Research Korner: Risk Management

London Olympics

London Olympics   Introduction Background   London 2012 was the successful bid for the 2012 Summer Games, to be held in London with most events taking place in Stratford, Newham.  The British Olympic Association had been working on the bid since 1997.  In December 2000 the report was shown to Government ministers.  After the failure of three consecutive bids in 1992 (Birmingham), 1996, and 2000 (Manchester), London was the city that had a chance of being selected by the International Olympic Committee when put up against other world cities in a competitive bidding process.    Definition of the project             The main areas for project definition and development would include that following: ·         Development proposals in the Olympic Zone that needs to be refined.  This is in discussion with the local authorities, in order that they are aligned with their regeneration plans to the maximum advantage of both, and form the basis of further quantification of the wider benefits.  ·         The legacy uses for key Olympic venues like the stadium need to be secured. ·         A land acquisition has to be further developed ready for immediate implementation if a decision is made to bid. ·         The opportunities for maximizing tourism potential from both the bid and the Games need to be explored ·         The attribution of costs to the various agencies and public sector budgets should be determined among other things in order to establish more precisely what public expenditure is attributable to the Olympics and what would happen anyway, and the proportions of income and expenditure that will accrue to LOCOG and to the taxpayer respectively.   Defining Project and its Environment   Main players and project environment             The proposals for the London Olympics Institute have been developed jointly by a consortium of partner organizations including the Department for Culture, Media and Sport, Department for Education and Skills, Department of Health, NHS, London Higher, Sport England, the English Institute of Sport and UK Sport, working closely with local authorities and agencies in East and South East London and the British Olympic Association.  These organizations, and others including the National Endowment for Science, Technology and the Arts, British Council, Arts Council England and Loughborough University have all produced a statement of support, committing themselves to helping London 2012 to develop and promote the London Olympic Institute (). The point of this event is to bring focus onto Project Management as one of the principal keys to regenerating Britain in terms of its construction and IT infrastructure, its culture and its sense of pride.  It is also a specific response to the question “What can industry do for the London 2012 Olympic bid?”  The bid is a major regeneration opportunity for Britain currently.               The event is being led by the Royal Institution of Chartered Surveyors Project Management Faculty and the Engineering Project Management Forum (EPMF) and will attract an audience of professionals all wishing to network, learn, exhibit, entertain and support the bid.  Many members of the institutions that belong to EPMF are professionals who will be directly involved with work arising from a successful bid, notably from the Stanford Regeneration.  There is general agreement that a collective show of support will make a solid contribution to a successful bid.  The size and shape of the Royal Albert Hall allows presentations to be spectacularly illustrated.  The Presentation Themes are all essential for a successful project and for a successful bid.  In addition, a Best of British trade exhibition will run during the day providing a major marketing opportunity to participants () Project team matrix structure   Project conception             The aim of Vision London was to create an opportunity for young people in Creative Partnerships London East schools to engage with the concept of the Olympic Festival and what a successful bid would mean for London. Feasibility and risk management               The cost and revenues included in the analysis are the best estimates based on the information currently available to us.  In the absence of agreed project objectives and outputs and an apportionment of obligations and responsibilities between the various agencies, this evaluation is a hybrid between a cash flow business plan and a conventional cost benefit analysis. Attributable costs have been built up and the incomes for bidding, preparing and staging the Games, made provision for risk, and estimated the residual values of the assets created.  This produces a total direct cash flow for LOCOG and all the public sector agencies that ultimately must provide the investment and the guarantees.  From a commercial point of view, this would produce a cash deficit (or surplus) if, hypothetically, one agency was responsible for everything.  The additional benefits, both quantified and unquantified, must justify the funding gap and the risk ().   Risk management   Sensitivities to estimate overall risk is used in the absence of a detailed risk assessment.  The sensitivity analysis shows the financial deficit as sensitive both to substantial cost over-run and to a lesser extent to a substantial reduction in media income.  It would also be sensitive to a greatly reduced ticket income, but it would be very unlikely that a London Olympics would fail to sell the number of tickets assumed.  The risk assumption used in Figure S1 is that all bidding and staging costs will be 5% higher than estimated and that capital costs will be 30-50% higher than estimated in the last three years before the Games as the deadline for completion approaches.  These provisions total ₤109 million, making a total deficit of ₤494 million.  A provision for reduced media income is not included because it is just likely to be higher than estimated as lower.  The opportunity therefore cancels out the risk.    There are also risks attached to implementation of the physical and transport proposals, to the technology requirements of the Games, and to security (including the threat of a major terrorist attack a year or two before the Games which could impact not only on cost but on ticket revenues and tourism benefits).  These risks will need to be taken into account in the decision whether or not to bid, but should be set against the opportunities to avoid or mitigate risk through management, anticipation, and planning.   Figure S1 – Summary Financial Analysis (NPV discounted at 6%)   (Expressed in ₤m)                        Expenditure   Income                     Surplus/deficit   Bidding for Games                                13                                 7                                  -6 Operating account for staging                779                               864                               +85 the Games Elite sport development                                     167                               0                                  -167 programme Capital cost of infrastructure                  403                               0                                  -403 and facilities Land purchase and residential                325                               431                               +106 Value Cash flow balance                                1,687                            1302                             -385 Provision for risk                                   109                               -                                   -109 Cash flow including risk                      1,796                            1302                             -494 (Source: )   Implementation operation and termination             It is critically important that implementation agencies exist with sufficient powers and resources to ensure that all the preparations are in place in time for 2012, and that the potentially very expensive risks are managed so that they are reduced to a minimum.  These agencies are crucial: (1) for a credible bid; (2) for staging the Games if the bid is successful; (c) for managing costs and risks; and (d) for securing the wider benefits.               Without implementation agencies there can be no Olympic Games, and without effective agencies, national and London prestige is at risk.  If the management of the event falls short of what is expected, the memory will be sour rather than positive.  If concentration of sufficient powers and resources in agencies with an Olympic mission is not politically acceptable, it would be better not to bid for the Games ().               The Olympic Delivery Authority (ODA) will ensure delivery of the physical infrastructure for the Games, including the construction of the new venues.  To help do this, it will be granted special powers to purchase land, compulsory of necessarily, and to grant detailed planning permissions in the Olympic Park.  The ODA will also ensure effective coordination of central and local government in the preparation and staging of the Games.               The ODA will be granted special powers to enable it to operate as an Olympic Transport Authority, which will control and coordinate all the transport requirements of the Games.  To ensure coordinated security planning and delivery, the UK Government will create a Cabinet-level Olympic Security Committee which will include the Metropolitan Police, the armed forces and the intelligence services as well as the LOCOG’s Director of Security.   Revisiting the levels of risk               London will provide a low-risk environment as Host City for the Olympic and Paralympic Games in 2012.  The assessment below is based on data provided by independent international bodies and relevant United Kingdom authorities as cited.                Plans for the Games, developed in close coordination with the London Fire Brigade (LFB), exemplify the importance attached to fire prevention and protection throughout the UK.  The nation’s fire services have extensive legal powers to regulate fire safety in publicly used premises.  These regulations cover evacuation times and methods, alarms and sprinkler systems.  The LFB is already working closely with London 2012 planners and architects to devise engineering solutions for the new and existing venues that will house the Games.                During the Games, the LFB will provide a full-time prevention and protection service to all Olympic venues, with special emphasis on the Olympic Park.  Dedicated resources will include two pumping appliances, a fire rescue unit and an incident response unit (with facilities for mass decontamination).  The on-site fire crews will be under the command of a divisional officer.  Olympic venues outside London will have similar levels of protection.    Secure Olympic facilities             New Scotland Yard is already working closely with London 2012 to incorporate physical and technical security measures throughout the Olympic facilities; starting with the design and planning phases.  These efforts will continue with the LOCOG to mitigate risk at every opportunity through high quality, robust security for every location and venue.              Surveillance and security operations will begin at the start of construction or adaptation for every venue and will continue throughout the Olympic and Paralympic Games.             Though civil disobedience in the UK is not unknown, it is rare.  Public demonstrations are considered to be expressions of civil liberties and are generally peaceful.  If trouble does occur, the police are well equipped – both legally and operationally – to contain any problems.              London’s Metropolitan Police Service (MPS), in particular, is well-experienced in the discreet and good-tempered handling of large crowds and demonstrations among a highly diverse population.   Reliable essential services             London’s position as a global communications and business center depends on a highly reliable infrastructure for delivering every utility.  The Games will benefit from this same degree of reliability.  The Nationality Security Advice Center (NSAC), part of the Security Service (M15), has developed the concept of a critical national infrastructure to introduce a common understanding of key sectors and functions that need to be preserved in the public interest.  Such safeguards come on top of years of significant investment.  The UK’s state-of-the-art transmission network for electricity and gas has benefited from investment of $50 billion in the past 18 years.  The telecoms network has attracted similarly high levels of investment.  The result is a highly resilient service capable of operating independently of mains electricity.  Five independent mobile network operators provide a huge capacity and are fully geared to giving the emergency services priority coverage if necessary.    Well-managed roads and railways             The UK has one of the world’s most robust transport security programmes with rigorously enforced regulations and stringent codes of practice.  The industry has a strong and well embedded culture of security established over many years.  Extensive road traffic control systems, supported by proactive traffic policing, will help ensure the safe and smooth operation of road transport during the Games.  Proactive traffic policing will focus particular attention on Olympic lanes and their safe use.  Transport for London (TfL) states that the traffic volume for the weeks of the year selected for the Games is normally 13% lower than at peak times.  Within central London, traffic congestion has been reduced by over 30% thanks to the positive impact of the congestion charge.               The Rail Safety & Standards Board reports that rail travel in the UK is safer than at any time in its history.  The railway system operates a safety case regime that will continue to ensure sound risk management.  Planned improvements to the rail network during the course of the next eight years, coupled with increased regulatory control, will result in further safety improvements.   Treatment of risk             London Resilience, a multi-agency partnership that ensures readiness to handle major incidents or catastrophes, states that London is located well away from major seismic faults and storm patterns.  Flooding from surge tides on the River Thames had previously been a concern; however, completion of the innovative  in 1984 resolved this problem.  Mitigating risk through regulation             Comprehensively drafted and conscientiously applied and enforced regulations are a feature of life in the UK.  These extend to rules governing the petrochemical and biotechnological industries and every aspect of transport including the carriage of potentially dangerous substances by air, road, rail, and sea.  Navigation along the River Thames, which flows near most of the Games venues, is controlled and policed by the Port of London Authority and the MPS.              In the unlikely event of a major incident, the police, fire and ambulance services are expertly equipped, trained, coordinated and rehearsed to deal with a emergency and contain it.  The UK has no nuclear power stations within 100 km of London.                          Summary Recommendations             While it has been found that the London Olympics 2012 will have its threat to financial matters following the successful bid, Olympic organizers then announced new plans for the 2012 Games that will further concentrate facilities and save 95 businesses threatened with being moved from their present site just north of Stratford, in East London (2006 January 31).              However, the lawyer for more than 200 firms, many of which still fear compulsory purchase orders (CPOs), claimed that plans for the Olympic Park had been drawn up so as to save compensation money “now that the overrun in the budgets can be perceived”.  The 95 businesses, affecting about 1, 200 jobs, will no longer need to be relocated because the temporary car and coach parking on Fish Island, on the edge of the Olympic Park, will be moved to a multistory car park in nearby Stratford.  In addition, new homes will not have to be found for 70 residents in the same area.              According to, chairman of the organizing committee, the changers will bring the facilities close together within the Olympic Park, resulting in an improved layout that will make the site even more secure for all users, including athletes and spectators as well as visitors, staff and community (2006 January 31).              The chief executive of the London Development Agency (LDA), Manny Lewis added that these improvements will help deliver an enhanced legacy for London and Londoners, which has always been the core of their vision.  This will significantly reduce the impact on local businesses, he said (2006 January 31).  The desired target is to get vacant possession of the main Olympic site by next year so that work can start on the main projects.  Moreover, one benefit of the new plans is that work on the Olympic Village will be able to start next year and take four years instead of the scheduled maximum of three, thus reducing pressure and costs.              After the Government’s failure to announce extra long-term funding, Olympic officials have been forced to approach a City bank to secure a ₤1 million loan so that more competitors can start preparing properly for the 2012 Games in London.  The details of the plans were discussed after the 200 days mark since London secured the 2012 Games.  The national governing bodies were optimistic that competitors would get the extra funding out from the new plans.              In the need for a properly funded program, Brian Stocks, the presidents of British Gymnastics, praised the British Olympic Association for its initiative in setting up the scheme with the bank and added that it was a brilliant idea (2006 January 26).  Conclusion             The plans to develop sites for the games affected residents in the area and up to 300 local businesses as well.  Following the success of London’s bid, the games were quoted as a chance to transform one of the poorest and most deprived parts of the capital city and unlocking sporting talent.  However, according to (2006), behind these expected spin and effusive patriotism, what basis is there for the fulfillment of such grand promises?  The concern now is with the local residents, workers, and experts about the lasting social or economic benefits that this Olympic will bring to London.  added that if we’ll be accounting to the previous games experience, the event could turn out to be a major liability for Londoners, who will still be paying for years after the games have come and gone.

London Olympics

London Olympics Introduction Background London 2012 was the successful bid for the 2012 Summer Games, to be held in London wi...

Influence of an Individual’s Perceptions and Interpretation In Decision-Making and Judgments

Every single day, people are faced with decisions whether be it as simple as what to do or what to wear for the day. Every single minute is characterized by choices, choices that people make, rationally or irrationally.  decision making is as essential process in the human nature. Much has been learned about the psychology of human decision making as well as decision making within organizations. This paper will examine and assess the extent by which people’s judgments and decisions are influenced by one’s perception and interpretation of the world.             There are many factors affecting our choices in life. The field of judgment and decision making is concerned on how people combine desires and beliefs to choose a course of action. There are three components in the conceptual design for a decision. It includes courses of action or choice options and alternatives; beliefs about objective states, processes and events in the world including outcome states and means to achieve them; and desires, values or utilities that describe the consequences associated with the outcomes of each action-event combination. Decision making is central to every human activity; thus, everybody is a decision-maker. It must be noted though that good decision making begins with a consecutive, purposeful, strategic-thinking process. In addition, good decisions are those that efficiently choose or select means that are available in a given circumstance or situation to attain the goals of the decision maker.             Defines a decision as “the act or process of deciding; a conclusion or resolution reached especially as to future action, after consideration; the settlement of a question; a formal judgment; tendency to decide firmly; resoluteness”. Many theories of decision making exist in disciplines for both scientific and social science paradigms. In statistics, decisional theory is a strategy of measuring the decision-making process, or making it into mathematical form to make the most efficient and effective choice. In early economic theories, there is also a decision-making model of economic utility wherein people choose the best option that provides the maximum positive utility. The aforementioned early theories are also referred to as classical decision-making which basically shows how decisions are made in ideal situations. In psychology, the highlight of the process of decision-making has been a primary area of focus and study. In Janis and Mann’s Conflict Model of Decision-making, the process of decision=making is viewed as a stressful process which involves an assessment of risk and an assessment of success and time availability to make a decision. This model hypothesize that people make a decision through a decision balance sheet wherein individuals evaluate the gains and losses of a decision on the basis of tangible gains or losses for oneself and for significant others and approval or disapproval from the self and from significant others as well.             Usually though, our decisions and judgments are primarily affected and influenced by how we perceive and interpret the world. In psychology, perception is a “neurological process of observation and interpretation; any neurological process of acquiring and mentally interpreting information from the senses”. It is the process by which individuals organize and interpret their sensory impressions in order to give meaning to what happens in their environment perceptions are essential because individuals act upon their interpretation of events and at other times fail to act because of perceptions. People are sometimes faces with the same events; however, there are different perceptions and views on such same events. Comments that perception is like beauty. It is in the eye of the beholder.             It must be noted that an individual’s behavior is based upon their perception of what reality, not on reality itself actually. The world as it is perceived or viewed is the world that is behaviorally important. Each one of use the five senses to experience our surroundings. They are the senses of sight, touch, smell, hearing and taste. Organizing all these information that we receive from these senses is called perception states that perception is a cognitive process. Perception actually helps individuals select, organize, store and interpret stimuli into a meaningful and rational picture of the world. As each person gives one meaning to stimuli, different individuals “see” the same things in different ways.  Obstacles in Making Accurate Perceptions             Sims has outlined some obstacles that hinder individuals from making accurate perceptions. They are stereotyping, first impression error, halo effect, contrast effect, selective perception and implicit personality theories. Each of these obstacles will be examined and discussed in the proceeding part of this paper. Stereotyping. Stereotypes are considered to be a group concept, actually held by one social group about another. They are often used in a negative or prejudicial sense and are usually used to justify certain discriminatory behavior . The basis for commonly held stereotypes may be associated to one’s sex, race, ethnic group and age. An example of stereotyping may be: the belief or perception that older workers are not capable of being trained for new tasks or younger workers cannot handle responsibility. Even though stereotyping may seem inaccurate and worthless, in some cases, there be “kernel of truth” in the basis of stereotyping; Stereotypes are sometimes based on actual group characteristics. It must be noted though that as stereotypes are some typical beliefs based on the element of truth wherein the beliefs are derived from observations that hold true for the entire group but do not hold much truth and accuracy for given individuals in the group. First Impression Error. As the saying goes, “first impressions last”. First impression errors mean that a person may observe a very brief bit about another person’s behavior in their first encounter and conclude that this behavior mirrors what the person is really like. Such impressions may be dangerous in interviews for work as these first impressions become the lasting impressions in the basis for their long-term employment relationships.    The Halo Effect. The halo effect is described as when a person good at something is assumed to be good at something else. This positive assumption creates a halo.  Gives two instances for this type of obstacle in making accurate perceptions. Example one: Let us say that you are a supervisor in a machine shop. An employee, let us call him John, has been one of the best drill operators in your section for the last ten years. A lathe operator is in need in another section. So, you recommend John, assuming that he will do superb at the lathe as he does in drill pressing. However, John fails; he may be very good in the other task but it doesn’t mean that he will definitely be great with the other task as well. He lacked the necessary skill and the training for the other task. Figuratively speaking, you have somehow placed a halo over John’s head. Another example may be when two people have a violent fistfight on the job. One is rather a personal friend of yours with whom you socialize off the job. There may be a tendency for you to place a halo over your friend’s head by assuming that the other person must have been the cause of the fight and conflict . Projection. Projection happens when an individual credit our own feelings and attributes to others. People engaging in projection have the tendency to perceive others according to what they themselves are like instead of according to what the person observed is really like. It must be noted that the observations may be accurate as they make observations of people who are actually like them; however, accuracy don’t always happen as they might have observations on people who are not like them. So, when engaging in projection, one must respond to individual differences. Contrast Effects.  Contrast effect can distort perceptions. A very common example is when illustrated in an old saying among entertainers that states never to follow an act which has kids or animals in it. There is a common belief that majority of the audience just love and adore kids and animals that the entertainer will look bad in comparison. This specific example portrays how contrast effects can affect and distort perceptions. States that people don’t assess a person in isolation. A person’s reaction to one person is influenced by other people we have just encountered. Selective Perception. Selective perception happens when perceptions arise from influences by one’s own interests. When individuals can longer take in all stimuli received, one has the tendency to select out certain elements. For instance, as one purchase a car, for some unknown reason you just begin to notice the same type of car every now and then on the streets compared to before purchasing the car . Implicit Personality Theories. As people have individual mini-theories on how people look and behave, this will result to inaccurate perceptions. These theories, helps each one of us to organize our perceptions and take shortcuts rather than incorporating new information all the time. Adds that people are cognitive misers. As the world becomes more complex and confusing and as people have only a limited mental capacity, people try to make sense of the world by grouping traits and appearances into clusters that may seem to go together. The discussion on what hinders making accurate perceptions have enlightened us on the issue of how much one’s perceptions and interpretation of the world can affect and influence decision-making as well as making judgments. We have seen how perceptions are distorted by stereotyping, first impression error, halo effect, contrast effect, selective perception and implicit personality theories. Researches on judgment and decision making have recognized important limitations in cognitive and emotional processing. It must be noted that errors in decisions occurring due to biases have widespread effects. Many scientists, economists and psychologists are driven to make behavioral assumptions in the market place as a result of real-world violations of the rational choice theory. In psychology, many examinations are made in the concept of rationality. Psychologists are further examining different and alternative frameworks and theories to explain ways of how people make decisions and what influences them upon making their decisions. The future of judgment and decision-making research within psychology lies in its capability and capacity to develop other theories and frameworks that make associations with research on emotions and cognition, in addition to social and institutional factors. Such associations will definitely influence and affect our views in decision making and adjustability and provide good foundations for research in many years ahead.

Influence of an Individual’s Perceptions and Interpretation In Decision-Making and Judgments

Every single day, people are faced with decisions whether be it as simple as what to do or what to wear for the day. Ev...

Risk Analysis of Hewlett Packard

Risk Analysis of Hewlett Packard   Risk Management: An Overview Risk management started out as an indemnity management purpose. The cost of indemnity had restricted management's alternatives in dealing with the hazards faced by the organization. One of the foremost problems was that insurers rated firms according to business in such a way that a fine run firm that had few losses were required to pay for the claims of poorly run firms within the same industry. With this, the role of risk management appeared. Management began to make out that abridged losses intended reduced cost of risk. If risk managers reduced losses they could hold them themselves without resorting to indemnity. However, it took some time for industries to settle in risk management. The delicate inquisitiveness in risk management is the result of a number of instantaneous drifts. Globalization of trade and production has augmented financial and direct investment in unstable up-and-coming markets. Risk management has also ensnared consideration as a result of the recurring and well-publicized breakdowns linked with its execution. Regardless of the amplified academic and specialized concentration paid to risk management, common instances still occur when classy investors or firms experience abrupt, unexpected, and devastating losses. To an economist, risk is described as the survival of ambiguity about potential upshots. Risk is a mean reason in economic existence for the reason that individuals and firms create immutable reserves in research and product improvement, inventory, plant and equipment and human capital, without knowing whether the potential cash flows from these funds will be adequate to pay off both debt and equity holders. If such genuine investments do not engender their necessary returns, then the financial claims on these returns will turn down in worth. In addition to altering the extent of equity and debt in their capital composition, firms/business organizations can also influence their chance of liquidation by extenuating the risk disclosures they countenance. Firms/Business organizations come out to prefer between the types and degrees of disclosures, assuming those that they consider have an aggressive gain in supervision and laying others off into the capital markets ( 1996). Other features of the firm's processes such as the convexity of its tax lists, can also influence the amount to which administrators challenge to alleviate risks (1996). Apparently, , (1996) believes that economists and strategic planners view risk management as being related to the issue of the boundaries of the firm. In this structure, the pronouncement to alleviate meticulous risks is comparable to the verdict to outsource a particular purpose. Thus, risk management, like technology, allocation, or level, is a basis of economical plus. As part of risk management, this paper aim to analyze risk in Hewlett-Packard Co.   The Company: Hewlett-Packard Headquarters for Hewlett Packard Company are in Palo Alto, California.  The Company is a global provider of computing and imaging solutions and services for business and home.  Its focus is on taking advantage opportunities arising due to the Internet and the proliferation of electronic services.  The number-two company worldwide has operations in the United States, Europe, Asia, and the Pacific Rim, Africa, Latin America, Canada and the Middle East.  The company is decentralized and prides itself on giving its 104 divisions decision-making authority.  The number of employees around the globe totals about 123,500.  Six hundred sales and support offices and distributor ships, resellers and retailers handle distribution for the company’s products.  The majority of revenues come from computers plus peripherals and services.  Fifty-four percent of HP’s business is derived outside the United States, and two thirds of that comes from Europe.  The company also lunches the Agilent Technologies as an independent corporation, which includes test and measurement, semiconductor products, chemical analysis, and health solution businesses.  The company also restructured itself as an Internet specialist to stimulate growth.  It provides Web hardware, software, and support to customers.  Basically, the future outlook is positive, and the company plans to remain a major player in the computer industry. From this preview, this paper attempts to evaluate the risk management of Hewlett Packard. Actually, risk management is a task similar to the other management functions such as marketing, purchasing or finance. Thus, if we look at economic development from a functional viewpoint risk management is somewhat every countries do which directs to the realisation of its overall economic objectives.   Risk and Return: Analysis for the Firm Estimating Historical Risk Parameters (Top-Down Betas) Stock Price History Beta: 1.62 52-Week Change3: 23.09% S&P500 52-Week Change3: 12.56% 52-Week High (12-Jan-07)3: 43.72 52-Week Low (08-Jun-06)3: 29.00 50-Day Moving Average3: 40.20 200-Day Moving Average3: 40.36   From the company Hewlett Packard, the regression of the individual stocks monthly prices against the S&P 500 index as of April 18 was conducted. The results of the regression on which we strenuous were the intercept (to calculate the Jensen’s alpha), the slope (beta/risk), the R-squared (to understand how much of the risk is diversifiable) and the standard error of the Beta (to assess the validity of the top down prediction). The results are presented in the following table.         a) Intercept: The intercepts of the regressions for the data gathered from Hewlett-Packard and S&P 500 are shown in coefficients table (i.e. 1330.821). Since the value is positive, then we may say that the stock performed better than expected by the market. Our Jensen’s alpha figure (12.56%) indicates that in S&P 500, the companies’ stocks performed better than expected during the period of the regression. This reveals that the Hewlett-Packard is in positive track and the market underrates the returns on these stocks. b) Slope: The slope of the regressions gave us the beta of Hewlett-Packard. The figures reveal that the Hewlett-Packard analyzed are below average risk (Beta = 0.873). This is most probably due to steady earnings and low debt ratios of the company. c) R2: The R2 indicates that the greatest part of the risk faced by Hewlett-Packard comes from specific sources. This is somehow surprising as the fortunes of the company depend on factors such as prices and general macroeconomics trends. It is also arguable however that the company’s operations involve high levels of risk of catastrophes (which is intrinsic to each firm’s safety policies). The computed R2 is 0.762. d) Standard Error: Since the standard errors of the betas are adequate, then it also allow us to consider these figures reliable.   Comparing to Sector Betas (Bottom-Up Betas) To understand the importance and role that financial leverage we calculated the value of the company’s unlevered betas. For the calculation we used the market value of debt and equity in order to come up with the D/E ratio to apply in the formula:   Unlevered Beta = Levered Beta/[1+(1-marginal tax rate) x D/E] The marginal tax rate of 40% was used. The values are:   Hewlett-Packard Unlevered Beta 1.66 Market value D/E 0.152 Beta 1.81   As shown in the table, there is significant difference between the unlevered beta and levered beta of Hewlett-Packard. The difference between the unlevered and the levered betas shows that debt does not play an important role. Actually, the Hewlett-Packard risks are due to business-related factors and only a smaller portion to financial leverage.   Choosing Between Betas Although the betas resulting from the regression are on average good estimates, because of the low standard errors we also calculated the betas using the bottom-up method. Most companies in S&P 500 are not solely involved in the exploration and production of computers, and marketing.     HPQ Industry Market Cap: 110.30B 438.98M Employees: 156,000 5.50K Qtrly Rev Growth (yoy): 10.70% 9.90% Revenue (ttm): 94.08B 450.80M Gross Margin (ttm): 24.51% 32.85% EBITDA (ttm): 10.16B 38.71M Oper Margins (ttm): 7.62% 3.34% Net Income (ttm): 6.52B 11.47M EPS (ttm): 2.306 0.4 P/E (ttm): 17.87 33.57 PEG (5 yr expected): 1.23 1.41 P/S (ttm): 1.17 1.53   As shown in the comparison estimates, the industry is much higher than HP. The production of computers and other operations represent a growing part of the overall businesses of these companies. The presentation below shows the direct comparison of HP to the overall industry with respect to their Betas.     Estimating Earnings and Cash Flows Typical Investment             Hewlett Packard is the world's leading producer of test and measurement instruments and one of the world's largest computer company. It has become a major player in the personal computer market, and at the time of our research was the sixth biggest in terms of market share, having moved up from fourteenth largest in 1992. It is also the second largest player in the computer workstations market, and holds the dominant position in the laser printer business. The company was the only major computer manufacturer which remained profitable during the recession. Underpinning the Hewlett Packard culture is the HP Way, developed by founders Bill Hewlett and Dave Packard, which emphasizes clearly stated and agreed overall objectives but gives people the freedom to work towards these goals in ways they determine best for their own areas of responsibility. Other pillars of the HP Way include an emphasis on selecting individuals on the basis of their creativity and their enthusiasm, and the need for cooperation between organizational levels. A sophisticated performance management process and clear organizational values, together with a single status culture, has brought strong identification with the company on the part of employees. The organization has traditionally had a decentralized structure, but with the growth of the computer business, a more centralized approach was taken to reflect the systems nature of the business.     Earnings and Cash Flows             From the website the following table presents the earnings and cash flows of Hewlett-Packard from April 2006 to January 2007. PERIOD ENDING 31-Jan-07 31-Oct-06 31-Jul-06 30-Apr-06 Net Income 1,547,000   1,697,000   1,375,000   1,899,000     Operating Activities, Cash Flows Provided By or Used In Depreciation 643,000   596,000   598,000   596,000   Adjustments To Net Income 335,000   587,000   171,000   314,000   Changes In Accounts Receivables 548,000   (1,246,000) 226,000   (1,055,000) Changes In Liabilities (909,000) 563,000   657,000   861,000   Changes In Inventories (698,000) (381,000) (732,000) (85,000) Changes In Other Operating Activities (1,488,000) 1,428,000   334,000   1,104,000     Total Cash Flow From Operating Activities (22,000) 3,244,000   2,629,000   3,634,000     Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (718,000) (965,000) (623,000) (521,000) Investments 79,000   19,000   11,000   10,000   Other Cashflows from Investing Activities (4,325,000) 65,000   171,000   13,000     Total Cash Flows From Investing Activities (4,964,000) (881,000) (441,000) (498,000)   Financing Activities, Cash Flows Provided By or Used In Dividends Paid (218,000) (219,000) (222,000) (226,000) Sale Purchase of Stock (1,515,000) (194,000) (1,758,000) (813,000) Net Borrowings 276,000   (67,000) 149,000   (57,000) Other Cash Flows from Financing Activities 100,000   (1,464,000) 1,592,000   58,000     Total Cash Flows From Financing Activities (1,357,000) (1,944,000) (239,000) (1,038,000) Effect Of Exchange Rate Changes -   -   -   -     Change In Cash and Cash Equivalents ($6,343,000) $419,000   $1,949,000   $2,098,000         From this table, the Hewlett-Packard works on a scale so awesome and has an influence so vast that it is often difficult to see. The level and diversity of technologies that it must deploy are increasing, which imposes both new investment burdens and new uncertainties and risks. Roughly a million new computer products are built around the world each week – they are easily the most complex products of their kind to be mass-produced in such volumes. The industry uses manufacturing technology that is the cutting edge of science. But still, the potential for developing coordination skills, intellectual capabilities and emotional sensitivities through electronic technologies remain far from fully exploited. There are numerous additional near-term technological opportunities to adapt the computer to changing market competitions. The possibilities suggest that Hewlett-Packard technology is unexpectedly robust and provides a powerful defense against the growing competition in the market.   Analyzing Existing Investments From the discussion, Hewlett-Packard Co. is subject to numerous technical directives and regulations, as well as legislation of a more legal nature. The legislation covers areas such as competition law, intellectual property law, consumer protection and taxation. When the computer industry reached full development, accelerated technological efforts were made to create a web of local suppliers that would make it possible to meet the growing legal requirements for the national integration of production. Other than the computer themselves, the business is intricately tied to the manufacture of a wide range of components and the extraction of precious raw materials. Indirectly, it brings cyber crimes, too many crimes in the cyber world and possibility to wave of other environmental troubles. The effect to the Hewlett-Packard Co. are that they needed to establish R&D centers to take advantage of research infrastructure and human capital, so that they can develop computer products both locally and international to satisfy the requirements of the cyber world, environmental and safety regulations more effectively.   Evaluating Sustainability of Competitive Strengths HP has several core competencies which they could utilize to further gain advantage over their competitors, and if possible, overtake IBM in its market leadership in the computer industry. One core competency of the company is their brand management. The strength of their computer marketing has been such that their brand is known even in the parts of the world where computers are not the common medium of communication and advancement in technology. Another core competency is their supply chain management, which links to their ability to maintain a steady stream of computer products. Their highly coordinated logistics system handled by outsourced firms also form part of their core competencies, leading to excellent inventory management and always on schedule production activities. Another marked advantage is their ability at the moving assembly line. Being the pioneer of such mass production system, they were able to get ahead of the competitors manufacturing processes-wise and were also able to save on costs and time. Yet another advantage is HP’s focusing on its product development technology under a single product-information-management program through standardizing and incorporating them. If sustainable development is to achieve its potential, it must be integrated into the planning and measurement systems of business enterprises. And for that to happen, the concept must be articulated in terms that are familiar to business leaders. Many observers believe that more stakeholders -- investors, consumers, nongovernmental organizations and others -- will insist that companies to take environmental and social costs as seriously as they take purely financial costs. In addition, investors are expected to increasingly seek out sustainable companies and avoid firms with poor environmental performance, judging the sustainable companies as better risks over the long term. Likewise, consumers are expected to search for products that perform well environmentally. In addition, the e-marketing procedures employed by HP Co. will possibly boost their advantage in international market since they have the capabilities to innovate computer products.

Risk Analysis of Hewlett Packard

Risk Analysis of Hewlett Packard Risk Management: An Overview Risk management started out as an indemnity management purpose....