Discussion 4-1: The Nature of Managerial Risk
As a manager responsible for the day-to-day operations within your department, which might be sales, marketing, production, etc., you probably do not think much about the daily price of your company’s stock or the firm’s overall value if it is not publicly traded. However, your proposed projects can impact stock price or firm value in different ways. For example, if investors in your company perceive little value in plant expansion or an expensive equipment modernization program due to slowing sales, such a reaction will result in a stock price drop or a lowering of the firm’s overall value. What you propose as a manager for funding must be perceived as a program or project that supports overall organization strategy with minimal risk. Consider the Goodyear example in your course text reading this week (see pages 290-291), which focuses on a major investment in a new product—recapped tires. While this new product may have high stand-alone risk, note how and why that risk actually mitigates overall stockholder risk due to its diversification properties.
To prepare for this Discussion, consider your organization or one with which you are familiar, and its current riskiness. Develop an idea for a new product or service that has the potential to generate a good return on investment at reasonable or even high stand-alone risk but that has an opportunity to lower the organization’s overall risk.
Develop an argument as to why your suggested project has the potential to reduce the organization’s overall risk. Be sure to identify at least two risk measurement tools used in the readings that you would deploy to measure the overall risk in the organization, and explain why your choices are appropriate for the situation.