ShangTIF Co. Business Risks Assignment Help
Section A
10 business risks facing ShangTIF Co. and business objective and the risk reduction strategy
Currency fluctuation (low risk): The Company operates in dollar, yen and Rmb, with the financial statements finally prepared in Rmb. This results in significant risk for the company in terms of exposure to volatility in the currency market. Though the company is in a strong position to absorb the losses due to the fluctuation, events like the earth quake in Japan can significantly dent the power of the home currency, in this case the yen (Baba et. al. 2008).
Though the risk of currency fluctuation is low, the company might benefit by hedging a portion of its earnings against volatilities in the currency market.
Risk response strategy: company must avoid losses due to currency fluctuation
Higher volumes from China (high risk): As the volumes from China to Japan are very high and the other way round is relatively low, the company becomes too dependent on its China to Japan route for the major share of the income. This is a dangerous situation because competition or economic factors may temporarily reduce the income on this route, thus putting the company in distress.
The company must more actively try to get businesses to use its services from Japan to China, in addition to the discounts provided to Chinese companies for using the services in return direction as well. This can be done by proactive B2B partnerships. The company must make use of its Japanese stake holder to get a sizeable amount of regular business. In addition to this, the company can also consider an additional stopover in another port in the return direction (Alexander 2009).
Risk response strategy: Try to share the load equally between China and Japan
Just one ship/ employees (medium): The fleet consists of just one ship which docks weekly once in Shanghai for maintenance. If the ship is in need of a major repair, a week`s services will be hit. In the service industry, quality of service is very important (Kalra 2008). If the cruise is off for a week, the company faces the wrath of the customers who have made reservations and also the companies that use the ship for freight purposes. This will result in huge loss of business and negative word of mouth. Though there is no report of this happening, this is a reasonably serious issue.
Risk response strategy: Accept the problem and look for solution.
The company must consider having a tie up with a few third party service provider to cater to their customers in case of the occurrence of such an event. The company must make sure that these cruises are of the same service level or higher, and at the same time make sure the customers don’t lose long term loyalty towards ShangTIF.
Lack of interest from Japanese investor (medium risk): The Japanese investor is disinterested in investing more into the JV. This is a medium risk because in the long term, the promoters must be looking to expand and increase the foot hold in the market rather than just try to consolidate; this may spell disaster for being too reserved in the service industry.
The Chinese company which is the more active part of the JV must convince the Japanese investor to consider expanding the foot hold of the business by introduction of newer ships, and experimenting with newer routes to diversify the business and reduce the risk.
Risk response strategy: Accept the problem and look for solution
Might be considered as a goods ferry in future (high risk): The ship carries both goods and passengers. The goods contribute 88% of the company`s profits. This shows that the goods business is the life line of the company. The ship however enjoys all benefits of being a cruise ship, which also allows it to unload/ load goods faster resulting in quicker turnaround time. Hence it is very important for the company to maintain its present tag as a passenger liner and not a predominantly goods carrying ship (Cremer et.al. 2008). The risk is high here because with the constant change in import export rules, and lobbying by competitors, there are chances that the company loses its tag of a cruise ship, and may have to use the dock for loading/ unloading which will severely affect its turnaround time. The political and environment factors thus are critical for the ship`s current mode of operation.
The company should ensure good relationship with lobbyists and policy makers to ensure a favorable environment of operation. Especially in Japan, the promoter should constantly try to better the operating environment and business of the company through his connection (Alexander 2009). As the South East Asian market is known for the practice of Guanxi, strong relationships with policy makers and men in power becomes critical for the firm`s success.
Risk response strategy: Avoid any change in operating environment.
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Employee costs are high (medium risk): The employees are rented from a sister concern firm of one of the promoters and the costs are reportedly going high.
This is a medium risk situation as it can be addressed by implementing six sigma and other similar processes to reduce cost.
The company can also consider hiring a few permanent employees rather than a large number of rented employees to make the employees more tailors made for the business.
Seasonal business (high risk): The business is seasonal; it is high risk scenario, as part time operators can operate during the favorable season, which can adversely impact full time operators.
The company must identify areas where it can grow and keep up operation even during off season.
Risk response strategy: Accept and identify a solution
Political disputes between China and Japan (medium risk): The recent island issue between China and Japan grabbed world headlines. Hence there is a chance of the political scenario becoming unfavorable.
The company must look for expanding operations beyond the two nations in order to diversify business and reduce risk.
Risk response strategy: Reduce total dependence on this route
Fuel is marked in US dollars (medium risk): As business can operate by directly converting Rmb to yen and other way wound, the crude oil is traded in dollars, which exposes the currency to volatility in the dollar.
The company must consider futures trading in oil, so that it is insured against fluctuating fuel prices.
Risk response strategy: Avoid losses due to currency fluctuation
Succession planning for the ship (high risk): The ship has a useful life of 35 years, and it is closely approaching this number, the risk is high because the new ship needs to be ordered, built, marketed, it has to be tested and it has to blend into the system which will take time (Dash et. al. 2008).
The company must start succession planning immediately. This will also allow the company to experiment newer routes for a brief period till the old ship is in operation.
Risk response strategy: Accept that the ship is ageing and look for succession plans
Section B
Since Diamond corporation wants to move from flat to floating rate and Random trading wants to shift from floating to fixed rate. As a bank we can initiate an interest swap. Diamond Corporation should enter into an agreement with Random trading with a higher LIBOR, since the rating of Random Trading is relatively lower (Krishnamurthy andVissing 2011).
Random Traders should enter the agreement with Diamond Corporation but should be willing to pay a higher LBOR as their credit rating is lower and due to the BBSW factor.
