Assignment 1: Discussion—Assessment of Risks
Risks are common for all firms, but there are different levels of risks in different industries and in different countries. The differences in risks from firm to firm or industry to industry are called unsystematic risks. Consequently, individual firms and industries deal with risks in different ways.
Consider two companies that deal in two entirely different industries, such as Microsoft, which is a technology company, and Caterpillar Inc., which manufactures heavy equipment.
Respond to the following questions:
- Explain how the risks and the approaches to anticipate these risks differ for each company.
- Analyze the kinds of risks that are most intimidating for each.
A major part of being in business or running a business is having risks. All organizations have risks, but there are “different levels of risks in different industries and in different countries” (Argosy University, 2018). These different risks, “unsystematic risks,” are dealt with in different ways (Argosy University, 2018). The economic, political and technological risks that impact the supply and demand for corporations are going to be examined for two companies in two entirely different industries. These companies are Kroger—the fifth largest retailer in the world that has store formats that include “grocery and multi-department stores, convenience stores and jewelry stores”—and McDonald’s—the world’s largest chain of hamburger, fast-food restaurants (Kroger, 2014).
For 2013 and 2014, the top risk for corporations was the economy. Even half a decade after the recession started, the economy still remains “lackluster” (Yahn, 2014). Kroger is no different from any other corporation and is affected by the economy. A representative from the organization said, “volatility in the global economy has been due to uncertainties related to “energy prices, availability of credit, difficulties in the banking and financial services sectors and the decline in the housing market, diminished market liquidity, low consumer confidence and high unemployment rates’” (Yahn, 2014). As a result of this, “consumers have become more cautious and have reduced spending and switched to less expensive mixes of products” (Yahn, 2014). This switch includes consumers going to discount stores or dollar stores instead of Kroger markets, which will affect their sales and earnings. There are not only risks in regards to the consumer at Kroger. Kroger also faces risks with their employees because of agreements negotiated between their employees and international unions. These agreements ensure that their employees’ “needs for good wages and affordable healthcare” are met (Yahn, 2014). While meeting these needs, Kroger needs to ensure they also seek a competitive cost structure. Kroger is aware of the risks they face and have already anticipated them. To keep their brand a household name and their market value high, Kroger remains competitive with their prices and sales to lure consumers into their stores. They have “invested over $3 billion in pricing” over the past few years (Eisen, 2014). In addition, they have expanded from being just a grocery store to having other products sold, such as clothing items and gas.
Even though McDonald’s is the world’s largest hamburger, fast-food chain, they are not immune to risks. As an international corporation, a risk that greatly effects how they do business is in regards to regulation and labor challenges. The company noted that regulations are constantly changing and seem to be inconsistent on state and federal levels. A representative noted “increasing costs and other effects of compliance with U.S. and overseas regulations affecting our workforce and our labor practices, including regulations relating to wage and hour practices, workplace conditions, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination” are major concerns for McDonald’s right now (Yahn, 2014). This leads to another risk the company faces that deal with unionization. Similar to Kroger, McDonald’s needs to figure out how to meet the needs of their associates while still remaining competitive in the market. However, unlike Kroger, McDonald’s employees are not currently in agreement with the union so there have been labor strikes about “increasing minimum hourly wages and the right to unionize” (Market Realist. (2014)). Because of the labor strikes and recent studies in regards to healthy eating, the biggest risk McDonald’s faces is their reputation. The public has different views on the way McDonald’s treats employees and the unhealthy ingredients used in their products. If society continues to have a negative perception of the corporation, then sales may be affected. McDonald’s is aware of the risks they face and have already anticipated them by trying to create a healthier menu and showing the public that they treat their employees more fairly.
It is apparent that both corporations face similar risks and very different risks. Kroger and McDonald’s both deal with the risks associated with employee well-being and working with unions. However, the biggest difference between these two organizations is that Kroger has a positive image with the general public, whereas McDonald’s has a more negative perception.