The Company’s Financial Risk Management Strategy

Introduction

The financial market opportunities primarily predetermine the development of all types of non-financial organizations, and their activities often depend on external market factors. When it is about the possible risks related to financial activities, various ways to protect budget funds can be considered as effective mechanisms. One such technique is strategic financial risk management that is a set of measures aimed at achieving success in preventing potential problems with the funds of a specific organization. Using the example of the world-famous British American Tobacco (BAT) company and its data, it is possible to analyze the effectiveness of such measures and assess the strengths and weaknesses of such a policy. The purpose of this work is to study the potential of the company in the field of financial management and compare the current strategy of the organization with other similar models. The practical significance lies in the possibility of using the data obtained for the analysis of other non-financial firms to evaluate the effectiveness of their strategies.

Company Description

To maximally competently evaluate the quality of financial risk management, it is essential to study the scope of a particular company and its interests. According to the official data1, this non-financial organization that is included in the FTSE 100 has a rather high price for shares, and today, there is a tendency for growth. However, when assessing the situation with the company for the past period of 2018, it can be noted that the organization is experiencing a significant decline in financial performance. Even though BAT is the company that has been operating in the market for quite a long time and occupies the second position in the list of organizations with identical products, it has begun to lose its positions. This phenomenon is likely to be associated with insufficiently effective financial policies.

Proceeding from a rapid drop in stock prices, it can be assumed that the leadership of BAT did not make sufficient efforts to ensure that the organization does not lose its positions. According to Gordon, Loeb, and Tseng2, risk management is the activity in which timely decision making determines the degree of success, and too conservative and slow approach, on the contrary, increases the chances of problems. Accordingly, for BAT not to lose its positions on the world market and be able to successfully compete with other companies in the field of tobacco sales, its leadership should take urgent measures and revise the mechanism for risk assessment. It is likely to produce a positive effect that will manifest itself in increasing market interest in BAT and growing the value of its shares. For a more detailed analysis, it is possible to consider the features of financial risk management of the organization. It will help to evaluate some of the nuances of the current strategies and define potentially perspective directions.

Peculiarities of the Company’s Financial Risk Management

By generally accepted business strategies, the management of the analyzed company usually appoints employees who are responsible for such a significant component of work as risk management. As Chan and Wong3 remark, a risk manager, together with his or her team, first thinks through possible scenarios for doing a certain job and then analyses the possible consequences that may develop from a particular scenario. A similar approach to the organization of work is realized in BAT where there is a whole team of specialists in this profile. Because this brand has a lot of branches all over the world, each of the representative offices has several specialists who are responsible for assessing financial risks. Such analytical work directly at the sales points helps to more accurately evaluate the needs and opportunities of a specific section of the market and make the most accurate forecast regarding the effectiveness of the chosen strategy.

From working efficiency that characterizes BAT, it can be noted that, according to Jaakko and Henrikki4, the effectiveness of customer focus, which is typical for the company under analysis, can become a valuable mechanism when used correctly. In other words, BAT has always differed in its desire to take into account the demands of customers, and this type of strategic work certainly has its advantages. Nevertheless, risk assessment is a slightly different area where not only consumers’ interest but also possible unsuccessful consequences are also considered.

Financial risk is the variable that characterizes the probability of economic damage (financial losses) that an enterprise can incur while carrying out its activities under uncertainty. Consequently, the probability of risk occurrence is largely determined by the level of business stability. As Bromiley et al.5 claim, knowing the source and the factor of financial risk, it is essential to develop the ways of reducing and the methods of limiting any hazard. At the same time, knowing the forms of manifestation of a specific risk, it is possible to foresee its negative consequences. BAT’s peculiarity is the strategy of adapting to the constantly changing needs of the market. This type is distinguished by some obvious advantages.

Strengths of the Company’s Financial Risk Management

Due to the adaptive model of financial risk management, BAT can work with the needs of consumers and focus not on the overall dynamics of the market but on customers’ interests. It, in turn, allows the management to constantly find new supply channels and deserves recognition from clients. According to Almeida, Hankins, and Williams6, supply problems arise in those organizations that are forced to spend long and time-consuming work to find customers. In the case of BAT, the company is the world-famous brand, and the number of regular customers gives the corporation leadership the possibility to adapt to existing market factors and conduct business based on the current situation.

Another undeniable advantage of the adaptive model of financial risk management is the ability to receive relatively accurate and timely information about the situation on the market, using ready-made leadership strategies. As practice shows, the cyclical nature of demand and supply, which is currently typical for BAT, is quite a frequent phenomenon. The use of ready-made recommendations in the form of special management programs helps to succeed in developing a particular strategy for managing financial risks to ensure business stability. As Brown and Conrad7 note, following the instructions can help prevent a serious financial crisis and the loss of capital. Certainly, such an advantage is significant enough. However, in the case of BAT, it was not properly implemented; therefore, some of the shortcomings of the current managerial system can be identified.

Weaknesses of the Company’s Financial Risk Management

Despite rather high positions and recognition in the world market, recently, there has been a decline in consumers’ activity, and the cost of the company’s shares has significantly reduced. Perhaps, it is caused by an insufficiently competent policy of financial risk management. An adaptive strategy used by BAT leadership has certain positive aspects. However, this type of management may have been more suitable for a small firm, at least, for a temporary search of the crisis solution. According to Karadag8, the financial challenges faced by small business managers are usually addressed through effective interventions, and current strategies can be rapidly changed. Nevertheless, in the case of BAT, such a large corporation with branches around the world is unlikely to quickly rebuild its model to adapt to changing market conditions. Consequently, this disadvantage of an adaptive model deserves attention.

As another argument about the mistakenness of the chosen strategy, it is possible to cite the assertion that a too complicated control structure complicates the work process. As Theriou9 claims, the system of leadership is an important component of the success of any company in the market, and the more complex such a system is, the higher the chance is that any implementation will occur slowly. Accordingly, simplifying the model of financial risk management will help to accelerate the recovery of the BAT corporation after an unpleasant crisis.

Similar Models of Financial Risk Management

Strategic financial management implies the concept that focuses on planning costs and profits by the current policies and market conditions. According to Banker, Mashruwala, and Tripathy10, “whether a firm possesses a sustainable competitive advantage or not requires the examination of the financial performance of firms over time.” To assess the performance of the BAT company, it is possible to consider the activities of some other large corporations with a similar type of business. For example, the British company Imperial Brands engaged in the production of tobacco products, as Filatotchev and Stahl11 the note has a similar management model. Nevertheless, BAT is a much more respected and well-known corporation, and the volume of its products significantly exceeds the Imperial Brands’ quantity of goods.

Another large enterprise that can be compared to BAT is the British company Diageo specializing in the production of alcoholic beverages, that is, excise goods. However, as Vomberg, Homburg, and Bornemann12 remark, Diageo and similar firms should work diligently to achieve worldwide recognition since according to the volume of capitalization of funds, it is almost twice inferior to BAT. It means that British American Tobacco has already managed to significantly exceed the sales volume, which confirms the quality of work carried out even despite the lack of effectiveness of the current financial strategy and temporary difficulties.

Concerning profit, BAT can also be compared to another large British company. It is about SABMiller, the world’s second-largest brewing concern that has been successfully working for almost twenty years. As Richardson, Marsh, and Graefe-Anderson13 claim, the multi-level management process that is typical for this corporation has turned it into one of the world’s largest companies. Despite this success, the BAT management model is also multi-level, and all the departments of the corporation control financial activities by established responsibilities. Moreover, British American Tobacco has an essentially big profit. Therefore, even despite temporary difficulties, BAT is one of the leading British and global companies.

Key Performance Indicators

To effectively monitor the activity, any company usually takes into account several factors that help to assess the success rate of the used strategy. The same factors can be used for BAT as the corporation needs rather accurate data for planning further work and recovering from a temporary crisis. Thus, Finkler et al.14 offer four key performance indicators:

  • Financial perspective.
  • Customer perspective.
  • Internal business perspective.
  • Learning and growth perspective.

All these four indicators can be theoretically justified. For example, a financial perspective helps to assess the current level of profit and costs. If the management devotes more time to this type of planning, it will make it possible to draw up a relatively accurate plan for the distribution of the company’s funds. If BAT specialists had timely done this work, their corporation would hardly have incurred such significant losses and certainly would not be struggling with the crisis at the moment.

A client perspective provides an opportunity to calculate the volume of consumer demand. As it is known, the higher this indicator is, the more successful the company’s activity will be. Consequently, it is required to not only adapt to the current number of clients but also conduct appropriate work to expand the consumer base.

From the internal business perspective, it is possible to correctly study the errors and strengths of the current financial model. Certain changes in the management of a particular production area can be required at any stage of work. Therefore, this approach should undoubtedly be used in BAT to improve its internal order.

Finally, the perspective of learning and growth is the factor that confirms the ability of a particular company’s specialists to learn and professionally self-develop. The more motivated employees are, the greater the chance is that the organization will achieve significant success and deserve recognition. Therefore, the level of qualification and training of employees is the value that should always be increased by any possible means. According to Aebi, Sabato, and Schmid15, risk management will be effective in the organization where the leadership strategically thinks about the way its business is conducted. Therefore, in the case of British American Tobacco, the management should pay attention to the above factors and conduct work based on the outlined perspectives.

Conclusion

Thus, a detailed study of BAT’s features of the financial risk management strategy has shown that such a type of leadership model has some strengths and weaknesses. Based on the conclusions, it can be assumed that certain measures should be aimed at revising the model of activity planning, as well as improving work in the area of development perspectives. Accounting for key performance indicators can provide an opportunity to achieve improvement in the main areas of development since these factors cover most of any company’s activities. The concept of risk management that is applicable in BAT is subject to revision to move from the adaptive model to the planning system when the work analysis is carried out in advance. Appropriate interventions will help British American Tobacco recover from the crisis and continue to occupy the highest positions in the world market.

Bibliography

Aebi, V., Sabato, G., and Schmid, M., ‘Risk management, corporate governance, and bank performance in the financial crisis’, Journal of Banking & Finance, vol. 36, no. 12, 2012, pp. 3213-3226.

Almeida, H., Hankins, K.W., and Williams, R., ‘Risk management with supply contracts’, The Review of Financial Studies, vol. 30, no. 12, 2017, pp. 4179-4215.

Banker, R.D., Mashruwala, R., and Tripathy, A., ‘Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy?’, Management Decision, vol. 52, no, 5, 2014, pp. 872 – 896.

British American Tobacco, Share price data, Web.

Bromiley, P. et al., ‘Enterprise Risk Management: Review, Critique, and Research Directions’, Long Range Planning, vol. 48, no. 4, 2015, pp. 265-276.

Brown, B.S., and Conrad, J., ‘The Effects of Derivatives on Firm Risk and Value’, Journal of Financial and Quantitative Analysis, vol. 46, no. 4, 2011, pp.967-999.

Chan, N.H., and Wong, H.Y., Simulation Techniques in Financial Risk Management, 2nd edn., Hoboken, NJ, John Wiley & Sons, 2015.

Filatotchev, I., and Stahl, G.K., ‘Towards Transnational CSR. Corporate Social Responsibility Approaches and Governance Solutions for Multinational Corporations’, Organizational Dynamics, vol. 44, no. 2, 2015, pp. 121-129.

Finkler, S.A. et al., Financial Management for Public, Health, and Not-for-Profit Organizations, 5th edn., Thousand Oaks, CA, Sage Publications, 2016.

Gordon, L.A., Loeb, M.P., and Tseng, C.Y., ‘Enterprise risk management and firm performance: a contingency perspective’, Journal of Accounting and Public Policy, vol. 28, no. 4, 2009, pp.301-327.

Jaakko, A., and Henrikki, T., ‘Creating Novel Consumer Value vs. Capturing Value: Strategic Emphases and Financial Performance Implications’, Journal of Business Research, vol. 66, no. 5, 2013, pp. 593–602.

Karadag, H., ‘Financial Management Challenges in Small and Medium-Sized Enterprises: A Strategic Management Approach’, Emerging Markets Journal, vol. 5, no. 1, 2015, pp. 26-40.

Richardson, W.D., Marsh, J.S., and Graefe-Anderson, R., ‘AB InBev’s offer for SABMiller (A): pricey or practical?’, Business Case Journal, vol. 24, no. 2, 2017, pp. 1-11.

Theriou, N.G., ‘Strategic Management Process and the Importance of Structured Formality, Financial and Non-Financial Information’, European Research Studies, vol. 18, no. 2, 2015, pp. 3-27.

Vomberg, A., Homburg, C., and Bornemann, T., ‘Talented people and strong brands: the contribution of human capital and brand equity to firm value’, Strategic Management Journal, vol. 36, no, 13, 2015, pp. 2122-2131.

Footnotes

  1. British American Tobacco, Share price data, Web.
  2. L.A. Gordon, M.P. Loeb and C.Y. Tseng, ‘Enterprise Risk Management and Firm Performance: A Contingency Perspective’, Journal of Accounting and Public Policy, vol. 28, no. 4, 2009, p. 307.
  3. N.H. Chan and H.Y. Wong, Simulation Techniques in Financial Risk Management, 2nd edn., Hoboken, NJ, John Wiley & Sons, 2015, p. 91.
  4. A. Jaakko and T. Henrikki, ‘Creating Novel Consumer Value vs. Capturing Value: Strategic Emphases and Financial Performance Implications’, Journal of Business Research, vol. 66, no. 5, 2013, p. 596.
  5. P. Bromiley et al., ‘Enterprise Risk Management: Review, Critique, and Research Directions’, Long Range Planning, vol. 48, no. 4, 2015, p. 268.
  6. H. Almeida, K.W. Hankins and R. Williams, ‘Risk Management with Supply Contracts’, The Review of Financial Studies, vol. 30, no. 12, 2017, p. 4182.
  7. B.S. Brown and J. Conrad, ‘The Effects of Derivatives on Firm Risk and Value’, Journal of Financial and Quantitative Analysis, vol. 46, no. 4, 2011, p. 974.
  8. H. Karadag, ‘Financial Management Challenges in Small and Medium-Sized Enterprises: A Strategic Management Approach’, Emerging Markets Journal, vol. 5, no. 1, 2015, p. 28.
  9. N.G. Theriou, ‘Strategic Management Process and the Importance of Structured Formality, Financial and Non-Financial Information’, European Research Studies, vol. 18, no. 2, 2015, p. 3.
  10. R.D. Banker, R. Mashruwala and A. Tripathy, ‘Does a Differentiation Strategy Lead to More Sustainable Financial Performance than a Cost Leadership Strategy?’, Management Decision, vol. 52, no, 5, 2014, p. 873.
  11. I. Filatotchev and G.K. Stahl, ‘Towards Transnational CSR. Corporate Social Responsibility Approaches and Governance Solutions for Multinational Corporations’, Organizational Dynamics, vol. 44, no. 2, 2015, p. 124.
  12. A. Vomberg, C. Homburg and T. Bornemann, ‘Talented People and Strong Brands: The Contribution of Human Capital and Brand Equity to Firm Value’, Strategic Management Journal, vol. 36, no, 13, 2015, p. 2125.
  13. W.D. Richardson, J.S. Marsh, and R. Graefe-Anderson, ‘AB InBev’s Offer for SABMiller (A): Pricey or Practical?’, Business Case Journal, vol. 24, no. 2, 2017, p. 2.
  14. S.A. Finkler et al., Financial Management for Public, Health, and Not-for-Profit Organizations, 5th edn., Thousand Oaks, CA, Sage Publications, 2016, p. 276.
  15. V. Aebi, G. Sabato and Schmid, M., ‘Risk Management, Corporate Governance, and Bank Performance in the Financial Crisis’, Journal of Banking & Finance, vol. 36, no. 12, 2012, p. 3215.