witnessed a large restaurant chain’s register payment systems impacted and a large business services firm’s marketing database with over 33 million corporate contacts shared across the web. Without much difficulty multiple other examples are found that cross any number of industries.

We were fortunate to have had Ohio Attorney General Mike DeWine introduce the topic to our audience of executives. AG DeWine is passionate about Cyber Crime and Cyber Risk and its impact upon the citizens of Ohio.

The session focused on raising the conversation of the obvious current situation with regard to Cyber Risk and Crime, but also considered risk mitigants that businesses can take.  The speed at which crisis communication and Public Relations plans are treated and managed are certainly at the forefront of dealing with Cyber challenges within business.  So much so, that the phrase “Fiasco Vortex” has been coined (see Glass Jaw by Eric Dezenhall). In the 21st Century, communication never sleeps. We live in a 24/7 news cycle that demands a much different treatment to Cyber Risk and Cyber business continuity planning.

An organizations business continuity plans will need to be tested to respond to geographic specific exposure that could have wider impact upon the business and it customers. Our speakers highlighted, from their diverse experiences and backgrounds, how companies can take a proactive approach to Cyber Risk and Crime.

Session leaders, Helen Patton, CISO, The Ohio State University; Jim Trainor, SVP, Aon Cyber Solutions and former FBI head of the FBI Cyber Division, Washington, DC; David White, CIO, Battelle Memorial Institute; David Lyon, Senior Manager, The Crumpton Group, LLC, collaborated to provide insight into:

  • Cyber a View from the CISO Trench
  • Cyber Threat Landscape 2017 and Beyond
  • Cyber Security’s Impact on IT Operations
  • The Role of Intelligence in Cyber Attacks: Offense vs. Defense

The session emphasized how to proactively use risk management to balance the risks related to Cyber Risk in order to meet business goals and enhance business performance.

The session did an excellent job of creating thought provoking ideas and advancing The Risk Institute’s unique role in uniting industry thought leaders, academics and highly respected practitioners. This is an ongoing dialog to advance the understanding and evolution of risk management in our world today. The Risk Institute’s conversation about risk management is open and collaborative with its relevance across all industries and its potential for competitiveness and growth.

The Art of Balancing Your Eggs Between Baskets

Strategizing your portfolio of real options for the win.

What factors make your real options portfolio valuable? How do you analyze the nature of the interactions among real options and their effects on portfolio value? Ultimately, how can your firm be most strategic in managing this in your industry’s unique market?

To begin, firms must consider growth and switching options in developing a portfolio of strategic options. Growth and switching options represent the trade-off between flexibility and commitment, according to the study, “Managing a Portfolio of Real Options” co-authored by Ohio State researcher Jaideep Anand and with researchers Raffaele Oriani in Italy and Roberto S. Vassolo in Argentina.   While growth options relate to early commitment in growth opportunities, switching options give firms essential forms of flexibility to handle different sources of uncertainty. Too much commitment could create vulnerability; too little could hinder competitive advantages.

So how do you determine the right balance for your unique market? Let’s consider the sources of uncertainty within growth opportunities and switching opportunities. Some sources generate growth opportunities while others might induce switching opportunities, according to the study. For example, when market demand is the main source of uncertainty, growth opportunities may dominate the strategic decision. These elements are applied to different strategic situations of technological and market uncertainty. Managers must consider what is unique about their portfolio and how they can incorporate that when assessing its value. They must first understand how market and technological uncertainty can have different effects on the value of switching and growth options.

When the market has inconsistencies between demand and the need for new products, it affects the market size and ultimately, sales. In this case, growth options could limit firms’ losses to their initial investments. However, potential gains from future growth opportunities are unlimited.

When the market has technological uncertainty, firms must choose the “right” technology. Here firms can apply switching options that allow them to hedge against the risk of being locked out of the market because they have not invested in the right technology.

Based on your industry’s unique market and focusing on the opportunities available, these are important considerations to keep in mind in a world of quickly advancing technologies and ever shifting markets. To dig deeper into this topic, view the original research and its translation here.

 

How Work Culture Impacts Brand Reputation

Work culture has been defined as “the interactions of all employees which in the aggregate creates a picture of how things get done and what matters inside the organization” (Gebler 2017). Culture, at a point, intersects with brand reputation in that it can be considered two sides of the same coin. Reputation comes from the external belief of your company behavior, while culture is how people inside your company behave and reaffirm those beliefs.

Earlier this month, we held a thought-provoking session that explored how work culture and impacts brand reputation, specifically exploring the conversation from the perspective of academics and business leaders.

Session presenters included:

  • David Gebler, of Indiggo, Washington, DC has over twenty years’ experience working with global organizations on how to reduce people based risks while improving productivity and corporate reputation. Named as one of America’s top Thought Leaders in Trustworthy Business Behavior.
  • Dennis Hirsch, Professor of Law and Director of the Program on Data and Governance at The Ohio State University. In 2010, he served as a Fulbright Senior Professor at the University of Amsterdam where he produced a leading study on Collaborative Dutch data protection regulation.
  • Bob Bowman, Director Risk Management, The Wendy’s Corporation. Bob has a diverse risk management background with Macy’s for many years and since 2014 with Wendy’s. Bob’s background and responsibility include enterprise risk, business continuity, data and privacy risk management.
  • Lowell (Chip) Howard, Jr., Honda North America, Inc. Chip is General Counsel- Manufacturing at Honda North America and has responsibility for HNA Law Division’s offices in Ohio, Alabama, Indiana and South Carolina.

At its core, culture and brand reputation have effective leaders and leadership as an underlying foundational element.  From that core, effective leaders develop engaged employees who develop loyal customers.

The impact of Big Data on culture and brand reputation begins with what Professor Hirsch refers to as the Three V’s: volume, velocity and variety.  The fourth attribute is correlation.  The use of big data can bring great benefit, but also significant risk to a brand. A now classic example is when Target figured out that a teen girl was pregnant before her father did.

The Target Example

Target assigns every customer a Guest ID number, tied to their credit card, name, or email address that becomes a bucket that stores a history of everything they’ve bought and any demographic information Target has collected from them or bought from other sources. (Forbes) Target then uses this data to create highly personalized marketing materials.

In the case with the pregnant teen, she received a mailer containing only advertisements for baby products. Her father saw the mailer and become enraged, as he thought that Target was encouraging her to become a teen mother. After some back and forth with his local Target’s management, where Target apologized for the error, the father returned to the store and informed management that his daughter was indeed expecting.

Target and many other companies continue to utilize big data in order to generate a customized consumer experience. But now, in order to mitigate the risk of revealing consumer secrets and just generally spooking people, Target incorporates those customized advertisements in with the regular circulars.

Big data certainly has massive benefits for companies and the consumer when applied thoughtfully and strategically, but can create headaches for brands when used too liberally.

Thinking Practically

Bob Bowman and Chip Howard engaged the audience in discussion about how their respective companies leverage positive company culture towards a positive brand image.

At Wendy’s, culture and values are everything, going all the way back to Dave Thomas, the company’s founder. Bowman expounded on some of the trials Wendy’s have been through over the years — from fingers in chili to viral Frosty videos — and how Wendy’s leveraged its brand equity and relied on culture to see them through varying crises.

Values inform culture at Honda too, in the form of the three joys — the joy of buying, the joy of selling, and the joy of creating — and respect for the individual. Howard explained to participants that every Honda employee are encouraged to “find their Honda joy” because Honda believes that when associates work towards their own happiness first, the company will grow as a result.

Takeaways

  • Brand reputation and company culture are two sides of the same coin.
  • Effective leaders develop engaged employees which ultimately lead to loyal customers. At the core is effective leadership.
  • In managing big data and big data analytics risk, we must be careful to consider the potential impacts of the data, the correlation of the data, how that data could profile and what predictions can be made using the data.
  • Significant benefit can exist from the big data analytics. Risks, however, are present to include privacy violation, legal and regulatory, as well as the consequential brand and values impact.
  • Wendy’s core belief is that their success is based on the relationship with the customer. The foundation is food, which relationship is enhanced or eroded by behavior and trust is earned when both are delivered in a predictable consistent manner.
  • The Honda philosophy is built on a foundation of respect for the individual. From that fundamental belief, they believe that;
    • Initiative — Associates should not be bound by preconceived ideas.
    • Equality — Recognize and respect individual differences in one another and treat each other fairly.
    • Trust — The associate relationship should be based on mutual trust.

The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.