Introduction:

The presence of risk in the case of business organizations and relevant activities is a commonly accepted notion and reflects on the requirements for establishing appropriate risk functions in an organization. 

The frameworks for corporate governance are primarily responsible for providing structures that can ensure accountability of the management with respect to the disparities between ownership and control (Beamish & Lupton, 2016). However, these structures have not been able to restrict the probabilities of large scale corporate disasters. Therefore, these factors were responsible for the measures followed by regulatory bodies including diverse combination of best practice recommendations and requirements for focusing on significance of internal control systems in order to improve accountability alongside depreciating the risk of corporate failure. 

The following report focuses on the development of a viable risk management strategy as a response to the losses incurred by Tesco Plc in 2015 that amounted to 6.4 billion pounds. As per Bottery (2013), the primary aspects addressed in this assessment include evaluation of principal risks and uncertainty, an evaluation of the background of the event and proposal for establishing risk management structures in Tesco Plc. The emphasis on identification of principal risk is supported with references to specific controls and resolving factors that can be used for addressing the risks (Bottery, 2013).  

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Risk management:

The reflection on literature pertaining to risk management is particularly associated with the implications of consistent evolution of the definition of risk and perception of risk management. In the traditional context, risk was perceived as an outcome of natural causes which are beyond the scope of identification or management. However, Bryce said that the existing paradigms for risk management are particularly focused on quantification of risk through the use of modern and scientific thinking that can assist in improving risk management through the use of protection and avoidance strategies (Bryce, 2017). Therefore risk management was profoundly associated with the diffusion of responsibility for detrimental consequences of risk alongside implications of accountability for demonstrating efforts for risk management. It is also imperative to observe the drastic transformation in the paradigms pertaining to organizational approaches for risk management (Christensen & Clark, 2017). 

One of the prominent highlights that are identified in the evolution of risk management is its transformation from a transaction and insurance based function to a wider scope comprising of emphasis on accomplishing strategic objectives and corporate governance. As per Cotter & Fritzsche (2014), risk management was conventionally associated with the financial instruments in order to control funding and transaction risks (Cotter & Fritzsche, 2014). However, the scope of risk management has widened with the inclusion of the aspects of regulatory compliance, supply chain management, corporate reputation, general operational activities, employees and health and safety. 

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According to Dagnino (2012), the second commonly noted transformation in risk management paradigms is identified in the broader definition of risk that subsequently leads to consideration of risk management as a complementary element for decision making for enhancing strategic performance of the business (Dagnino, 2012). These paradigm shifts are considered as the notable contributions to the definition of business risk suggesting the uncertainty pertaining to benefits that can be obtained by an organization through pursuing its strategic approaches and objectives. Thus enterprise risk management was developed as a holistic approach comprising of broader definitions of risk and recognizing he governance and strategic roles implied by risk management (Dey & Jana, 2016). 

The definition of enterprise risk management refers to various distinct components such as the role of board of directors in providing the initial platform of developing a risk management process alongside the application of the process throughout the organization with the channels of line management. Enterprise risk management also comprises of significant references to the inclusion of all probable events that could influence the achievement of objectives. Another promising highlight that can be identified in context of ERM is the implication for restricting risk in the limitations of risk tolerance alongside facilitating the required assurance in this context. 

Evolution Of Risk Management

Considering the evolution of risk management perspectives, it is essential to focus on the necessity of developing a comprehensive strategy that would help in identification, measurement, monitoring and control over a wide assortment of risk vulnerabilities. The contemporary risk management perspectives are also explicitly associated with the requirements for communicating the risk policy imperatives to employees at various levels in the organization alongside promulgating a culture of risk awareness (Frynas & Mellahi, 2015). 

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As per Gamble & Thompson (2014), enterprise risk management is a formidable responsibility for managers and is responsible for presenting notable challenges for real time implementation of the processes. The specific principle associated with ERM is particularly identified in the integration of enterprise risk management in the existing performance management and control systems (Gamble & Thompson, 2014). 

Furthermore, it is also responsible for proliferating major issues between various parties associated with the organization such as risk management and internal auditors albeit with the minimal conflict between objectives of organizational control systems and ERM. One of the notable control and performance management system used in contemporary organizations is the balanced scorecard. 

Balanced scorecard:

The balanced scorecard is a notable control system that is derived from Porter’s definition of strategy as a measure to address competitive forces in an industry. The most prominent advantage of using the balanced scorecard is identified in the consideration of various non-financial factors rather than focusing only on financial measures of strategic performance. The consideration of a balanced scorecard as a feed-forward control system also proves its capabilities for performance measurement. 

The balanced scorecard emphasises on four significant aspects that are required by an organization for obtaining an improvement in strategic performance (Hamel, 2011). The four components could be outlined as financial, learning and growth, customers and internal business processes which are interrelated on the basis of cause and effect relationship among the performance in the individual areas and strategic outcomes for an organization. The example for the cause and effect relationship could be identified in the initiatives for organizational learning and growth that subsequently lead to improvement of internal business processes thereby ensuring customer satisfaction. This would be responsible for improving the levels of financial performance (Heldman, 2010). 

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It is imperative to note that the illustration of operational behaviour targets could contribute to improvement in strategic performance. Balanced scorecard is also responsible for ensuring the specification of the corporate strategy alongside factors that can lead to strategic success. However, balanced scorecard is also subject to various criticisms on the grounds of lack of classification of strategic objectives according to the precedents of critical actions and critical success factors and assumption of existing communication systems that are necessary for conveying strategic objectives and approaches effectively throughout the organization. On the contrary, the balanced scorecard can be accounted as a prolific instrument for integrating strategy with the daily activities of the organization that addresses a major setback encountered in risk management. 

Tesco Plc’s risk management:

The reputation of Tesco as the leading retailer in the UK market was subject to uncertainties owing to the industry price war which was initiated by the competitors such as Lidl and Aldi. The company faced a substantial 60% drop in its trading profits for the financial year 2014-2015 which was primarily due to the formidable competition alongside detrimental accounting discrepancies. 

In view of such as corporate scandal which was the highlight of the British corporate industry, Hubbard, Rice & Galvin said that Tesco aimed to identify the notable risks and uncertainties encountered by the company (Hubbard, Rice & Galvin, 2014). The risks were profoundly based on their impact on the performance of Tesco, the future opportunities and the ability for accomplishing strategic priorities. The risk management strategy followed by Tesco Plc is particularly implemented across the complete organizational framework comprising of various business units of the company. 

The business units are required to undertake frequent risk assessments in order to recognize and evaluate the principal risks as well as market specific risks inherent in the markets where Tesco operates. The strategy implies prominent advantage from the perspective of consistency as well as risk reporting through following a bottom-up approach (Jackson, 2013). Tesco also considered enhancement of risk management competences and activities through revision of processes for evaluation and reporting of principal risks. The organization also considers the influence of external and internal business environment on determining risks in its risk management framework. 

One of the prominent highlights of development in the risk process of Tesco can be identified in the inclusion of liquidity risk (McKiernan, 1997). In event of the accounting scandal encountered by Tesco, it is inevitable to present an illustration of the operational and financial risks faced by the business in order to provide viable recommendations for reforms in the existing risk process adopted by Tesco. The following section of the report estimates the various principal risks and uncertainties which should be included in the risk management strategy recommendations for the CEO of Tesco Plc.

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Risks and uncertainties for Tesco:

According to Stead & Stead (2014), the practical observation of risks and uncertainties for Tesco could help in creating a comprehensive risk management framework that could prioritize risks and improve tolerance of the business to the same (Stead & Stead, 2014). The specific operational aspects in Tesco which can be accounted as prominent risks include competition and market, safety, regulatory and compliance, customer proposition, liquidity, technology, brand reputation and trust, transformation of economic model, people and data security and data privacy. 

Tesco has established three specific priorities in its risk management framework for resolving the negative implications of risks faced by the business (Morden, 2016). The priorities could be identified in protection of the balance sheet, rebuilding trust and transparency and regaining competitiveness. The illustration of individual risk levels in various operational aspects of the organization could be accounted as prolific contributions to the development of risk management strategy with feasible recommendations (Tattam, 2017). 

First of all, Tesco Plc has to ascertain the risks with respect to customer proposition as the accounting scandal can lead to depreciation of trust among customers thereby leading to loss of competitive edge in the industry. The insufficiency depicted by the organization in listening to customers for ascertaining the changing trends in the marketplace could be assumed as a formidable risk in the aftermath of the 6.4 billion pound loss. The reasonable approach to address this risk is to identify customer needs for obtaining credible insights for decision making processes (Scholes, et al., 2014). 

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The recommended strategy for Tesco in this case would be directed towards obtaining customer insights thereby leading to proliferation of customer-centric strategies across various business units and markets in which Tesco operates. The organization should also consider the promotion of customer service through training of staff to interact with customers thereby leading to a promising customer experience that can lead to strategic success in managing the risks of customer performance.

The transformation of the economic model of Tesco is also liable to pose formidable risks for the business and could be responsible for restrictions on response to changes in external economic environment. The transformation is also characterized by slow progress in terms of maintaining the operating margin. This factor could be accounted as a major setback for Tesco Plc owing to the lack of substantial funds to address business objectives thereby leading to detrimental impacts on shareholder and business confidence. 

The transformation of the business is appropriate for accomplishing improvement and strategic performance albeit with notable concerns for uncertainty arising from the new economic model. The recommended strategy for risk management in this case would be focused on introducing enterprise wide transformation across the areas of data strategy, organizational design, supplier relationships, competences, people and cost reduction. The specific examples of periodic sales margin planning and forecasting should be reviewed by the financial functions of the organization and its business units. 

Liquidity

Liquidity could be considered as the most crucial risk factor for Tesco Plc in response to the incident of accounting scandal wherein the organization had to incur a formidable loss. The risk factor could be investigated to identify that the performance of the business is not sufficient for generating cash according to expectations alongside notable references towards restrictions on access to funding facilities or marketing as well as setbacks in operational liquidity management (Trigeorgis & Reuer, 2017). 

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The outcome of the risk factor from the aspect of liquidity could be identified on the financial performance as well as prospects for continuing provision of funds for operational activities. The recommended strategic options for Tesco to address the liquidity risk can be identified in the review of funding plan and crucial elements that shall be supported by key financial metrics and liquidity updates. Cost control measures could be assumed as productive approaches for supporting activities implemented for reduction of debt levels. Another prominent factor that must be emphasized in the strategy for addressing the review of financially non-related units such as Tesco Bank in terms of risk tolerance that can provide clear impression of optimum ranges, tolerance limits, key risks and alert limits. 

Final Aspect

The final aspect which must be focused on by Tesco plc to respond to the incident of major financial loss is vested in competition and markets since the organization does not have an adequately productive and coherent strategy that can address changes in markets and competitors. The challenge of varying pressure across different markets as well as the price war spiked by the challenges of competitors should be assumed as a priority risk factor by the management of Tesco Plc. 

The recommendations for the management in order to address this risk would have to be vested in consistent development and reforms in strategic direction. The management should consistently make use of competitor analysis and market research reports for identifying market trends as well as development of suitable propositions. It is also imperative for the organization to ensure close alignment with local governments, trade associations and policy makers in various markets for ensuring credibility of the initiatives for risk management (Wilson, 2014).

Therefore, it can be clearly observed that the principal risks for Tesco can be aligned with the four components of the balanced scorecard such as customer proposition is related to customer component. Transformation of the economic model could be related to internal business processes and liquidity risk could be associated with the financial component of balanced scorecard. The element of risk in competition and markets could be related to the scope of learning based interventions through market research reports and competitor analysis. However, the recommendations for risk management strategy would have to be supported by description of the interplay between risk management and strategy.              

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Strategy and risk management:

The effectiveness of the risk management strategy is not determined from the accomplishment of established targets in context of people, processes and customers. It can be imperatively observed that risk management controls should act as supporting entities for performance targets rather than conflicting with them. 

The revision of the operating model of Tesco in order to address risks that were responsible for the trading loss would be responsible for inducing conflicts among performance targets to recover funding for operations as well as risk management imperatives for establishing controls over sourcing of funds. Therefore, Tesco has to establish a formidable risk management process that would imply notable references to the elements of risk response, risk assessment and risk reporting. Risk assessment would be helpful for the management to establish risk tolerance and recognition of risks and is followed by risk reporting with support of the monitoring of risks by internal audit and line management (Hubbard, Rice & Galvin, 2014). The responses for risk and control mechanisms are vested in the line management which would be subjected to internal audit for evaluation of the risk systems employed by Tesco. Internal audit is a promising resource that can facilitate cognizable information pertaining to discrepancies in risk controls and potential for improvement. 

Corporate Strategy of Tesco

The corporate strategy of Tesco outlined by the senior management is reviewed on the grounds of market knowledge and information pertaining to shareholder requirement. The reflection on the tradeoffs between risk and returns would also be accounted as a feasible recommendation for risk management of Tesco Plc. The line management is responsible for design and implementation of controls in accordance to the level of risk tolerance specified in the corporate strategy of the organization. It is essential to observe the significance of internal audit in determining the feasibility of the controls through process mapping that helps in comparing risk exposure and risk tolerance level specified by the Board (Gamble & Thompson, 2014). 

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Strategic Approach for Risk Management

The strategic approach for risk management followed in the case of Tesco Plc would also include references to measurement of the efficiency of controls implemented in various business units of the organization. The line managers as well as CEO should take responsibility for using performance measures to determine whether the strategy for risk management assumed in the company is successful. Therefore, the need for operationally based risk management could be supported by references to risk based internal audits that are focused specifically on anticipated risk areas. 

The identification of the risk areas should be largely associated with the influence of managerial experience as support for risk modelling that can lead to precise interpretation of risks (Cotter & Fritzsche, 2014). Therefore, the strategy for risk management of Tesco to prevent further trading losses should comprise of internal audit that has to be executed on a frequent periodic basis. The degree of controls is another prominent factor that shall be taken into account by Tesco for strategic efficiency in risk management since it could assist in redirecting audit resources for monitoring of high risk areas for decision making purposes. The maintenance of the principal risk register should be complemented with the inclusion of colour coding system for the risks that can be subject to change according to the priorities of the organization. This factor would provide the management with opportunities to obtain a categorized impression of the risks as well as contribute to efficient reporting. Apart from internal audit, the risk management strategy should focus on establishing specific communication lines for risk control. 

Communication is perceived as a necessary element due to the requirements for communicating the risk objectives across all levels of the organization (Scholes, et al., 2014). Communication framework is also responsible to implement relevant controls in operations thereby implying that Tesco Plc requires a comprehensive communications framework that can help the staff in understanding the strategic objectives of risk management and performance measures associated with the same. Communication systems are considered as crucial entities for preventing conflict between risk controls and performance of strategic objectives outlined by Tesco Plc.

Conclusion:

The report presented a coherent strategic approach for risk management for Tesco Plc with respect to the 6.4 billion pound trading loss encountered by the organization. The strategic recommendations placed in the report were derived from a critical reflection on available literature pertaining to risk management and the principal risks encountered by Tesco. The report also illustrated the interrelationship between strategy and risk management through emphasizing on the components of communication and internal audit.     

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