New report on risk management in consumer sectors is launched by the Centre for Risk Studies at Cambridge Judge Business School in collaboration with the Institute for Risk Management.
A new model to assess six types of
risk in the consumer sector, developed by the Centre for Risk Studies at
Cambridge Judge Business School in collaboration with the Institute for Risk
Management, was unveiled today (14 November) at a conference in London.
The new report translates six types
of risk to value lost to a consumer business over a five-year period, and
adopts a yardstick to measure this loss called “[email protected]” – or “Five-Year
Enterprise Value at Risk”.
“This provides a consistent
risk metric that is meaningful to managers,” the report says. “Enterprise
Value at Risk is a proxy for stock price instability, and can be derived for a
wide range of different types of risk.”
As consumer spending comprises more
than 50 per cent of gross domestic product in many advanced economies, and more
than 65 per cent in the UK and US, risk assessment is increasingly important to
firms in the consumer sector.
“Traditional dimensions of
inherent risk in consumer sectors include thin profit margins, global supply
chain challenges regarding operations and sustainability, and economic
fluctuations affecting both retail demand and cross-border supply costs,”
the report says.
The 47-page report – entitled “Risk
Management for the Consumer Sectors” – was launched at the Institute of
Risk Management’s 10th Annual Risk Leaders Conference in London.
“The scenario-based approach
developed in this report will provide useful guidance to practitioners looking
for robust and objective ways of evaluating and prioritising these risks in the
context of the business balance sheet,” said Socrates Coudounaris, IRM
Chair and Risk Management Director of the Reinsurance Group of America, in a
foreword to the new report.
The report looks at risks faced by
a “fictional but realistic” company in the consumer sector, called
Avocado plc, a leading food company in the FTSE 100 list of top UK stocks. The
report’s case study draws on information modelled from several real businesses
to represent various elements of this fictional avocado business.
The six risk scenarios modelled for
A trade dispute
involving the United States and European Union
in this case involving India and Pakistan
Cyber attack in the
form of a contagious malware infestation
involving flooding to a key facility
Pandemic, in this case
a highly infectious influenza virus
Governance issues in
the form of an equal pay movement.
These are chosen to represent six
major risk classes: financial, geopolitical, technology, environmental, social
The report develops a method for
translating each of these major risk classes into explicit scenarios in an
organisation’s risk register, representing how it might occur and how it could
affect the business. Such a model is derived by devising a “digital twin”
of the company’s five-year balance sheet with and without the six risks
occurring, which “provides an objective way of ranking them and exploring
the most effective risk management actions”.
For example, the US-EU trade
dispute scenario looks at the impact on a UK-headquartered European business
that has a major component of its revenues in the US. It looks at what might
happen if tariffs are imposed by both sides, evaluating four different levels
of severity with tariffs ranging from 10 per cent to 140 per cent. Risks from
the other five scenarios are evaluated based on three different levels of
The report says there is unpredictability in whether any of the six modelled risks may occur, but it views all six types as “foreseeable in that history provides some basis for estimating future impacts”.
“Unpredictability or low risk of a damaging event is no excuse for lack of preparation,” says Professor Daniel Ralph at the Centre for Risk Studies. “Enterprise Value at Risk converts any risk scenario into a loss number, and puts a value on any mitigation. This is the building block for managing a firm’s resilience in a universe of risks.”