20200411043839li_assessing_and_managing_risk.docx.pdf

Running Head: ASSESSING AND MANAGING RISK 1

Assessing and Managing Risk

Tianxiang Li

Professor Smith

Grand Canyon University

4.5.2020

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ASSESSING AND MANAGING RISK 2

Assessing and Managing Risk

A comprehensive analysis of strategic alternatives and assessment of financial analysis

has an impact on the respective firm upon implementation. Stakeholders are tasked to ensure a

prime combination of recommended activities for the overall benefit of the firm. Following the

prior studies on Nike’s strategic alternatives assessment and financial analysis, a recapitulation of

the two studies is recommended to point out the underlying value-enhancing strategies. Potential

value-enhancing strategies may pose a risk to a firm as determined through the recapitulation of

strategic alternative analysis and financial analysis assessment.

A. Strategic Alternatives Assessment Recap

The established Nike’s brand counts on the firm’s outstanding strength. Unlike most

firms, Nike does not exert much effort in product promotion activities. Besides, the firm has

earned a vast global influence with its brands selling across the globe. Multicultural customers

across the world have deeply rooted the firm’s positive reputation and further expansion

potential. Due to economies of scale, Nike has achieved low production costs hence gaining the

financial stamina to finance iconic subsidiaries like the Air Jordan brand according to McNew

(2017).

Batson (2013) reveals that strategic alliance formation entails collaboration with an

autonomous firm to formulate a common strategic goal for purposes of collective improvement

and expansion. Despite the strong capital base implied by the strategic alternative assessment,

the formation of a strategic alliance poses a potential risk to Nike. The possibility of hidden

costs, weakening of the brand’s market base, management wrangles, and unstable control of the

firm’s operations pose a huge potential risk to Nike. The process of developing and maintaining a

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ASSESSING AND MANAGING RISK 3

brand is quite involving. Potential value-enhancement policies that pose a threat to the firm’s

reputation and brand destabilization should be critically scrutinized to avoid hazardous decisions.

Both short-term and long-term financial implications of the strategies to be implemented for

Nike should be considered to ensure the global brand is maintained. Besides, setting a strategic

alliance with a globally established firm might create unnecessary competitive forces due to

natural dynamics. For instance, striking the deal with Adidas, whose P/E ratio is at 20.64 as

compared with Nike’s 30.72 might work for the sole benefit of Adidas hence posing a huge loss

of global market share for Nike according to white et at. (2020).

B. Strategic Alternatives and Associated Risks Information Gaps

The formulation of value-enhancing strategic alternatives for an established firm like Nike is

a broad task. Some customized data is required to ensure the process is successful and productive

hence posing a positive growth index to the firm. For instance, organizational culture is quite

essential in the determination of the firm’s future. Decision-making processes and general

planning of an organization is based on the firm’s culture. Information on Nike’s organizational

culture concerning strategic alliances and other value enhancement strategies would be quite

productive in the formulation of the best strategies to improve the firm. Consequently, some

organizations have mission and vision statements pegged to their respective organizational

culture. Despite the availability of strategic alternatives to achieve the set objectives, such firms

are limited to their culture hence hindering the decision. The information on Nike’s

organizational culture and related aspects would be elemental in the formulation of value-

enhancing strategic alternatives.

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ASSESSING AND MANAGING RISK 4

Besides, Nike’s outstanding threats include competitive forces from other global firms and

the introduction of poor-quality counterfeits at lower prices. A legal approach to combat

production and trading of counterfeit products would help Nike mitigate the challenges posed by

the introduction of counterfeit products. Besides, the improvement of production techniques by

the use of technology-based methods would lower the cost of production further. With low

production costs, Nike would avail products at affordable prices hence beating the competitive

forces.

C. Financial Analysis Recap

Formation of strategic alliances consideration of profitability ratios is the key financial

aspects considered in the financial analysis study according to Batson (2013). The right

combinations of these aspects would ensure safe value-enhancement strategies. Nike has

consistently maintained the promising values of profitability ratios over time (McNew, 2017).

For instance, the P/E ratio which determines the firms against its earning has been fairly

consistent. The current Nike’s P/E of 32.72 explains the company’s high possibility of expansion.

In this case, an expansion would mean devising technological means to combat its weaknesses

and threats (Nike Inc., n.d.).

Alliance formation could be a lucrative strategy owing to keen scrutiny before

implementation. However, the strategy entails a higher risk as compared to potential profits

attached. For instance, allying with an untrusted partner would result in conflicts that would cost

Nike both finances and reputation. Besides, alliance formation is a long-term strategy with

uncertain immediate cost implications to develop and maintain. Owing to the undefined nature of

the strategy’s outcome, it poses more risks than potential benefits to Nike. Also, the outstanding

Nike’s profitability ratios would drastically fall after commitment to any alliance. The time to be

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ASSESSING AND MANAGING RISK 5

taken to restore the values poses a higher risk to the company’s global market positioning as

compared to the little anticipated value enhancement.

D. Financial Assessment Update

The global market is quite dynamic due to numerous external factors that affect the market.

International policies, natural calamities, internal legislative issues, and internal factors are

among the outstanding aspects that contribute to a dynamic global market. Referring to Nike’s

financial position, the outbreak of the COVID-19 pandemic has negatively affected the

company’s global financial position. The United States forms the biggest market for Nike

Company. In reaction to the pandemic, Nike has closed its stores in the United States, New

Zealand, Canada, Western Europe, and Australia according to Fernandes (2020). The gross loss

in sales and promotional opportunities due to the pandemic has decimated the company’s

financial status as compared to the values presented in the previous study.

However, digital marketing and other internet-based techniques pose a potential rise in

Nike’s profit ratios despite the pandemic. COVID-19 is a global pandemic hence most of the

firms are equally affected. Besides, as of 25th March 2020, the company’s shares fell nearly by

8% due to worries over the pandemic. 16% of Nike’s revenues are from china hence resulting in

the loss. The company’s PEG has fallen up to 1.5x. Moreover, Nike’s P/E is arguably 37x as

compared to the initial value of 32x according to Fernandes (2020)

E. Decision Matrix Applicability

A decision matrix compares the possible choices arranged on rows against the respective

parameters that should be considered in selecting the choices. Keen application of the tool would

yield informed decisions for Nike Company in selecting the most appropriate strategies. For

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ASSESSING AND MANAGING RISK 6

instance, the decision matrix would have the Alliance Strategies arranged in one row then cost

implications, the emergence of conflicts, company mission and company mission on the columns

to compare against.

Risk prediction is a lucrative task in an established company. Risk factors affect both the

current financial state of an organization as well as future goals. Investors consider the risk

factors in their decision-making process on where to invest and the amounts to invest. A well-

structured application of the decision matrix would easily predict the risks pegged to various

strategic alternatives and other potential value-enhancing strategies. More so, the decision matrix

offers several options to choose from hence proving to be effective upon informed application.

The application of the decision matrix offers a comparison of the previously suggested value-

enhancement strategies against their repercussions. The initial suggestions might be nullified due

to the risk posed by the strategy to the company. For instance, the tool would alter the initial

suggestion to consider the financial alliance strategy. The alteration is because of the high risk of

the strategy.

F. Risk Matrix

Considering financial alliances as the most potential strategic alternative, the row containing

“Financial Alliances” would be placed against 10 columns. The contents of the columns are;

conflicts, unnecessary cost, loss of competence, management wrangles, poor operational control,

partner lock-in, fall of profit ratios, mismatch with organizational culture, and information

leakage. Comparing the strategy, financial alliances against the ten potential risks would yield in

drawing an informed decision that would favor Nike Company.

G. Critical Risk Impacts

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ASSESSING AND MANAGING RISK 7

Critical risks of a given strategy play a crucial role in decision making. In this discussion, the

impacts of conflicts, poor operational control, and unnecessary costs will be discussed. Conflicts

in a financial alliance are bought by mistrust among partners. Financial alliances require two ally

companies to agree for mutual benefit. However, in case of a mistrust, conflicts set-in. the

impacts of conflicts among partners include; leakage of contract details to the competitors,

presentation of misleading information among partners, mismanagement of joint projects and

loss in market trust.

Consequently, the impacts of unnecessary costs include; reduced profits, increased prices of

products, internal management disputes, company borrowing, reduction of profitability ratios

and financial instability within the company. Besides, the impacts of poor operational control

include; market inconsistency, irregular pricing of products, internal leadership wrangles, poor

utilization of resources and poor planning.

The greatest threat of Nike is competitive forces and the availability of counterfeit products

Nike Inc. (n.d). The impacts of the three selected risks would give competing firms like Adidas a

prime chance to dominate the industry. Internal leadership disputes due to poor operational

control would destabilize the company’s management hence paving the way for fraudulent

manufacturers to continue producing Nike counterfeit products.

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ASSESSING AND MANAGING RISK 8

References

Batson, M. J. (2013, June 6). 5 Keys To Creating Successful Strategic Alliances. Retrieved from

https://www.forbes.com/2002/07/18/0719alliance.html#3678309611f4

Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world

economy. Available at SSRN 3557504.

McNew, B. S. (2017, February 15). 3 Biggest Opportunities for Nike Inc. Retrieved from

https://www.fool.com/investing/2017/02/15/3-biggest-opportunities-for-nike-inc.aspx

Nike Inc. (n.d.). Read Nike’s Mission Statement and find information about NIKE, Inc.

innovation, sustainability, community impact and more. Retrieved from

https://about.nike.com/

White, D. M., Sharma, G., Benjamin, S., Divya, Sg, & Oasis. (2020, April 4). Nike SWOT 2020:

SWOT Analysis of Nike. Retrieved from https://bstrategyhub.com/swot-analysis-of-nike-nike-

swot-analysis/

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