Toyota is the most efficient and renowned organization involved in manufacturing and selling automobiles all over the world and also known for providing financial services to its customers. The company is known for its car models like Camry, Corolla, lexus, though, Toyota entered the automobile industry after General motors and Ford but it eventually became the major player in the industry by setting the new standards by providing better services to its customers. Toyota like its competitors is also exposed to certain market risks such as fluctuation in the currency rates, interest rates, and variations in other commodities and equities values.
The automotive segment of Toyota motor company is involved in designing, manufacturing and assembling passenger cars as well as other recreational and heavy vehicles. While on the other hand, the financial segment provides the leasing facilities to dealers and customers and other services include the designing and manufacturing of customized intelligent transport systems, advanced transportation systems and logistics systems. Toyota has gained the reputation of best brands in the auto industry by selling 7.8 millions cars worldwide in 2009 that constituted almost 16.7% of overall market share but in 2010, the Toyota company's recall shattered the overall growth of the company when investigators determined that the entrapment floor mats in the gas pedal actually caused the unintended acceleration that resulted in relatively recall of 55,000 vehicles but the same problem reappeared when the investigation of lexus car accident revealed that the same problem existed and caused the death of four people. That made Toyota to issue recall to fix the defected pedals
DEFINING RISK AND ITS CAUSES
The most important component of any innovation within an organization is the risk factor and by taking risks only the innovative ideas become a reality, so risk can be described as a creative as well as the accelerating force. Taking risk within an organization can be better understood by Gelb's explanation as he says, "Taking risk is simply the difference between one's reach and his grasp" (Gelb, 1998). While on the other hand, discussions of risk management theories focus more on risk and other factors rather than its management, as how to measure the values at risk should be given more importance in order to implement the risk management strategies in an effective manner rather than concentrating on conflicts among the shareholders, investors, creditor and managers. The most effective and healthy risk management framework can be defined as a framework that avoids the three basic fallacies about taking risk and these are as follows:
Risk either provides an opportunity or a threat. In other words, taking risk is not always bad.
Some risks should be avoided as well as eliminated at any costs
Playing it safe when to choose between certainty and uncertainty, especially when uncertainty has more potential threat
Discussion on risk management strategies focus more on defining risk as a factor rather than its management processes. The hazards denotes a phenomenon having increased level of potential to cause harm to physical property, life or other resources.
Corporate Risk Management
Corporate risk management can be described as the management of organizational processes as well as its operational activities by maintaining the corporation's portfolio of potential threats and risks involved that may have an adverse effect on overall the economic as well as financial growth of any organization. Corporate risk management strategies are more focused on the selection of financial tools in order to maintain any organization's cash flows, while on the other hand, the other path of corporate risk management activities deals with the organization's decision making processes as well as the insurance products that are used to preserve the corporation's resources from any accidental losses. A number of policies are designed and implemented while keep in view the insurance perspective of an organizations in an effort to minimize the financial risks and losses. Corporate risk management policies are not only creating awareness among organizations, but also increasing the focus of insurers on the ever growing needs of their corporate clients. Corporate risk management strategies have been implemented in an effort to manage the insurable risks, property as well as other liabilities by large corporations but damage to physical property has more downward trend and may be considered as a value at more risk. Insurable risks such as damage to physical property, loss of income and other legal liabilities can be managed by insuring them but with the advent of better risk management strategies, it has been recognized that this is not the only possible solution as insurance provides the source of income to pay for losses but the firm may adopt other internal funding mechanism by setting up a subsidiary insurance company, so the risk could be priced and the premium would be paid to the captive by implementing the formal loss settlement process. While on the other hand, the insurable risks can, further, be controlled:
By minimizing the probabilities of any damage to the physical property
By making effective risk control policies, so this way risk can be minimized or reduced to some extent
By investing in its safety measures, quality control measures, and
By creating awareness about the possible hazards, the firm may reduce the expected value of such losses by complementing insurance and other risk management policies.
Large business corporations like Toyota deals with both pure and speculative risks and hazards that are associated with positive as well as negative consequences because the rate of return shrinks in case of negative consequences which the investors are not ready to accept but by implementing a better corporate risk management system, the share holders may invest in portfolio diversification. The firm may also achieve the same results by reducing the volatility of cash flow by altering its operational as well as its financing policies and also by modifying its compensation structure for its managers. But managers, on the other hand, may have little interest to reduce the corporate overall risk as they may want to separate their managerial performance processes from those of accidental ones. The important factors in any organization's risk management program may include:
By focusing mainly on firm's risk return goals
By clearly identifying and evaluating the organization's potential expenses as well as its financial fluctuation
There should be a balance between the risk control activities as well as loss of income tools
corporate risk management activities should be monitored and reviewed from time to time
In an effort to identify and evaluate the potential losses as to whether these are physical or financial losses, their sources and causes are identified and evaluated and the risk analyst determines the impact of these losses on the overall cash flow of the organization that may also effect on the ability of the firm to generate revenue for its stakeholders.
Loss of income or liquidity risk includes a market liquidity risk as we can see in the case of Toyota's recall of vehicles in 2009 and 2010. And when financial markets may inhibit volatility trends by losing transactions or by the establishment of new transactions to hedge the existing market exposure to liquidity problems or can be better explained as the discounted net present value of the future cash flows because all future cash flows will affect the current net present value of the corporations' assets. Different organizations have different design patterns such as regulatory conflicts of interest, secrecy or lack of participation from all management team members that are directly associated with the failures of corporate risk management system. But these associations can be used effectively to design better risk management practices by implementing an extended process of "Hazard audits" (Toft, 1990). The other most important key area of effective risk management system is the liability or the extent to which the risk management practice should be more or less oriented as the high blame oriented approach is highly controversial with the effective risk management framework because it is based on incentive structures that place strict financial as well as legal liability for risk on any corporate management team who are in best position to implement risk management strategies in order to minimize risk. While on the other hand, the decision making team of any organization should also keep in view the liability or other legal bindings as well, because if the legal liability is not precisely addressed to specific target then the poorly constructed institutional incentive structure may lead to further corporate failures as well as financial losses of any firm in question. Therefore more attention should be paid on making effective incentive structures that aim to support corporate legal bindings that are targeted specifically on insurance premium practices and regulatory practices that have direct impact on the governing bodies within an organizations to lay off sanctions against the undifferentiated decision makers. But there is still no clear indication of where to put more emphasis either on strict legal liabilities or on a non blame approach since failure and near misses are inevitable in an environment where risks and hazards are abundant but contributors to risk management policies argue that more emphasis should be laid on to achieve better understanding and learning from the failure as they occur. Today, corporate organizations are more responsible for providing safety measures to their employees at workplaces and are also liable to provide compensations for injuries or deaths as corporate organizations are subject to same criminal laws as any other individual would be.
There is a close analogy with the interpretation of causes and effects of hazards and risks involved in any situation that affects the overall environment of any corporate organization. The risk control practices may be implemented in order to minimize the expected risk such as :
By completely eliminating the risky environment
By creating an awareness about the risks involved in a particular situation
Or by completely denying access to risky areas
A fundamental change has been witnesses that is known as integrated risk management approach that allows organizations to achieve competitive and strategic advantage by anticipating critical events occurring in near future. The organizations may implement better and optimal solutions to these occurring risk in order to achieve corporate goals rather than concentrating solely on risks and hazards involved. By implementing integrated risk management framework, the organizations seek to establish consistent processes for addressing all kind of critical situations that may affect the overall progress of any large organization.
By the increasing speed of today's business environment, the need for effective risk management system has become an essential need within an organization because the organizations have to react and adapt to ever changing demands of their customers, changes in the global marketplace, continuous advancements in the technological field as well as new governments with their respective agendas, all these factors play an important role and old practices are not enough to manage risk in the current scenario.
There is another category of risk that is non-insurable and does not meet the requirements of insurable risk which as as follows:
an insurable interest can only be an entity or an individually
only similar kind of risks can be insured in any organization
Losses claimed must be accidental
Losses claimed should not be catastrophic for any organization
Occurring loss should be calculated
NON-INSURABLE RISKS
The non-insurable category of risk involves things that are not really risk as risk can be described as an exposure to risks and vulnerabilities. the 'risk' is more concerned with the assessment of the adverse effects of consequences but many scientists disagree with that by saying that the term 'risk' should not be restricted to the mere likelihood of any chance of loss but it is a combination of the probability, frequency and the severity of any occurrence, thus, hazard becomes an integrated component of risk.(Berç Rustem , Melendres Howe, 2002) so it can be said that non-insurable risks are those risks that exceeds the size of insurers to a certain level that the insurer cannot bear such as the example of time of war as the risk cannot be calculated during war. Large corporations such as Toyota also provides effective risk management mechanism to avoid many environmental as well as other financial risks. Environmental risk management is an integral part of Toyota as the management look after all the essential aspects of manufacturing operations and try to evaluate their likelihood and probabilities as well as their negative impacts on the environment. Toyota's risk management system applies different techniques in order to avoid risk such as:
By applying elimination methodologies
By implementing substitution methodologies
By improving their engineering processes
By separating their interfaces with their implementation methods
By monitoring all manufacturing as well as other engineering processes by implementing administrative controls
Or by implementing exclusively extra protective mechanism
Toyota implemented better risk assessment and management strategies in order to meet the expected potential threat to their overall progress as we have witnessed in Toyota's total recall of defective vehicles unlike other corporations that focus more on three particular kinds of risks such as hazards, financial risks and operational risks. But generally speaking, the more dangerous risk than hazards, financial and operational risks are the strategic risk that any business may face during their business time. Strategic risks involve the steps taken that are not appropriate to solve the problems faced at that particular time. For example, when any project fails or customers are diverted to other products by changing their preferences and the overall profit margins of the company are compressed across the entire specific industry, these all are some examples of strategic risks that are non insurable risks. Strategic risks are the most crucial components of any corporate risk management system. There are seven major types of strategic risk that are as follows:
Project feasibility risks
customer response risks
transitional risks
unique competitors risks
Branding risks
industry specific risks
stagnation risks
The potential for all these strategic risks is too high that the financial insurance is considered illegal or may be restricted by public policy. The losses that are considered inevitable also come under the category of non-insurable risks. Corporate risk management strategies have been implemented in an effort to manage the insurable risks, property as well as other liabilities by large corporations but damage to physical property has more downward trend and may be considered as a value at more risk. Risks are considered as inherent in nature in every business while on the other hand, some risks can be avoided if not minimized or completely eliminated by using better risk management practices. Large corporations like Toyota implements better risk management policies in order to maximize their profits, return on investments and overall growth of their organization. The various methods for handling risk and their probabilities that may be used by any organization are as follows:
Risk Avoidance or elimination: any organization may completely avoid the project or product failure by refusing to introduce any new product lines in the marketplace but there are other business costs associated with it.
Risk reduction practices: If risk can not be complete avoided or eliminated then it may be reduced to a certain level. As in the case of defected vehicles, Toyota issued a recall of vehicles in order to reduce the expected risk at minimum level.
Risk avoidance by further improvement and proper planning: a manufacturer like Toyota may reduce the expected risk by careful planning and properly testing the manufacturing product in order to gain customer satisfaction.
By improving operational performance of the products already in their development cycle
A company must fulfill its commitment to the existing customers by providing better customer services
A company needs to identify control activities in an effort to reduce risk and to evaluate the costs associated with these control activities
All processes of risk management must be carefully monitored so that better decisions must be made to reduce the risk probabilities and the firm may refine its risk assessment as well as it responses to specific events
Conclusion
The most important component of any innovation within an organization is the risk factor and by taking risks only the innovative ideas become a reality, so risk can be described as a creative as well as the accelerating force. Corporate risk management strategies have been implemented in an effort to manage the insurable risks, property as well as other liabilities by large corporations but damage to physical property has more downward trend and may be considered as a value at more risk. Insurable risks such as damage to physical property, loss of income and other legal liabilities can be managed by insuring them. The important factors in any organization's risk management program may include:
1.By focusing mainly on firm's risk return goals
2. By clearly identifying and evaluating the organization's potential expenses as well as its financial fluctuation
3. There should be a balance between the risk control activities as well as loss of income tools
4. corporate risk management activities should be monitored and reviewed from time to time
The more dangerous risk than hazards, financial and operational risks are the strategic risk that any business may face during their business time. Strategic risks involve the steps taken that are not appropriate to solve the problems faced at that particular time. By the increasing speed of today's business environment, the need for effective risk management system has become an essential need within an organization because the organizations have to react and adapt to ever changing demands of their customers, changes in the global marketplace, continuous advancements in the technological field as well as new governments with their respective agendas, all these factors play an important role and old practices are not enough to manage risk in the current scenario. The most effective and healthy risk management framework can be defined as a framework that avoids the three basic fallacies about taking risk and these are as follows:
Risk either provides an opportunity or a threat. In other words, taking risk is not always bad.
Some risks should be avoided as well as eliminated at any costs
Playing it safe when to choose between certainty and uncertainty, especially when uncertainty has more potential threat
