Mcdonalds Risk And Risk Management

Mcdonalds chance And Risk ManagementIntroduction to attempt c arThe only thing we know about future tense is that we do not know what is going to happen. This is related to definition of venture in general.Miles Wilson (1998) define insecurity as being an exposure or a probability of occurrence of a loss. Risk basin to a fault be viewed as having a verifying effect. PMBOK (2004) defines pretend as an uncertain event or condition that, if it occurs, has a positive or negative effect on line of merchandise objectives.Risks grant a huge influence on the success or failure of telephone line. However, lay on the lines cannot be avoided, but they can be managed. They must be managed by applying effort to their reduction or elimination. Not all risks need to be eliminated. They be sometimes sufficient to reduce the projects exposure to a level that is acceptable to the project. Risk focus make ups time and effort, but the impacts can be significant. Without risk management, the chances of danger of failure will be high.Effective strategical risk management can minimise of weaknesses inwardly transcriptions causing damage. However, effective strategic risk management tools became harder to implement as business operations grow, deform much complex, and operate in multiple locations.Risk management is increasingly value as being concerned with both(prenominal) positive and negative aspects of risk. Potentially, there ar the opportunities for benefit or threats to success as a result of risk.Risk in financial climate arises through countless transactions of an economic nature, including sales and purchases, investments and loans, and various otherwisewise business activities.Therefore, risk management can set up a solution to making individual and caller-out less in danger. Identifying strategy for risks as soon as possible is particularly issueant.There are common approaches to risk which take alternative action when risks exposure, remova l as insure risk, measure opportunities to risk whitethorn occur and make plan to hear and acceptation of risk. correspond to Mills (2001), the systematic approach makes the risks clear, formally describing them and making them easier to manage. In other words, systematic risk management is a management tool, which requires realistic experience and training in the use of the techniques.Appropriate responses to risk must be prepared to all the risks that would significantly affect the strategy or returns of the friendship if they were to occur.Background of McDonald check to McDonald (2010), McDonald is the worlds largest chain of quick portion restaurants organisation in the world, serving tens of millions of customers daily worldwide.There are more than 30,000 restaurants in 120 countries worldwide. fit to McDonalds bow window Annual Report (2009), revenue has reached a record more than US$20 billion and US$6.8 billion income and 390,000 employees.McDonalds operates according to four set which are quality, service, convenience and value. Part of organisational culture is the quality of the food and service wherever the branch is located. The good reputation of the company and the view of an excellent service no matter which branch people eat is a securities industrying strategy of McDonalds. McDonalds set a standard applicable to all branches worldwide. However the company also gives a way for innovation by allowing the branches to integrate culture into food and service increasing market share.McDonalds tries to operate on a salute leadership basis by offering low priced goods with higher profit margins. Most of the efficient strategies adopted by McDonalds associate with this strategy of low cost.Since McDonalds operates in 120 countries on 6 variant continents, they offer different food selections be military campaign of different unavoidably in each country, callable to religion, diets, and resources of each individual country. This flexibil ity and knowledge allows McDonalds to achieve multinational targets and compete with the other competitors. It shows that the company predict customer needs and handled well to risk.The PESTLE summary of the macro environsAccording to BADU (2002), many of organisations success or failure, profit or loss, growth or decline depends on how well they respond to macro political, economic, societal, technological and regulatory changes which is the orthogonal macro environs.Johnson Scholes (2005) support that the external factors can be divided into six categories which political, surround, social, technology, environment and legal. These external factors usually are out of the organisations control and sometimes acquaint themselves as threats.The macro environment analytic thinking is usually the prototypal step of a strategic analysis. It is sometimes referred to as an external analysis or a PESTLE analysis. In other words, it can be analysed with the many different factors in an organisations macro environment by using the PESTEL framework.The purpose of the macro environment analysis is to unwrap possible opportunities and threats in the industry as a whole that are right(prenominal) the control of the industry.According to Kotler (1984), the macro environment consists of the large societal forces that affect micro environment. The micro environment, on the other hand, consists of the forces blotto to the company that affect its ability to serve its stakeholders.Firstly, the macro economic environment analysis will identify trends much(prenominal) as changes in personal disposable income as rises in living standards or the general level of demand, rises or waterfall in interest rates, unemployment rates and inflation. According to Luffman Sanderson (1988), the economic environment consists of the watercourse and future state of key economic variables used to describe wealth, purchasing power, savings and consumption, together with government e conomic policy deployed to affect those variables. For examples, Gross National Product (GNP) or disposable income are key determinants of demand. The distribution of income in company provides opportunities for organisations to separate product or service offerings in cost of levels of disposable income. The rate of inflation and government policy towards it can really affect consumers attitudes to consumption. As a result, company strategy in the economic environment can be not simply threat for organisation, but opportunities for improvement that company can do better.Moreover, Tchankova (2002) states that the economic environment usually is hardly influenced by the political environment in a single country, but the globalisation of the market wees a market that is greater than a single market and needs to be considered separately. Although a particular activity of the government can affect the international jacket market, the control of the market is impossible for a single government. Examples of sources of risk generated from the economic environment in global are economic recession and depression and current put back rate.McDonald could suffer in country where the economy of the respective states is hit by inflation and changes in the win over rates.Secondly, the macro political and legal environment analysis will identify changes in government, or a change in government policy. As a result, legislation will be do such as minimum age discrimination and disability discrimination and minimum wages. Moreover, political decisions can impact on many essential areas for business such as the environmental regulations, the employment laws, trade restrictions and tariffs, political stability for interior(a)ly and externally and decision making structures.Luffman Sanderson support that Government at both national and local levels can affect companies not only on a day-to-day basis through laws, policies and its authority, but also at a strategic level by creating opportunities and threats.Furthermore, Tchankova states that the political environment is a more complex and important source of risk in an international aspect. The difference in the ruling system raises different attitudes and policies toward business. For example, extraneous investment might be confiscated, or taxation systems might change significantly, which will hurt the investors interests. The political environment can present opportunities as well.McDonald is the international operations which greatly influenced by the government policies such as regulations and new legislations for tax, trade, product safety, health care and labour.Thirdly, the macro technological environment analysis will identify changes in the application of technology. It is related with the application of new inventions and ideas such as the development of the internet or websites as McDonald company business marketing tools.Luffman Sanderson support that the technological environment is co mpounded of the impact of science and technology in product and service innovation. applied science can improve quality, reduce costs and lead to innovation. These developments can benefit consumers as well as the organisations providing the products and service.Fourthly, the macro social and cultural environment analysis will identify trends in religion, beliefs, behaviours, values and standard such as changes in lifestyles like more women going out to work, changes in tastes and buying patterns. Furthermore, the exit of part time workers and attitudes and diverse working environment are also related with changes in society.The speed of change in the social environment may be slow, but its effects are unstoppable.Generally, the companys strategies need time to evaluate the corporate response to social changes.Besides, Tchankova states that the changes in human behaviour and state of social structures are cause of risk. The level of employee and loyalty to the organisation deter mine to a large extent the success of the organisation. At the same time the changes of culture create opportunities.Lastly, the macro environmental analysis will identify factors such as natural disaster or global warming. For example, volcanic eruption that occur fewer weeks ago impact on many industries including airline, farming and insurance because of volcanic ash. Also, McDonald recycle standard is result of environment analysis. Oxford University Press (2007) supports that with the weather and climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider.Micro environment analysisThis environment influences the organisation directly. According to Beamish Ashford (2005), simple approach to this analysis will be to break it down into 5 elements which are business, customers, suppliers, stakeholders and competitors. These are internal factors close to the company that cast a direct impact on the organisations and strategic planning.First of all, in terms of customers, organisations should focus on meeting what customer needs and wants and providing benefits for their customers. Success of business depends on how well organisation analysis of their customer. This analysis can be the basis of organisation provides the safe product at right price and to the right place at the right time. Otherwise, business strategy will be failed as a result. Customers are a major environmental factor for McDonalds. Nearly 54 billion customers served by McDonald daily basis. McDonalds customers are mostly young generation. Thats way, company always conscious about their choice. For this reason, customers demand, their choice, what they like is impacting McDonalds.In terms of competitors, restaurant industry is extremely war-ridden. McDonald is one of them and very successful company. They are doing everything in their power to make sure that they attract to their custo mers. Therefore, competitor such as KFC and Burger King analysing and monitoring is critical if an organisation is to importanttain its position within the market. As the competition increase, there are more advantages to the customers. As a result, McDonald is up to date with customer taste and preference.Also, employing the proper staff and keeping these staff motivated is a vital part of the strategic planning process of an organisation. Training and development are essential, particularly in service sector, in order to gain a competitive advantage. McDonald has master(prenominal)tained a huge loyalty to their employees and their training, which includes making available to all entitled employees and a consistent management and training programme.In terms of supplier, Beamish Ashford states that supplier relationships are a save critical component to the success of any organisation. It is important to many organisations to ensure consistent supplies in order to meet consiste nt demand for their product ensuring competitive and quality products for an organisation. Therefore, supplier analysis is essential. As a result, organisation must review some factors such as costs, quality, warranty, financial stability and the relationship suppliers have with competitors.For example, increasing beef prices will have affect on the strategy of McDonald. Prices may be going up as a result.In terms of stakeholders, they are individual or group that can greatly influence the performance of the company. Stakeholders support makes company successful. They have in turn certain expectation from the company. Therefore, to analysed stakeholder expectation is fundamental.According to Beamish Ashford, the role of stakeholders in any organisation seems to have an increasing influence in which organisation can do business.Shareholders are one of typical stakeholders who require a certain level of return which means it is important for any organisations to focus on making decis ions that satisfy and tap this return. Satisfying shareholder needs may result in a change in strategy employed by an organisation. McDonalds stakeholders are individuals or groups that have an interest in the organisation and how it operates. McDonald take into account the needs and requirements of stakeholders.In addition, microenvironment also provides organisations possible threats in the market place that would reduce their profit or rate at which consumers purchasing their products. One of those threats is that consumers use as a substitute to their products. These threats usually come from competitor organisations.Global company and risk managementBrindley (2004) suggest that global competition, technological change and the continuous search for competitive advantage are the primary motives behind organisations turning towards risk management approaches in the international chain industry. Furthermore, the increase in economic activity at the global level encourages business organisations to seek a competitive advantage by accessing new markets and expanding their operations. According to Porter (1990), the term competitive advantage refers to the strategies that allow successful companies to create profits in their sector of economic activity which is main objective and goal of most organisations.Dalgleish Cooper (2005) support that organisations manage their operations on a day-to-day basis and risk management does not of course add value to this activity. Its application is, however, becoming more focussed with organisations identifying a sense of purpose and making proper use of the assessments. This has resulted in its adoption within the internal control systems of organisations in making informed decisions, improving communication with the board and improving their take careing of the risks and controls within the business.Therefore, risk identification is the first format in any organisations risk management. It is a base for correct future work of the organisation with regards to developing and implementing new programmes for risk control. According to George (2009), risk management is the process of planning, organising, directing, and controlling resources to achieve given objectives.Brown (2000) recommends that boards or responsible directors should consider the key risks and assess how they have been identified, evaluated and managed, and assess the effectiveness of the system of internal control. As a result, directors should have responsibility for all aspects of control and a duty to establish a strong system of risk management, designed to identify and evaluate potential risks in every aspect of the business operation. Risk management is fundamental process in every organisation, which includes control systems to inform managers that organisation has being exposure to risks, and guarantee that strategic risk management is properly implementing.Financial riskAccording to Jorion GARP (2009), financial risk inc ludes market risk, credit risk and operational risk. Market risk is the risk of losses due to movement in financial market prices or volatilities. This usually includes liquidity risk which is the risk of losses due to the need to liquidate positions to meet funding requirement. Liquidity risk is not amendable to formal quantification. Credit risk is the risk of losses due to the fact that counterparties may be unwilling or unable to fulfil their contractual obligations. Operational risk is the risk of less resulting from failed or deficient internal processes, system and people or from external events.Financial risk is that a company will not have sufficient cash endure to meet financial obligations. Wikipedia (2010) supports that financial risk is the additional risk a shareholder bears when a company uses debt in addition to equity financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly or entirely by equity.Therefo re, the financial risk management process must not be involve avoidance of risks, but designed at identifying and managing these risks instead.For example, according to McDonald, McDonalds restaurants worldwide, contribute 7% of global profits, making the UK a very important financial market for McDonalds shareholders. Each individual McDonalds restaurant is structured as an independent business, with restaurant management responsible for its financial performance. McDonalds financial reporting and management accounting ensures the scoop up financial position for the company now and for the future.Market riskAccording to Monetary Authority of Singapore (2006), market risk refers to the risk to an organisation resulting from movements in market prices, in particular, changes in interest rates, unlike re-sentencing rates, and equity and commodity prices.The market risk strategy should first determine the level of market risk the organisation is prepared to assume. This level should be set with consideration given to, among other factors, the amount of market risk capital set past by the organisation.The organisation should develop a strategy that balances its business goals with its market risk appetite.Accessing to all current operative cash flows and to all financial transactions is indispensable for complete risk management. In order to determine and control risks, the information from these two sources needs to be brought to together.Currency exchange rate risk for McDonaldAccording to Mathur Loy (1984), in a world of increased uncertainty about the future value of exchange rates and increased visibility of foreign exchange gains and losses, it is not surprising that global companies have become more concerned about minimising foreign exchange risks. Exchange rate risk may powerfully affect firms profitability and it can be hedged. Once a company becomes involved in international trade, it consequently becomes subject to foreign exchange risk exposure.I n other words, because of the increased globalisation, exchange rate has become an important source of risk for an organisation operating in international environment.McDonald is international liberty fast food restaurant. Lashley Morrison (2000) support that franchising business format has become an established global enterprise trend within the service sector. They indicate further that franchising has become a mature industry in the USA and well established in the UK.According to Edwards (2006), the reasons why company is going for international are kind more brand and shareholder value, add revenue sources and growth markets, reduce dependence on home market and leverage existing corporate technology, publish chains, know-how and intellectual property.However, certainly, some risks are exposure for those reasons. Exchange rate risk is one of them which unavoidable for global company.According to FinancialCAD Corporation (2009), in 1967, McDonalds opened its first foreign cou ntry franchise in Canada. Today, more than 65% of total revenue is derived internationally, as more and more restaurants are opened in countries outside the United States, with increasing McDonalds foreign exchange and interest rate risks. McDonald is challenged with managing these risks as hedging the interest rate and foreign exchange risks for operations based in foreign countries is complex. As a result, McDonalds warned their investors of the potential changes in currency exchange rates to impact company profits, but that the company has tried to reduce these risks.FinancialCAD Corporation continously states that the McDonald financial markets group is responsible for hedging the balance sheet and income statement against foreign exchange and interest rate risks, while funding the growth of global operations. They often fund assets locally, but in many markets this is challenging. The assets are funded by more than $8 billion in debt, with over 50% of the debt denominated in a foreign currency.According to Abor (2005), foreign exchange risk is the risk that an entity will be required to pay more or less than expected as a result of fluctuations in the exchange rate between its currency and the foreign currency in which payment must be made. Foreign exchange risk is commonly defined as the additional variability experienced by a multinational corporation in its worldwide consolidated meshing that results from unexpected currency fluctuations. It is generally understood that this considerable win variability can be eliminated partially or fully at a cost, the cost of foreign exchange risk.Companies are exposed to foreign exchange risk if the results of their projects depend on future exchange rates and if exchange rate changes cannot be fully anticipated.According to Madura (2003), companies are generally exposed to three types of foreign exchange risk which are transaction (commitment) exposure, economic (operational, competitive or cash flow) exposure a nd translation (accounting) exposure. Transaction risk occurs where the value of existing obligations are worsened by movements in foreign exchange rates. Economic risk relates to unbecoming impact on equity or income for both domestic and foreign operations because of sharp, unexpected change in exchange rate. Translation risk is also related to assets or income derived from offshore enterprise.Foreign exchange risk can be managed in various ways. There are techniques used for hedging against risk. According to Prindl (1976), hedging can be defined as all actions taken to change the exposed positions of a company in one currency or in multiple currencies. Clark, Levasseur, Rousseau (1993) argue that hedging refers to the technique of making offsetting commitments in order to minimise the impact of unfavourable potential outcomes. The risk managers choice of the different types of hedging techniques may be influenced by costs, taxes, effects on accounting conventions and regulatio n.Foreign exchange risk is mainly managed by adjusting prices to reflect changes in import prices resulting from currency fluctuation and also by buying and saving foreign currency in advance. The main problems firms face are the frequent appreciation of foreign currencies against the local currency and the difficulty in retaining local customers because of the high prices of imported inputs which tend to affect the prices of final products sold locally.Investing in a foreign stock market is equivalent to investing in two assets foreign stocks and foreign currency. Therefore, the return-risk outcome of a foreign investment can be quarantined into contributions from the local market factors and the currency factor. The currency impact on the return outcome can be positive or negative, and can be a substantial part of the total return.According to Fatemi (2000), the objectives of risk management include minimise foreign exchange losses, reduce the volatility of cash flows, protect ea rnings fluctuations, increase profitability and ensure survival of the firm.Conclusion and RecommendationRisk taking is essential for any organisation in the global environment. Therefore, organisations need to understand the nature of the risks they meet and prepare to manage them appropriately.Evaluating significance by estimating potential damage and possibility of events is often not an exact science, and sometimes based on best guesses.However, monitoring and managing significant exposures of risk is vital in globalisation of today business strategy as many factors in our environment are changing with extreme speed.McDonald is one of the biggest and most successful international franchise companies in the world. The research indicates that the way of how company manage risk is outstanding compared to other global companies. Burger King has just imitated what McDonald has done for risk management. Excellent risk management might be the best reason that McDonald has become succes sful business in the field. In other word, it is hard to find unmanaged area to be in risk in organisation.As a result, well prepared risk management of company and flexibility for changing environment are bringing to organisation benefits.However, there are some unanticipated other risks still may occur. For example, McDonalds size of business could be obstacle of effective hedging.International service organisation such as McDonald must consider the opportunity cost of international expansion. Being more flexible and international expansion might be a benefit to get wider market customers. On the other hand, this might cause of taking risks. It therefore certainly requires a thorough analysis of the factors such as the details on key current economic environment for the country, the main competitors, demand characteristics and trends, contribution of the project to shareholder value, the level of risk and potential difficulty for the organisation.Moreover, the company need to cons ider that competitors are not just other fast food chain restaurant. It means that company should put lots of effort for analysing other companies. For example, variety of more relevant menu can be developed.Furthermore, the research indicates that the company should be well aware of importance that steady rise of profitability and share price. Therefore, company manage for financial strength by reducing capital spending and using the money remaining after capital expenditures to pay debt and return cash to shareholders.The research also shows that changes in exchange rates generally impact the outcomes negatively. That is why it needs to be managed properly.Therefore, global organisation management must consider commitments for innovation and flexibility to enhance positive risk management effects.