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Question
Through your connections at the Columbia University Enterprise Risk Management program, you recently started a new assignment as a senior risk analyst at The Surrey Group, one of New York City’s most prestigious private equity funds, named after the famous hotel where the founders of the firm met to start the firm. This private equity fund has a strong focus on (1) proactively managing the strategic risk associated with companies in its portfolio and (2) understanding the strategic risk posture of any potential acquisition. You report to the Director of Portfolio Risk Management (“PRM”), who has a team of 23 risk analysts who are constantly evaluate companies. The Director of PRM is very busy as she is constantly evaluating the strategic risk posture of companies in the portfolio and assessing potential acquisition in order to advise the firms’ managers.
Your first assignment for the Director was to assess the company that you selected in Assignment 1, (the project is code named “Buffalo”). Based upon the information that you provided in Assignment 1, the Surrey Group has taken a 5% pre-emptive stake in the firm you evaluated in Assignment 1. The Surry Group’s executives are poised to complete the acquisition of that firm, but before they do, they want to make sure they are selecting the best firm in the industry. Since you did such a good job on the first assignment, the Director has selected you to be part of the due diligence team for project Buffalo. There are members from legal, finance, operations, human resources, and others on the due diligence team, as well, performing analyses in their disciplines. Your task is to identify a close competitor of the firm you evaluated in Assignment 1 and do a thorough comparative analysis of the firms from a strategic risk management perspective. You must address all elements listed in the memo below.
The Director has sent to you the following email asking for your help.
_______________________________________________
To: You, Senior Risk Analyst
From: The Director, Portfolio Risk Management, The Surrey Group
Subject: Due Diligence Assessment for Senior Management
Date: March 14, 2018
Thanks for your help on Assignment 1. Well Done.
Now I need your help again. I am assigning you to the due diligence team for this project. However, I’d like to review your work before the senior executive see it so that I can give you some feedback on its contents. I’ll assess your memo based on a 200 point scale, utilizing the points allocated below. Please address the following issues in a memo to me delivered no later than April 4, 2018.
Step 1: Identify a major close competitor of the company you assessed in Assignment 1, email the name of that company to your SRM professor and Teaching Associate for approval. If you do not receive approval/objection within 24 hours, you may proceed to analyze that company.
Step 2: In a memo address to me, the Director, (or in powerpoint presentation, if you prefer), that I can share with the firm’s senior executives, address the following issues:
a. Summarize the business of the competitor and the strategy it is pursuing. Does the company utilize an action-oriented strategic principal? Has the strategy evolved over time? If so, how and why? (15 points)
b. Assess the company strategy using the tools discussed in the lecture notes and in the reading and present your findings. Compare and contrast your findings to those for the company evaluated in Assignment 1. Which company has the better strategy? Why? (20 points)
c. Identify, describe in reasonable detail and evaluate the key strategic risks that this company is facing or is likely to face as it pursues its strategy. Into what SRM category do these risks fall? Emphasis should be given to the strategic risks we have covered in class thus far. Compare and contrast these risks with the risks identified for the company evaluated in Assignment 1 (20 points)
d. Discuss each of these risks, providing a summary of the potential impact on the company and the potential downside implications. Quantify the probability that the risk will occur. (I understand that you do not have full information for this task, so an estimate base on your understanding will suffice for this memo.) Quantify the impact that the risk will have on the company if it occurs. (Again, I understand that you do not have full information for this task either, so an estimate base on your understanding will suffice for this memo. I note that very often companies will ascribe a dollar value impact or change attributable to a particular strategic objective. If this is available for your company, it will provide a good basis for this assessment. If not, your best estimate will suffice.) Assign an expected value/impact to the risk (probability * impact). Prioritize the risks based upon expected negative impacts from most impactful to least impactful. Between this company and the one evaluated in Assignment 1, which company faces the most significant set of risks and why? (30 points).
e. Categorize the risks as either avoid, mitigate, transfer or accept and justify your categorization. (15 points)
f. For the 3 most impactful risks that require mitigation, please describe in reasonable detail how the company will reasonably mitigate those risks. If the steps described are implemented, what level of mitigation will be achieved; i.e., assign a percentage to the level of mitigation achieved. To the extent that full mitigation is not achieved, what will happen with the remaining risk: accepted, transferred or otherwise mitigated. When compared with the mitigation measures recommended in Assignment 1, which set of mitigation measures are most likely to be successful and why. (35 points)
g. What controls would you put in place to help manage the risks and the effectiveness of the mitigation? Please explain why these controls will produce results. (20 points)
h. Given the identified risks, express your opinion as to whether or not the company’s strategy can be executed successfully. Is the strategy fundamentally sound? Why or why not? (30 points)
i. Based on your overall assessment in this memo and the assessment completed in Assignment 1,focusing on the strategy and the strategic risk posture of the firms, should the Surrey Group complete the acquisition of the company assessed in Assignment 1, the company assessed in this assignment, both or neither. Why? (15 points)
You will also be assessed on:
(i) whether you addressed all components of the assignment,
(ii) the quality of your responses,
(iii) your ability to support your analytical observations and strategic recommendations,
(iv) appropriate usage of the tools we discussed in class and that are included in the reading,
(v) your ability to communicate information in a clear and concise manner suitable for the defined audience,
(vi) whether you identify sufficient sources to support your conclusions and arguments and whether all of the sources relied upon are identified (however, you should not excessively quote sources, e.g., quoting the Form 10-K does not demonstrate knowledge of the company). If you use the Form 10-K as a source, it should be the most recent one.
To most effectively complete this assignment, you will most likely need to use other sources in addition to the most recent Form 10-K. Please reference all your sources. If the Annual Report on Form 10-K is your only source, you will lose 25 points for failure to research the company.
Typographical, grammatical and syntax errors will result in reduced points.
Consider various types of visual aids that will facilitate communicating your points, e.g., charts, graphs, tables, etc. Headings are very helpful in organizing your material.
Page count is limited to up to 12 single-sided, double-spaced pages, excluding your reference sheet. The references pages does not count in the 12 page limit.
If you elect to use a Powerpoint presentation format instead of a memo, which is totally acceptable, I will be flexible on the page limit. Please discuss the page limit with me separately prior to submitting your assignment.
Answer
Contents
The Company’s Business Environment. 3
Comparison of the Companies. 7
Observations and Conclusion. 9
Suntech Power Holdings Co., Ltd
Introduction
Suntech Power Holdings Co., Ltd is a Chinese company that was founded by Dr. Shi Zhengrong (Suntech, 2017). The company specializes in the provision of photovoltaic solar systems that are sold globally. The company has almost eighteen years of experience in the solar market and has made to become one of the most influential leaders in the solar market production. The company’s investment in the production of solar panels provides people with an alternative source of energy thus reducing the reliance on nonrenewable energy resources. The economically friendly alternative source of energy provided by the company has endeared the company to a lot of customers globally thus making it the future of the world’s largest power plants. The company has a global presence in countries that include the United States, Germany, Switzerland, Australia, Spain, Japan among other countries. The energy solutions provided by the company have enabled it to develop an outstanding reputation and image globally.
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Suntech’s main strategic principle is to understand the expectations and demands of the customer while at the same time enhancing its growth and stability. Based on the four key strategy questions of the company, it is important to understand the current position of the company, the company’s future concerns and their future vision, the methods of getting there, and the how the company will monitor the progress. Currently, the company has a customer base of over 100 million people (Suntech, 2017). It aims to further enhance the quality and efficiency of its services by investing in intensive employee training and development in customer service. At the same time, the company aims at leveraging on intensive infrastructure that will enable it to engage in mass production while maintaining the quality, reliability and efficiency of its solar products. Over 55 percent of the Suntech sales go to large consumers, for example businesses and learning institutions. The company aims to expand its market so that it also covers household consumers (residential). It will enable it to have an advantage in the industry because few companies have considered small consumers in their marketing strategies. Suntech is thus committed to making cost-effective solar energy solutions, managing the company’s product lifecycle, and improving the environmental and safety management systems and the environmental quality of the products and processes.
Suntech has the best growth strategy of the two companies. Its growth model will be dependent on the understanding of the customers’ wants and expectations unlike the other company whose growth is pursued on the basis of penetrating a wide market. A firm must first identify a gap in the market and then seek to fill it by enhancing its strategies and manufacturing plans. An understanding of the market will allow Suntech to invest a growth strategy that is in line with their customer needs.
The Company’s Business Environment
Suntech operates in the energy industry. The industry offers a lot of competition due to the number of companies that have invested in the sector. To remain afloat in the energy industry, firms must keep abreast with the latest technology to enhance durability and efficiency of the solar module systems that are produced. The following is an evaluation of the company using the Five Force Analysis.
Threat of New Entrants
New entrants provide the most significant threat in the industry because the industry costs are high and new technologies can disrupt the industry. Moreover, the industry is popular to new entrants because it promises a higher chance of gaining profits due to policy shift towards renewable energy. A number of companies are trying to make the breakthrough and be a part of the industry. The competition between the new and old companies is fierce. Due to the relative ease of acquiring the licenses for operation, there are number of new companies that are seeking to take advantage of the ever-growing solar market. The existing players have to constantly evaluate their customer service, production, and supply systems to ensure they match the current standards. The threat of new entrant in the industry is thus high.
Bargaining Power of Buyers
Customer power in the industry is high since they are sensitive to price changes, durability, and reliability of the solar systems. Besides, the customers that are using the solar systems are currently limited due to the existence of other alternatives of renewable energy. The buyers of the solar equipment are choosy due to the differentiation on the basis of cost-watt efficiency. In this industry, the products are differentiated through the basis of cost-watt efficiency. Therefore, buyers can be very choosy. The company depends on the limited number of buyers. However, the increased efficiency of technology for manufacturing has increased the reliability of the solar system thus attracting more customers. The market will be more developed in future. Therefore, the customers have a high bargaining power.
Threat of Substitutes
There is a high level of competition among the firms that manufacture crystalline silicon solar modules and solar photovoltaic systems. The customers have a wide range of solar systems to choose as alternatives. There are other sources of renewable energy that the consumers can use such as electricity from wind sources and hydropower generation. There are companies that have developed rechargeable lighting systems that are becoming popular among consumers, especially residential consumers. The threat of substitutes can be categorized as moderate.
Supplier Power
The power of suppliers is determined through the number of suppliers that provide the raw materials for Suntech. The production of one solar module requires an estimated over thirty types of raw materials. A low number of suppliers for the raw material can lead to an increase in the price of the raw materials. It is thus important for suppliers to adhere to their contracts. The production disruption might become a significant factor of unable to meet the contract’s requirements. The suppliers, therefore, have a significant impact in the performance of the company.
Industry Rivalry
The competition level in the production of solar systems is high. The high number of companies in the industry has been facilitated by the ease of licensure since the government is keen for more companies to be involved in the production of renewable energy. The solar manufacturing has both direct and indirect competitors. Among the companies that are competing with Suntech directly is First Solar Company. These competitors are more financially and technologically developed. There is one more type of rivalry such as the competition from the companies that develop other renewable technologies. The competitive rivalry in the industry is high.
Generic Strategies
Suntech has adopted action-strategic oriented principle in order to continue widening its customer base in the industry. The company has increased its focus on differentiation strategy to compete effectively in the renewable energy sector in the industry. The company solely focuses on the production of photovoltaic solar systems. The company targets both high consumers (companies, institutions, government agencies etc.) and small consumers (residential). Previously, most solar companies have targeted high consumers in their marketing strategies, For example, a direct competitor, First Solar Company, is focused on selling to large consumers as opposed to small consumers. The company has invested heavily in infrastructure to enable it produce the solar panels that are efficient. The company has also invested in opening its own store, thereby, bridging the gap between the manufacturer and the consumers. It interacts with its customers hence has an upper hand because it gets first hand feedback. The strategies have ensured that the company experiences consistent growth.
The Key Strategic Risks
In the pursuit of its strategies, Suntech faces a number of key strategic risks. The risks that the company faces in the implementation of its strategies include execution, supply chain, competitors, and governance. There are some risks that cannot be prevented by the company because they arise outside the organization (Reuvid, 2013). A growth strategy is accompanied by strategic risks. The key impact of each strategic risk is discussed in this section and their potential costs.
Strategy Execution Risks
The company is pursuing its expansion through organic growth. It seeks to increase its sales revenue through expanding its customer base and increasing its output through investing in the high efficiency technology systems. Expansion strategy that utilizes organic growth is measured since it is reliant on the resource capacity of the organization (Sull, Homkes, & Sull, 2015)). Suntech growth is slow because it is dependent on the availability of the resources for any growth strategy to be pursued. Competitors that are using other growth strategies such as mergers and acquisition have the capacity to reach the market faster than Suntech. The company thus risks lagging behind other companies due to its growth pursuit strategy. The differentiation strategy poses a risk of small revenues to the company since it can be forced to sell its products at a competitive price that is cheaper than the cost of differentiation. The risk has a low likelihood of occurrence that is estimated at 8 percent. The cost impact to the company in terms of revenue can be estimated at $ 0.8 billion.
Supply Chain Risks
Although the company has invested in providing their services directly to the consumers, they still require suppliers to move the goods to areas that they have not established their stores. A firm has to move services to its suppliers or move services to customers for its business objectives to be realized (Zsidisin, & Ritchie, 2009). The solar system requires considerable knowledge for it to be installed appropriately. In areas that the company does not have its stores and agents, the company faces the risk of poor execution of its strategy due to the use of third parties who may be unqualified. The firm has invested in information systems for its supply chain. It faces the risk of sabotage or virus infection that may derail its operations. The probability of occurrence of such risks is 2 percent, and its impact could be $ 0.2 billion.
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Competitor Risks
Suntech is operating in an industry that is highly competitive. Besides, the renewable energy sources are numerous thus offering the customers a number of substitutes. The company is at a risk of intense price competition due to the availability of the product and service from many companies. There are firms that have a huge resource base that they can utilize to sustain them in the competition. The risk posed by competition is moderate and can be estimated at 4 percent. It will have a significant financial impact of $0.4 billion.
Governance Risks
For companies to maintain a steady growth, they have to adhere to the ethical principles that guide the operation of companies in the industry. The firms also have to maintain prudent management practices that are free of corruption and discriminative practices. Weaknesses in internal controls are likely to lead to loss of cash by the firm. Poor management of the firm can create negative publicity that leads to reduced customer base. The chances of such a risk are high given the complex governance structure of the firm. It is estimated at 10 percent, and the financial impact will also be high at approximately $ 1 billion.
Comparison of the Companies
In comparison to the first company that was analyzed. Suntech faces the most significant risks due to its relatively small resource base and infrastructure. Increased competition in the industry is most likely to impact it due to its small base of resources. The risks however can be mitigated to avoid slow growth in its expansion to have a big market base.
The Risk Categorization
Suntech can help minimize the risk of execution by ensuring that all employees in the company understand the mission and objectives of the firm. According to Tarantino (2008), ease of implementation of the strategy can be ensured through implementing simple and straightforward policies that are easy to achieve. The employees should be sufficiently trained to engage in the implementation of the strategy professionally. Budgeting for the departments should be done in good time so that the relevant departments are allocated money early. The strategy should target functions that are essential to the growth. The firm should ensure that it goes through all the feedback given by the employees and customers to guide it in making decisions. The risks associated with execution can be fully mitigated by the firm.
The nature of operation of the company makes it difficult to mitigate the risks that are associated with supply chain. The company has a complex supply chain structure that involves its agents and third party agents. The company operates globally hence has not fully strengthened its supply chain. The nature of operations makes it difficult to alleviate the problems. However, the firm can invest in more research to help it gain a better understanding of the supply chain management. The risk will thus be partially mitigated and the rest will be accepted.
Competitor risks can also not be avoided because the firm is operating in an industry that has already been populated by other companies. By differentiating its products, the firm can beat competition from other companies since it will appeal to a particular market segment. The company can also expand its market by targeting low-cost consumers. Implementation of the strategies can result in partial mitigation of the competition risks, and the rest will be accepted.
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Suntech should ensure that it adheres to the principles of operation of the industry. Besides, the management should emphasize adherence to strict governance principles that will help alleviate corruption and other unethical practices that may tarnish the image of the company and reduce its customer base. The management of the company should understand good governance practices and use them to guide their operations. Suntech can fully mitigate the risks that are associated with governance.
The Controlling Measures
Suntech Company needs to implement some controls that will ensure that it successfully mitigates the risks. The company needs to incorporate its stakeholders in a consultative forum to ensure that it obtains varied opinions and ideas that when implemented will gain acceptance. Contracting professionals can be helpful in the initial and subsequent planning so that it keeps the process simple and easy to implement. The company can focus on training both its suppliers and third party suppliers so that they become knowledgeable in the installation procedures. The board of directors and the management should be given independence and strict supervision to ensure that they observe the governance principles. In the mitigation of risks in supply chain, the company should thoroughly vet its business partners before awarding them contracts.
Observations and Conclusion
Suntech has developed a viable growth strategy that can be easily sustained if there is proper planning. The firm has invested in high efficiency technology and infrastructure that will give a leverage of penetrating the global market with ease. It has invested in a distribution process that enables it to come into contact with customer and gain first-hand feedback. Having its stores and agents spread in its countries of operation has increased its ability to reach a wide market at a reduced cost. The growth model does not have intensive challenges that can pose a risk to the farm.
The most significant risks in the implementation of the growth strategy include governance and strategy execution risks. The company can minimize the risks by training the management in governance ethics. The firm will allow for independence of the board of directors and management team to facilitate unhindered decision making. The stakeholders will be brought on board during decision making forums to facilitate consultation. It will help in reducing constant friction.
The Surrey Group should complete the acquisition of both companies because the firms have effective growth strategies that can be achieved through keeping the implementation simple and straightforward. The strategic risks identified in both cases do not pose a significant threat to the growth and operations of the firm. The risks can be mitigated or partially mitigated and the rest of the effect absorbed by the company. Surrey Group will benefit from the high revenues that will be generated when the growth strategy is achieved.
References
Reuvid, J. (2013). Managing business risk: A practical guide to protecting your business. London: Kogan Page.
Sull, D., Homkes, R., & Sull, C. (2015). Why strategy execution unravels–and what to do about it. Harvard Business Review, 93(3), 57-66.
Suntech (2017). Who We Are & What We Do. Retrieved from http://www.suntech-power.com/menu/about-suntech.html
Tarantino, A. (2008). Governance, risk, and compliance handbook: technology, finance, environmental, and international guidance and best practices. John Wiley & Sons.
Zsidisin, G. A., & Ritchie, B. (2009). Supply chain risk management–developments, issues and challenges. In Supply Chain Risk (pp. 1-12). Springer, Boston, MA.
