Risk and performance

Organisations tend to have a business delivery model dealing with current value creation for stakeholders and a business development model looking at future value creation. Chapter 35 of Hopkin’s (2014, p 373) provides the key components of a business model which include:

• Customer
• Resources
• Offering
• Ethos
• Sustainability

This video highlights the nine building blocks of a business model:

Cost of risk

Chapter 7 of Doherty’s (2000) text analyses the cost of risk. The author argues that finance theories show that reducing risk does not add value to publically traded firms. This is indeed the case, as the risk is spread over the shareholders and is therefore diversified. In this case, any uninsured risk from the company will not impact the portfolio of the shareholders: the risk of loss to a single firm is in essence diversified over the capital market. Finance theory may show that shareholders have little interest in managing risk; however, Doherty does show that risk is costly due to the indirect effects of reducing the firm’s performance and thus its shareholders’ income.

Although the chapter relies on prior knowledge in finance theory, it is an interesting read. The author provides three reasons why risk has costs: namely, tax considerations, cost of bankruptcy and agency costs (here between shareholders and creditors), leading to dysfunctional investment. The chapter concludes by highlighting that risk affects corporate value due to transaction costs.

Activity 7.1

Consider a high-street retailer of your choice and the possible devaluation of the pound compared to the euro. Identify the impact of such risk on the nine blocks of the business model of this retailer. Post your findings to the Discussion Board and label the message appropriately (The link to the Discussion Board is not available in this course taster).