Best practices in risk management

1.  Basis of Risk management

The risk is defined and understood in several ways. The term dates from the mid 17th century, when  it was  met as  risque  in  French and  rischo  (derived  from risch) in Italian[1, p.1].

Dictionaries  define  risk,  also  in  different  ways.  Romanian  explanatory dictionary defines risk as "the chance to get into danger, to have to face trouble or support a  loss, possible danger”[6]. In the  market economy, risk  is defined as "a probably  and  future  event,  the  occurrence  of  which  could  cause  some loss ."[8]

According to economic dictionary edited by The Economist, risk taking is the basis of capitalism and is responsible for a part of the economy growth.[4] Any human activity may be associated with a certain amount of risk.

To understand  better  the  concept  of  risk  is  necessary  to  make  a  clear distinction between risk and uncertainty. Risk refers to situations where objective probabilities  can  be  identified  for  possible  outcomes.  In  other  words,  it can be quantified.  Uncertainty  refers  to  situations  or  events  about  which  there are insufficient information to identify objective probabilities
The key element  in  making the distinction between  risk and  uncertainty  is the probability[2,p.6].  The  probability  refers  to  the  possibility  that  a  certain phenomenon or event to  happen  under well  defined conditions.  According to the probability, can be identified three categories of situations:  absolute certainty, risk and  uncertainty. The risk is situated between certainty and uncertaint
The risk  management at an economic agent  level,  is process  for  managing the risk  exposure  of  a  business  or  activity,  assuming  the  adoption  of  effective 

measures  to  minimize  the  consequences  of  the  risk  materialisation.  The risk management aims to reduce the company's vulnerability to unfavorable changes in the operating environment in order to achieve targets with maximum efficiency. [4]

For  risk  management,  decision  makers  can  take  the  following  important 

measures:
      a) avoiding risks;
      b) insurance against risk;
      c) restructuring the activity;

      d) diversification;
      e) divestiture;
      f) maximizing short-term profit;
      g) assuming the risk.

2.  Risk management at H&M 

H&M  Hennes&Mauritz  AB  (H&M)  is  a  multinational  retail-clothing company, known for its fast-fashion clothing. The company was founded in 1948 by Erling Persson in Västerås, Sweden.[5] 

H & M currently holds a total of 2776 stores in 48 countries and a total of 104,000  employees,  of  which  150  are  internationally  acclaimed  designers.
The company  does  not  own  any  factory  it  collaborates  with  over  800 suppliers worldwide, especially from Asia and Eastern Europe.[7]
The business and  results of H&M group may be influenced by a  number of factors. Many of these factors can be administered with internal rules.

The  main  risks  faced  by  the  company  H  &  M  are:  uncertainties related  to trend, weather conditions, logistics risk, macroeconomic changes, external factors of production countries, legal risks and financial risks.[3]

a)  Trend

Making  business  in  the  fashion  industry  is  a  risk  in  itself.  Fashion  has  a  limited  lifetime.  There  is  always  a  risk  that   a  part  of  the  collection  is  not  well received by customers.
To  limit  this  risk,  the  company  H&M  realize  regular  market  research, the collection is  launched throughout the season,  not all at once, and the products are made in small quantities.
Considering that the company operates in several countries,  H&M  adapts its products  according  to  anthropocentric  measurements,  weather  conditions in  that country, the culture [3, p.47].

b)  Weather conditions

H&M produces clothing under normal weather conditions. Deviations from normal weather conditions affects sales group.[3, p.47]

In  order  to  limit  losses  due  to  weather  deviations,  H&M  redistributes the stock to other countries, where weather conditions are favorable.

Due  to  climate  change,  when  the  company  is  launching  a  collection  for  a 

season such as winter,  they  prepare several articles for pre-season. In this way they will not be taken by surprise. However the company's business model is based on flexibility  and high speed of response, they never prepare  all the stock before the season.

c)  Risks of logistics

To  reduce  and  eliminate  risks  related  to  logistics,  the  company  has developed an IT platform with the help of  which the  sales and  logistics department can monitor sales and stocks from stores.[3, p.7]

For the transport of products, they turn to companies specialized in transport, so this risk is transferred to the transport company.

d)  Negative macroeconomic changes

There is a risk that the negative macroeconomic changes  from one  or more countries  to  result  an  economic  downturn  likely  to  change  consumer purchasing behavior and thus affect the H&M Group's sales.  Therefore, the H & M is aware of such changes that can affect the business model of the production and use  a  flexible  model  for  the  clothing  production,  which  can be  adjusted  to  the requirements on different markets.[3,p.47]

e)   External factors from production countries

H&M  Group  closely  monitor  external  factors  changes  (commodity  prices, transportation costs, etc.) a nd prepare strategies to combat fluctuations of external factors as favorable as possible, both for the company and customers.

f)  Legal risk

Given  that  the  company  carries  out  its  activities  on  several  continents,  the 

company is very careful in the elaboration of contracts. For this reason  they appeal to lawyers experience in international contracts.

g)  Financial risks

Funding policy and risk management adopted by the H&M is performed at central  level,  in the  financial department,  in accordance with the  financial policy established by the Board of Directors.[3,p.47]

The  biggest  risk  is  the  currency  risk.  To  protect  against  this  risk,  the company appeals to hedging operations and pre-contracts.

Conclusions 

Company  H&M  has  understood the  need  to  manage  very well the  risks to which they are exposed, if it wants to meet its goals. 

Financial results confirm that the measures taken to prevent and counter the risks were very effective.

Considering that so far the H&M Group  have shown that they are a flexible company that knows how to successfully manage the risks to which it is exposed, 

we  believe  that  in  the  future  they  will  do  the  same,  and  therefore  keeping  their financially stable position that currently has . 

Bibliography

1.  ***Teoria riscurilor şi aplicaţii, Centrul de Formare şi Analiză în Ingineria Riscurilor, 

ediţia nr. 3, Editura Alexandru Myller, 2012 

2.  N., Slobozeanu, Analiza şi evaluarea riscurilor economice şi financiarea ale 

întreprinderii, Chişinău, 2008,  http://www.cnaa.acad.md/thesis/11591/

3.  H&M Annual Report 2012, http://about.hm.com/en/About/Investor-Relations/FinancialReports/Annual-Reports.html

4.  http://www.economist.com/economics-a-to-z/r#node-21529781

5.  http://en.wikipedia.org/wiki/H%26M

6.  http://www.dexonline.ro/

7.  http://www.hm.com/

8.http://www.perfect-service.ro/intelinet/2010/ianuarie/intel(i)net.php?legatura=4