MBA684 | A Contemporary Approach to Strategic Management of Risk

Introduction to the organization

Volkswagen is one of the largest car manufacturing organizations founded in Germany in 1937. The organization is running the operation worldwide with the highest market share and presence in Europe and the United States. Currently, Volkswagen formed a group along with 12 different brands including Audi, BMW, Lamborghini, Ducati, Bugatti and seven more.  Due to the persistent growth and expansion in the global market, the organization is able to report a growth of 11% in European market and sales of the cars are expected to increase in the period 2018-2022. However, the board of directors of the organization is wary of their marketing approaches due to the emission scandal occurred in 2015 damaging the overall market share.  

Latest thinking and approaches to the strategic management of risks

It has been identified that the contemporary approaches to strategies are barely monolithic even though the scholars incorporate current thinking. The ongoing advances in the business strategy literature have enabled the discussion concerning the context and strategic process that are in general separate. In this context, Grant and Robert (2016, p.19) communed that “strategic content” is somewhat or similar to what a corporate organization usually does to remain competitive gaining the insight of competitive positioning or possibly through the evaluation of the significant values generation of resources as well as competences. On the other side, Hopkin, and Paul (2016, p. 45) mentioned that over the past few decades, the businesses in both public and private sectors had paid their attention to the aspects of their operation. Nowadays, it has become common in several industries for businesses to have documented risks management processes and strategies. When it comes to the traditional approach to strategic control, Juergens, Ulrich and Eva Brumlop, (2017. p. 84) mentioned that traditional approaches are sequential in which the strategies are developed, and top management sets goals and business performance are measured against the predetermined goals set.

However, the contemporary approaches to strategic control include two significant aspects such as informational control as well as behavioural control. There is a significant relationship between the strategy formulation and implementation. The author of this study specified the control as informational control and behavioural control. Hence, the informational control is fundamentally concerned with the fact whether or not the business is doing the appropriate things and on the other side, behavioural control is mainly concerned with whether or not the business is doing appropriate things in the implementation. A study on contemporary practices in risk management performed by Priem, Richard Sali Li, and Jon (2012, p.354), have mentioned adopting innovation and advanced marketing approaches for the strategic management to deal with the business. The risk is only effective when the innovators are as good as next big thing; thereby, for an internal auditor, you are the innovator is as good as the risk they have foreseen and enabled the organization to resolve or avoid.

As put forward by Hénard et al. (2012, p.21), a critical element of a successful business bonding between internal audit and organization involves the right skills and tool to measure, identify and communicate risks. This certainly allows management to identify and resolve the challenge and provide confirmation to stakeholders in the field of governance, compliance and risks management. What organizations represented in the figure is a diversity of structural approaches to internal auditing and risks management. It is particularly identified that risk of related processes was independent of each business’ structural alignment to geographic regions, units of business, operational functions or the risk framework. Gamble et al. (2013, p.12) mentioned that when it comes to contemporary approaches to strategic management, mentioned that less than half of the businesses described having a designated chief risk officer. A general leading practice, nonetheless, involving assessment of risks ownership, accountability to specific senior managers. Also, the formal and informal leaders’ councils support discussion on business risks across silos (Macnamara, Jim and Ansgar Zerfass, 2012, p.291).  

The below figure in the following described the fact that each respondent explained a process flow for risk identification through audit plat development. Some fundamental elements of the techniques flow incorporate risk identification as well as the risk universe, development risk assessment, and plan development.  The variation may include sources of inputs as well as risk framework model, top-down and bottom-up assessment processes and interactive involvement with the management.

Figure 1: Risk inputs and collaborative efforts to strategic marketing

(Sources: Gamble et al. 2013, p.12)

On the other side, Koutsoukis (2012, p.41) performed a study and mentioned about an NGOs committed to social change have invested mostly in enhancing professional competence. According to the author of this study, one significant innovation has been capable of strategic planning. Within every five years, NGOs tend to agree as well as implement a multi-annual process centered on placing the organization to achieve its mission as well as long-term goals. Another study, performed by Grant et al.  (2013, p.12) emphasized too much on the risk identification and actions of minimizing the risk instead of stressing on the contemporary approaches. According to this author, contemporary strategic approaches to risk management is today emerging as an organization-wide management approach, which is little different than the management of an organization. This implies that risk management is expanding its coverage beyond the conventional approaches of problem-solving because it often remains in the typical application context. On the contrary, it demonstrates that it demonstrates that contemporary management is also developing and requiring growth of ability to conduct effectively.

Linking the theatrical concept with the practical concept

Even though there are different dynamics and trends in the market, the organizations in today’s market environment, such as Volkswagen is not lagging behind when it comes to managing risks in the businesses. Volkswagen’s long-term success is mainly determined by how early the business is able to identify the risks as well as opportunities in their business operating activities and how far in advance, the business responds to those risk and opportunities. Taking this into consideration, the Risk Management System, Compliance Management System, and Internal Control System have been combined with the help of a holistic and interactive approach developed by Volkswagen. A study used in the above analysis, performed by Rothaermel and Frank (2015, p.12) have mentioned the fact an organisation can achieve success in the long run if it conducts itself with the integrity which complies with the regulations over the world and continues to run by its voluntary commitment as well as ethical principles even in the time of difficulties.

Economic crisis remains as the major challenge that business in today’s dynamic environment deals with; thereby, the opportunity and risks are often dealt by contemporary approaches. It has been identified that organizational design of Volkswagen Group is developed on the basis of internally identified COSO framework particularly for the risk management: Committee of Sponsoring Organizations of Tread way Commission (Juergens, Ulrich, and Eva Brumlop, 2017, p.81). Nonetheless, even though this COSO framework is used for identifying and managing strategic risks, developing the Risk Management System according to the COSO framework for strategic risk management should ensure that significant risk areas are covered properly (MacKay, Bradley and Robert Chia, 2013, p.11). Moreover, in the reporting period, Volkswagen implemented an approach to risk management that mixes up the aspects of the Internal Control System and the compliance management system. Bailey, David, and Lisa De Propris, 2014, p.380) performed a case study analysis on risk management and mentioned that organization’s unanimous “Group” principles are applied as fundamental for managing risks in a standardized way. Auditing report of Volkswagen indicates that business of VW is much centered on the external market trends and the risk associated with it, but the organizations but VW is not paying adequate attention to the legal requirements, while much attention has been given to the financial reporting processes (Compliance & Risk Management 2018).

Nevertheless, the organization is able to deal with the significant risks to its newly formed group quite effectively by adopting both tangible and intangible criteria. Furthermore, a study performed by Noruzy et al. (2013, p.391) mentioned the fact that an open approach to deal with the risk in the organization as well as reporting on the existing challenges on the quarterly basis is the pivotal point in reporting period to the hoc as well as annual risk assessment. Therefore, the organization should continue to strengthen the internal control system in the field of product compliance in 2017 as this is often referred as the golden rules in the areas of control unit software, classification of emission and issues management. Such rules can represent minimum requirements in the organizations, processes, tools & system categories, as these mainly help to deal with governance as well as compliance (Bailey, David, and Lisa De Propris, 2014, p.381).

As the purpose of incorporating contemporary approaches to strategic management of risks, Volkswagen should incorporate a key element to its risk management system, which is known as the three lines of defense model -a fundamental element required among the other bodies and this might help the organizations to protect Organization from significant risks.

Figure 2: Contemporary approaches to strategic market initiatives

(Source: Deflorin, Patricia, and Maike Scherrer-Rathje, 2012, p.3957)

It has been identified that the initial line of defense framework may compromise the operational risk management as well as integral systems at the individual group's firms as well as the units of the business. The organization needs to incorporate RMS as an integral part of the workflow and operational structure. Some particular events that might give rise to the risk are identified and assessed regionally in the divisions. Likewise, against the risk, the countermeasures should be introduced on an immediate basis, and their influence should be assessed, and the information needs to be incorporated into the planning on a frequent and timely manner. In addition to this, the outcome of the operational risk management techniques should be incorporated into the budgets financial control and planning control on an ongoing basis. Likewise, the specific targets need to be agreed in the budget panning rounds are persistently assessed in revising planning updates.

Nonetheless, MacDuffie and John Paul (2013, p.9) mentioned that the first line process adopted by VW does not consider the outcomes of risk measures. Therefore, the author has mentioned that the process should include the outcome of risk mitigation measures that need to be simultaneously taken or incorporated into the monthly forecasts on further business development without any delay. This suggestion indicates that the Board of Management also needs to have access to the overall picture of the present risk situations through the documented reporting channels during the phase. In this context, Bryce and Herrington, (2017, p.p.113) commented that the least requirements for the business functional risks management as well as internal control systems should be formed for the whole group in uniform guidelines. On the other side, Priem et al. 2012, p.353), in addition to existing functional risks management, Group Risk Management departments in every year should send standardized surveys particularly on the risk situations as well as the effectiveness of Risk Management System.

Recommendations 

It has been identified that due to the growing marketing needs, challenges and opportunities are not supposed to go with lasting existing techniques. The businesses in the automotive and car manufacturing sector observed a growing demand but due to market such as the financial downturn, the organizations in need of adopting contemporary approaches for both internal and external market environments. However, the organizations in the car manufacturing industry, should not shy away from the observed demands due to the potential risk associated with it. Thus, to deal with those possible management challenges and opportunities the following suggestions have been developed including the flavour of contemporary approaches. The contemporary approaches are provided in the form of the Ansoff matrix framework tool.

Market Penetration: In this section, first, Volkswagen should think of meeting customer demands in the existing market. It is certain that demands of cars may remain high but not all customers are able to afford the price of a luxury car.  Thus, what Volkswagen needs to do is, identify the market needs related to cars- such as ranges and features that customers are looking for in a car. For example, in an Asian market, the demands of VW Vento is high, but the customers are looking for additional features that Vento does not include. Therefore, identifying those needs, VW needs to incorporate them into the existing Vento to make it a standardized car meeting the average industry needs. However, including those additional features are not the only requirement here, the brand also needs to think of its availability in every class of the customers. Therefore, there should be more variants of VW Vento with the diverse price range to attract customers. Such variants will help customers to avail the product, and consequently, VW will be able to gain a wide customer reach. With such an approach, VW can target a wide audience in the existing market.

Market Development: Although, the variants in the existing product is a good approach to cover the existing market with a high reach but applying the approach to one single market will not help to mitigate the future of risk or increase the profits against the market dynamics. Thus, the organization needs to identify a market where the car in the same category is not broadly available. The organization needs to target a new market with the existing developed product – VW Vento. When applying this approach, the organization does not need to invest in Research & Development, but it should spend the estimated resources in acquiring different sales of channels such as both online and direct sales. VW needs to perform a market analysis covering market segmentation and developed a suitable market mix approaches. In applying this approach, financial risks are low as the business is supposed to use the existing resources once allocated for developing variants of the existing product. So, here the product is ready, all it should do is, manage the marketing campaigns in the new market.

Product Development:  Proceeding with different variants of the same product to increase the existing market coverage is a good approach but there are high-end customers in the same markets, who may not prefer an economy- class vehicles. In this context, the organization needs to think to cater their increasing or unique needs. Thus, VW should manufacture a new car but related to the existing one. The new product should be of high-quality with effective customers services that are not delivered to general class customers. High ends customers should be segmented separately.

Nonetheless, Volkswagen needs to be very conscious about this segment as risks are there if the business is not able to meet the market needs of these premium segmented markets. The business needs to consider each and every aspect ranging from product development to customer service. Lastly, when dealing with or understanding the risks, the organization needs to realize that if the business is supposed to grow in the long-term, they cannot stick to a business as conventional. The business needs to find out new ways for-profit management.

References

Grant, Robert M. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons, 2016.

Hopkin, Paul. Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers, 2018.

Juergens, Ulrich, and Eva Brumlop. "Rationalisation and industrial relations: A case study of Volkswagen." In Technological change, rationalisation and industrial relations, pp. 73-94. Routledge, 2017.

Priem, Richard L., Sali Li, and Jon C. Carr. "Insights and new directions from demand-side approaches to technology innovation, entrepreneurship, and strategic management research." Journal of management 38, no. 1 (2012): 346-374.

Hénard, Fabrice, Leslie Diamond, and Deborah Roseveare. "Approaches to internationalisation and their implications for strategic management and institutional practice." IMHE Institutional Management in Higher Education. Accessed on [https://www. oecd. org/edu/imhe/Approaches% 20to% 20internationalisation% 20-% 20final% 20-% 20web. pdf] 11, no. 12 (2012): 2013.

Gamble, John E., Arthur A. Thompson, and Margaret Ann Peteraf. Essentials of strategic management: The quest for competitive advantage. McGraw-Hill/Irwin, 2013.

Macnamara, Jim, and Ansgar Zerfass. "Social media communication in organizations: The challenges of balancing openness, strategy, and management." International Journal of Strategic Communication 6, no. 4 (2012): 287-308.

Koutsoukis, Nikitas-Spiros, Pantelis Sklias, and Spyros Roukanas. "A reputation risk perspective on the Greek crisis." International Journal of Decision Sciences, Risk and Management 4, no. 1-2 (2012): 38-57.

"Compliance & Risk Management". 2018. Volkswagenag.Com. https://www.volkswagenag.com/en/group/compliance-and-risk-management.html.

Grant, Robert, Bella Butler, Stuart Orr, and Peter A. Murray. Contemporary strategic management: An Australasian perspective. John Wiley & Sons Australia, Ltd., 2014.

Rothaermel, Frank T. Strategic management. McGraw-Hill Education, 2015.

Priem, Richard L., Sali Li, and Jon C. Carr. "Insights and new directions from demand-side approaches to technology innovation, entrepreneurship, and strategic management research." Journal of management 38, no. 1 (2012): 346-374.

Bryce, Herrington J. Financial and strategic management for non-profit organizations. Walter de Gruyter GmbH & Co KG, 2017.

MacKay, R. Bradley, and Robert Chia. "Choice, chance, and unintended consequences in strategic change: A process understanding of the rise and fall of NorthCo Automotive." Academy of Management Journal 56, no. 1 (2013): 208-230.

Noruzy, Ali, Vahid Majazi Dalfard, Behnaz Azhdari, Salman Nazari-Shirkouhi, and Aliasghar Rezazadeh. "Relations between transformational leadership, organizational learning, knowledge management, organizational innovation, and organizational performance: an empirical investigation of manufacturing firms." The International Journal of Advanced Manufacturing Technology 64, no. 5-8 (2013): 1073-1085.

Bailey, David, and Lisa De Propris. "Manufacturing reshoring and its limits: the UK automotive case." Cambridge Journal of Regions, Economy and Society 7, no. 3 (2014): 379-395.

Deflorin, Patricia, and Maike Scherrer-Rathje. "Challenges in the transformation to lean production from different manufacturing-process choices: a path-dependent perspective." International Journal of Production Research 50, no. 14 (2012): 3956-3973.

MacDuffie, John Paul. "Modularity?as?property, modularization?as?process, and ‘modularity'?as?frame: Lessons from product architecture initiatives in the global automotive industry." Global Strategy Journal 3, no. 1 (2013): 8-40.