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Moving Forward: Overseeing Strategy and Risks

To ensure that risks were adequately considered during the strategic planning process, JAA nominated its board-level Risk Oversight Committee to also be its Strategy Oversight Committee and named it the Risk and Strategy Committee (RSC). However, to ensure there is day-to-day monitoring of risks and controls and timely implementation of risk treatment plans to achieve strategic goals, JAA established an Executive Risk Oversight Committee (EROC) chaired by the CEO. The board believed this would reflect the corporate commitment of senior management to play an active role in day-to-day decision making and set the tone across the company that risk management is central to corporate culture.

Nonexecutive oversight of strategy and risk is the responsibility of the RSC, which regularly scrutinizes and exercises independent judgment over the most significant risks and effectiveness of the treatment plans and controls across the business. Discussions with the CRO and the heads of other oversight functions are also conducted without executive management being present. The nonexecutive directors (NEDs) are a step removed from the daily operations of the business, enabling them to assess and challenge the risk treatment plans. The complete board of JAA is responsible for overseeing achievement of strategy and the long-term goals of JAA through the risk governance structures it has established and maintained.

Looking to the Future: JAA's Management of Uncertainty

The successful turnaround in the fortunes of JAA is evidenced by its financial performance (see Appendix A) achieved through meeting its strategic objectives. JAA successfully seized opportunities emanating from the uncertainties impacting on those objectives. What follows is a comprehensive discussion on how JAA went about responding to the risks comprising its risk profile. The risk profile of the company appears in Exhibit 22.6a with a related risk map in Exhibit 22.6b. They clearly indicate how the risks of JAA have been changing due to its successful treatment of risks (i.e., emerging and current). The perceptions or flat trends exist because the treatment plans are a work in progress. As the treatment results are achieved, relative levels of risk will decrease as the benefits emerge for the objectives. The risks comprising the risk profile of the organization and the risk treatments selected to manage them are discussed next.

European Union (EU) Anti-Dumping Regulation Changes Because of the latest data from the World Trade Organization (WTO), JAA noted that there is increased market penetration from Eastern markets to EU markets. Also, complaints from local manufacturers have commenced. The EU Parliament may start to investigate anti-dumping measures against Asian countries in the textile industry, which could very well result in increased tariffs. If this scenario is realized, this will strengthen global presence and help to maintain market leadership, two of the strategic objectives of JAA. This will also have an impact on production costs, satisfying new quotas, and logistics. If the net effect is negative, JAA may need to change its business model, which could create additional hardships on the company. To avoid this situation, the maturity level of markets in the Middle East and South Africa needs to be evaluated for both logistics and

Exhibit 22.6a Current Risk Profile

Risk Source

2013 Perception

2014 Forecast

Trend

EU Anti-Dumping regulation

Medium

High

changes

Outsourcing and supplier contract management: Quality and delivery assurance

Medium

Medium

Competitors' marketing strategies

Medium-high

High

Imports: National FITs for trade discrimination

Medium-high

Medium-high

Cost variability and management

Medium

Medium

Local trade laws and regulations

Medium

Medium

New fabric production and dye technologies

Medium

Medium-high

Reaching target customers in new locations (countries)

Medium

Medium

Environmental sensitivity of creditors

Medium

Medium-high

Imitation of JAA's products

Medium-high

Medium

Trends: f: Impact is increasing, ↗: Both impact and likelihood increasing, ↘: Impact decreasing but likelihood increasing, ↔: Same from the last assessment, ↙: Both likelihood and impact decreasing.

production sites as alternatives. This step will help to ensure preservation of competitive advantage and the ability to identify new markets.

Outsourcing and Supplier Contract Management: Quality and Delivery Assurance

The latest trends demonstrate that there will be high volatility caused by mergers and acquisitions among outsourced suppliers. The agreed standards of service- level agreements (SLA) may be degraded, which could cause delivery delays and quality issues because of laid-off workers who are more experienced and certified but more costly. This kind of situation may impact JAA's objective of strengthening its global presence. Therefore, it decided to maintain a database of potential suppliers and set up procedures for sample production lots with them so that it can respond in a timely fashion and shift outsourcing arrangements to limit delays and maintain product quality.

Competitors' Marketing Strategies

JAA noted that there has been an increase in new entries to the sector with aggressive marketing strategies, which may affect its objective of maintaining market leadership. The quality of its products and customer satisfaction have become increasingly important. To have timely and more comprehensive information, a new customer survey for both current satisfaction and future expectations will be needed among both customers and local retail partners. This will provide JAA with the information and ability to act promptly. If JAA fails to obtain adequate information on competition, then this could result in faulty strategy setting at JAA with severe consequences.

Risk Map

Exhibit 22.6b Risk Map

Likelihood and Impact Matrix: Sizes of the bubbles are proportional to the relative interdependency of risk sources. The bigger the bubble, the greater the effect on other risk sources.

Imports: National Feed-In Tariffs for Trade Discrimination Market sentiment has become more sensitive. Local producers in the countries in which JAA operates have become increasingly sensitive to price changes. It has been decided to monitor closely the price levels in these countries. Any changes in national feed-in tariffs (FITs) will have an effect in either direction, which will also affect all of JAA's objectives.

Cost Variability and Management

Because of social movements and environmental issues in some of the countries, the working conditions may be affected severely, which in turn may impact JAA's sales and production costs as well as business continuity. The risk treatment decided for reaching new markets and contractors will help to decrease the cost volatility in the long run. In the short term, risk acceptance criteria will be reduced and hedging will be required for short positions of the foreign exchange portfolio above the agreed risk criteria. In the long run, the cost parameters will be monitored continuously. According to the monitoring results, moving of production lines to different countries will be reevaluated (see Exhibit 22.7).

Local Trade Laws and Regulations

Compliance with local laws and regulations is one of JAA's strategic objectives. Therefore, a chief compliance officer position was established to bolster the compliance department and to improve its monitoring and assessment capability.

One of the most important risk sources is the potential U.S. and European Union Free Trade Agreement. It will highly impact JAA's business and result in new opportunities and threats. The non-EU operations may be affected negatively, whereas EU operations will benefit from this agreement. The compliance department will use its contacts and sources to proactively acquire information about the details of the agreement. This will ensure a precise risk assessment as to how these developments may benefit JAA or the threat they may pose for its EU operations.

New Fabric Production and Dye Technologies

JAA has the ability to reduce costs and demonstrate market leadership among competitors through the efficient deployment of technology. It decided to engage in several research projects with universities that have a high reputation in these areas to stay ahead of competitors, as stated in the company's objectives. Also, this will be done to ensure that disruptive entrants to its market can be dissuaded due to the technological advantages JAA enjoys and the cost other companies would incur to enter and compete in its market.

Reaching Target Customers in New Locations

Being unable to reach target customers in new locations is considered a major risk because it would affect the market share of JAA in the future. Since the treatment of this risk would affect some other consequences that would arise from other risks, it has a special priority because of this dependency. A special markets research team was established to gather detailed information about potential new markets and customers. This team will be responsible for the extraction of information about the cultural and behavioral expectations in the targeted countries.

Environmental Sensitivity of Creditors

There is a high interest from creditors of JAA concerning the environmental effect of production/chemical usage and treatment actions. Even though special agreements exist in the SLAs with our contractors, any failure to comply will severely degrade the credibility and the reputation of the company. Therefore all the outsourcing arrangements allow JAA to receive monitoring reports from the external and internal auditors of its business partners to ensure that governance processes and controls are effective and their operations efficient. They also allow the company to initiate its own assessments if these aforementioned assurances cannot be provided.

Imitation of JAA's Products

Given the high quality and international acceptance of JAA's products, it noted that several attempts have been initiated to copy the brand with inferior products. A market research team will also be responsible to detect such illegal activities and report as necessary, with action to be taken accordingly.

Each risk is reassessed whenever significant new information is collected from any item in the context, as well as on the feedback from the results of treatments. Risk levels are not changed until results from the treatments are validated.

 
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