Individual Journal Article Analysis Report Task Ibus 1000.

TABLE OF CONTENTS

Objective        2

Risk and uncertainties        2-3

The Miller’s three categorizations of uncertainties        3-6

How MNC responses to uncertainties        6-8

Conclusion        8

Reference        9-10

OBJECTIVE

This analysis report is based on the article work “A Framework for Integrated Risk Management in International Business” written by K.D Miller in 1992. This report will focus on the understanding of Risk and differentiate between Risk and Uncertainty. The following section briefly describes the three major categories of Uncertainties faced by the international firms today. The third section will discuss how can multinational corporations managing their Risk and Uncertainty with three proper responses.

RISK AND UNCERTAINTY

The definition of risk is generally associated with the result of an action to be taken or not taken, in a specific situation which may result in gain or loss. In the business, strategic management field, the term “risk” can be perceived in many ways.

The principal uses of the term are about the unexpected or negative variation in business performance variables such as revenues, costs, profit, market share, and so forth. The term “Downside Risk” is one of the examples referring to this usage. The downside risk is the potential losses that may occur if a particular investment position is taken (David L. Scott. 2003).

The label “risk” is usually also assigned to the company's external or internal factors that affect the risk experienced by the firm. The source of risk, in this case, is the certain reference of the term “risk.” The terms such as "Political risk" and "competitive risk" are the examples of risk referring to risk sources, which connect specific uncertain environmental circumstances to the unpredictability incorporation performance.

The term “uncertainty” can be defined by strategic management and organization theory as the unpredictability, which affects the firm performance through environmental or organizational variables, or the lack of information relate to these variables. The shock from the external environment can raise the uncertainty of a company, as well as an unforeseeable behavioral choice, or a combination of both.

Isolate from any other context; risk has a strong relationship with uncertainty. However, there’re a few critical differences between these two terms in strategic management theory.  As Dr. Miller addressed in his article that risk is referred to unanticipated and negative alteration or the internal and external factors that affect the risk experienced by the company. Which indicates that risk is the situation of winning or losing something worthwhile, risk can be quantified and measured by certain theoretical models. With necessary and proper actions, risk can be minimized. On the other hand, uncertainty is the unpredictability of environmental or organizational variables with lacks of knowledge. Thus, it cannot be quantified in any terms through a theoretical model, and it is impossible to minimize as the future is unpredictable.

THE MILLER’S THREE CATEGORIZATIONS OF THE UNCERTAINTIES

Miller proposed that the managerial uncertainties can be classified in a threefold categorization. A Strategic manager may recognize as uncertain (1) general environment, (2) industry, and (3) firm-specific variables. Each of these categories possesses many uncertain elements. General environmental uncertainties include political instability, government policy instability, macroeconomic uncertainties, social uncertainties, and nature uncertainties. Industry uncertainties encompass input market, product market, competitive, and technological uncertainties. The third category, firm-specific uncertainties, includes uncertainties regarding operations, liability, research, and development (Miller, Kent D., 1993).

    Miller’s hypothesis in his article suggested that managers' perceptions of environmental uncertainties differ across nations and industries in a manner consistent with the levels of the analysis indicated in the article. Which is, political, government policy, and macroeconomic uncertainties were anticipated to differentiate across countries but not across industries. Political uncertainty indicates the unpredictability of changes in political regimes (Shubik, M. 1983; Ting, W. 1988). For example, an outbreak of war or military coup d’état. However, Policy uncertainty indicates the instability in government policies that have a significant impact on the business community (Ting, W. 1988). Relevant examples are money devaluations or reforms, price controls, changes in the trade barriers. To the national social influences and sovereign choice, both political and policy changes are subjective and should discriminate from one country to another.

Macroeconomic uncertainty encompasses variation in the level of economic activity and prices. To the extent that national product and financial markets are segmented, managers operating multinational should have acknowledged distinct levels of macroeconomic uncertainty.

Input market uncertainty in industry uncertainties categories regards the industry-level uncertainties encompass the result of sufficient quantities and qualities of inputs into the production process. Input market uncertainty may arise from either change in producer supplying resources or variations in other users' demand for the input. Uncertainty surrounding the result of inputs is likely to take place in a situation where there are only a few input suppliers. For instance, during 2017, Samsung became one of the few suppliers in the capability of producing memory chips for the digital industry. Therefore, with the limit competitions in the market, Samsung successfully manipulated the price and quantity of memory chips, causing some uncertain variations in the computer industry.

Product market uncertainty refers to unanticipated changes in the demand for an industry's output. Such shifts may be because of changes in consumer preference or the availability of substitute goods. The lack of availability of complementary goods, such as replacement parts for cars, can also negatively affect the market demand.

The firm uncertainty is the third set of uncertainty which associated with firm-specific factors. Operation uncertainty in this categorization has three subcategories: labor uncertainty, firm-specific input supply uncertainty, and production uncertainty. Labor uncertainties indicate the changes in the workers’ productivity, such as labor unrest or a strike against the firm. The production uncertainty includes the failure of machines which would negatively affect in output and many factors such as working accident, or a disturb in the production process.

Liability uncertainties are associated with unanticipated adverse effects because of the production or consumption of a firm's product. While the product liability, uncertainty regards to unexpected negative effects of the use of a product that can result in lawsuits against the producer.

    Research and development uncertainty is referring to the relations between a firm’s R&D investment and the output of a new product. When a company invests in R&D, the time required to complete the project is unknown as well as the output of the product in the future.

HOW MNC RESPONSES TO RISK AND UNCERTAINTIES

Financial risk management and strategic risk management are the two major responses for multinational corporations to use in managing exposure to risks and uncertainties.

The financial management, risk has many dimensions and involves many types of decisions. The more critical decisions are the choice among alternative portfolios, whether to change a portfolio or take a new position, whether and how to hedge risks (Dowd, Kevin.,1999). The conventional methods of financial risk reduction are purchasing insurance and buying and selling financial instruments such as forward contract and future contract. A forward or futures contract the seller of the business contract deliver a specific amount of products or assets at some particular time in the future. With the ability to lock in a fixed price for certain goods, which is vital risk-reduction features in the forward contract, both the seller and buyer can avoid the risks of the foreign exchange. The multinational corporations wide adopt these financial hedges.