It is important to underline that under modern economic circumstances and its constant changes causing a growing influence of risk factors and uncertainties in business, efficient risk management becomes more crucial in the economic activities of enterprises. All enterprises when implementing their business processes systematically face with a necessity to manage different types of risks. The current essay critically analyses the case study describing risk management system at Microsoft Corporation presented in the textbook written by Barton, Shenkir, and Walker (2002).
Microsoft Corporation is the world leader in the software development, IT services and solutions. According to the official website of the Microsoft Corporation, the company is one of the largest global corporations, with offices in more than 100 countries and 92,700 employees. Microsoft turnover in fiscal 2009 totaled $58.4 billion, net profit – $14.6 billion. It should be noted that it is less than a year earlier ($60.4 and $17.7 billion), but more than in fiscal year 2007 ($51.1 and $14.1 billion). Microsoft brand is still one of the most expensive in the world; its value is more than $59 billion.
In comparison with other global industrial giants, Microsoft is a very young company. It was founded in 1975. However, the world economy cannot be imaged without its existence – just as the existence of transport, broadcasting, medicine, utilities and entertainment.
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Microsoft unprecedented range of products for broad IT industry covers desktop and network operating systems, server applications for client-server environments, desktop business applications and office applications for users, interactive programs to work on the Internet and other software and IT solutions. In addition, Microsoft offers interactive online services, publishes books on computer topics, and manufactures peripherals for computers.
Important areas of Microsoft Corporation business are research and development, the financing of which, despite the difficult economic situation, is increased. According to the official website of the Microsoft Corporation, in 2010 fiscal year, Microsoft spent more than $9.5 billion for developing new computer technologies.
Naturally, such an IT giant faces numerous risks in its business activities. Uncertainty caused by the appearance of new technologies, rapid changes in the economic circumstances as well as fierce competition influence the operations in the PC industry. It should be stated that analyzed case study focuses on the two main types of risks inherent to the Microsoft Corporation business. They are financial and business risks.
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It is necessary to underline that the approach, that the top management of the Microsoft Corporation demonstrates, deserves a lot of attention and study as the most successful example of the application of practical experience to the risk management. The risk identification process is supported by the Intranet system efficiently used by all employees.
The company does not wait that all the needed data about the event will be accessible. Instead of this, risk management department tries to analyze all the available information and create an understanding of the potential cost that the company will bear and reaction that should take place concerning the analyzed event.
Regarding the financial risks, it should be stated the following. As it is argued by Barton, Shenkir, and Walker (2002), “financial risk management is not only a way to protect the company’s profits from changes in interest rates or currency fluctuations.” Managing financial risks is a form of managing business risk. Microsoft has developed and implemented a special program to be protected against currency fluctuations in countries with non-convertible currencies, so called “price protection”. Microsoft sells its products to distributors in dollars. Distributors sold the products in the local currency, avoiding the risk of losing revenue due to the growth of the dollar exchange rate. If retailers believe that there is a real risk of devaluation of the local currency, they do not order Microsoft products.
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Profitability of retail distributors’ operations is quite low, so no price protection devaluation would deprive them of any profit. With minimal losses Microsoft applies distributors’ income protection programs. This is the case where the financial risk management is the business risk management. Naturally, such procedures do not influence the overall risk of Microsoft, but such price protection is very essential from the partners’ point of view.
It is essential to point out that currency risk hedging program was the first essential step made by Microsoft Corporation in 1994, in financial risks management sphere. The company started to calculate VAR to predict the worst scenario related to the potential losses due to the currency risks. Furthermore, the top management of the company widened the area of VAR application. Therefore, it means that the company began to calculate VAR in investment sphere related to the shares and bonds investment.
Moreover, a system called Gibraltar was created. With this treasury system, Microsoft finance department can provide a senior management with the consolidated analysis of the existing market risks, which proposes to take a group of capital market.
Gibraltar also makes it possible to perform a calculation of the indicator VAR applied to investments of the company. VAR is used to assess and quantify the market risk related to the currency, share price and interest rate. VAR measures each of the risks and reports the results to the employees who are responsible for analyzing certain risks and assets.
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With the aim to measure VAR, Microsoft created its own system called IRMA (Internal Risk Management Application). The finance department also uses two other programs, and all three systems are used for verification of the received results.
Microsoft Corporation measures the financial risks not only via VAR, but also through stress testing process, which allows determining the effect of other risks including political, geographic and economic factors.
It is worth noting that Microsoft Corporation demonstrates specific approaches to the risk management. As for the business risks management, the company strives to measure potential risks consequences, which mean that even if employees and top management do not have all financial and other data, they try to make a quantification of the risks.
Moreover, Microsoft Corporation implemented such techniques for sharing the data and thoughts about potential and inherent risks as Intranet. It is a system where all employees can search for the needed financial and other operational information and be aware of the state of Microsoft Corporation business. Face-to-face approach to the risk management is implemented too. Employees have the opportunity to share their experience of the projects underlining the existing risks to the head of the risk management department. Therefore, the process of the risk identification, measurement and control is supported by additional practical data.
Another essential business risk management process is the scenarios technique. This approach to the risk management is very efficient. For instance, taking one potential event that can cause harm to the company’s business, this event’s risks are regarded from a very wide perspective. Such example was given in the case study related to the risks of possible earthquake. An ordinary firm that observes risk management only from the perspective of property and insurance risks will have large losses after the event takes place. Instead, Microsoft Corporation tries to predict all possible consequences and harms that can be the result of the insurance event for all the stakeholders of the company. They are employees, investors, suppliers, shareholders and the company’s image.
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Besides, as it is stated in the case study when evaluating the potential cost for the Microsoft Corporations, risk management department specialists conduct an in-depth research of the analogical events. The harms caused by the earthquake also happen to other corporations. It is important to not only be theoretically prepared, but to understand what steps and actions Microsoft should avoid in order not to repeat the mistakes made by other companies.
It is crucial to point out that risk measuring and controlling processes as well as innovative IT techniques of Microsoft Corporation that help employees to identify, measure and make important decisions on risk management are very successful. The company, even under the circumstances of economic crises, succeeded in increasing its revenues and the number of employees. It is an evidence of the timely reaction on the emerging risks in business and an effective system of internal control over such risks.