Strategic Risk and Performance management by Strategy@Risk Ltd.

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© Copyright 2006 Strategy@Risk Ltd. All rights reserved
Value based Strategic Risk and Performance Management achieves a
sustainable increase in enterprise value over time.
It represents an important tool for planning as well as for performance
measurement and for controlling purposes .
“S@R has set out to create models that boost income and save our clients time and money. Our models can give answers to
both deterministic and stochastic questions, by linking dedicated ebitda models to holistic balance simulation taking into
account all important factors describing the company. The basis is a real balance simulation model – not a simple cash flow
forecast model.”
Presentation to:

2. Why S@R
For Enterprise Risk Management (ERM) to be value creating, it must be
embedded in and connected directly to the enterprise’s strategy – that is
what Strategy @ Risk provides, thus improving ERM through ‘Strategic Risk
and Performance Management’ (SRM).
The S@R models provide:
1. Platform for comprehensive Strategic Risk and Performance
Management and state of the art P&L and Balance simulation
models.
2. The possibility to add uncertainty to all variables and calculations,
enabling valuation and decisions under uncertainty .
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3. S@R gives you the capability to achieve results
through your ERM
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4. Value creation with S@R – Guide to why SRM
should be on top managements agenda
Placing SRM in the corporate risk and finance
lancscape can be tricky. S@R has developed the
necessary methods and tools for securing better
decision making, revealing total risk and
increasing shareholder value towards corporate
goals.
The figure depicts the relations between risk
tolerance, the board’s risk indifference curves,
risk appetite, risk capacity and the risk efficiency
frontier.
The risk efficiency frontier is found as the locus of
upside potential ratios where all unwanted
risk/uncertainty have been mitigated. What is left
is residual risk, assuming that the mitigation is
effective.
The enterprise utility function gives the board’s
preferences between risk and value.
0
0
Downside Risk
(Lower partial moment LPM2)
Shareholder value upside
(Upper partial moment UPM1)
The Board's risk
indifference curves
(Risk aversion)
U1
Strategic RM
U2
Risk reduction Risk appetite
U3
ERM
Enterprise
Risk efficiency frontier
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5. S@R Value Based Strategic Risk and Performance
Management
1. Enterprise wide – value based with all areas in scope and
supports business decision making
2. All risk categories – financial, operational and strategic
3. Integrated – captures interactivity on a consistent
and integrated basis, at enterprise and
business segment level
4. Finance oriented ‐‐ Ties finance with risk
5. Aggregated – enterprise level risk exposure and appetite
6. Dynamic planning – to develop and evaluate strategies
6. Decision making – not just risk reporting
7. Risk versus return – mitigation and risk exploitation
8. Risk disclosures – integrates ERM information
9. Value impacts – includes enterprise and value of equity
10. Stakeholder focus – not only rating agency driven
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6. The S@R framework for Strategic Risk and
Performance Management
Strategy@Risk offers
clients a framework and
solution that elevates
the value of ERM and
Business Management
in general.
Be able to apply the
reults for a range of
purposes:
• Communicate risk
• Act on
risk/opportunity
• Employ Business
tactics
• Test and improve
Strategic decisions
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Creation of
Framework model
Implementation
of the S&R
software
Problem
Description
Simulation and
Reporting
EBITDA model
P&L and Balance
model
Valuation
simulation
Forecasts and
distributions
Evaluation and
treatment of
Results
Systemic
Implementation
of EBITDA model
Data entry
template for
EBIDA model
Data for balance
model template
Definition of
value and cost
drivers and
their
distributions
Dependencies
("Correlations")
between cost
and value drivers
Company
environment:
taxes,
interest rates
etc
Time frame
Quantification:
Opening balance
Inventories
Taxes, etc.
Legal requirements
Interest rates
(yield curves)
Exchange rates
Financial strategy
etc.

7. S@R models create real value and deliver the
insight that makes you capable of improving ERM
WHO?
WHAT?
Strategic Risk Credit Risk Market Risk Operational Risk
Board
CEO
CFO
CFO
Treasurer
Business Unit
Manager
Internal Audit
ISO standards
Insurance
Suppliers
etc
Sales
Procurement
Operations
etc
Debitors
Trading Limits
Currency
etc.
Investments
Markets
Interest rates
Hedging
etc.
The "Silo" Thinking
Regardless of maturety and
level of ERM in the company.
S@R and leading professionals*
advise an initiative focused on
Strategic Risk Management.
This initiative will create value
and ease the exisiting work in
ERM projects.
• Eliminate silos, avoid and
mitigate risk.
• Reveal risk in meeting
strategic and operational
objectives
*Mark L. Frigo and Richard J. Anderson , Kellstadt Graduate
Graduate School of Business, DePaul University Chicago
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8. S@R adds value
• Release resources for other purposes than calculations – gain one tool that
can be used for all types of simulations internally.
• S@R gives you strategic risk management capabilities that can be aligned
with growth strategies, and help companies achieve their business priorities
and goals.
• Avoid and mitigate risk.
• Achieve integration of strategic planning and risk management.
• Establish risk tolerance for the enterprise, and align risk appetite both for
individual projects/investments as well as for the enterprise.
• Improve ways to assess and analyse risk capacity.
• Align risk management with the overall business strategy, respond to
regulatory demands and improve their modeling and analytics capabilities.
• Create shareholder value from risk management.
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9. • Decide how much risk the investor can take?
• Decide how much risk the investor need to take?
• Evaluate alternative strategic investment options at risk?
• Evaluate equity values and enterprise values in acquisitions at risk?
• Improve predictability in operating earnings at risk that may impact
corporate financial position and performance?
• Identify risk tolerance level?
• Evaluate optimal financial hedging strategies?
• Identify and benchmark an investment portfolio and/or individual
business units’ risk profiles?
• Develop risk mitigating strategies?
• Evaluate the effect of alternative risk retention and risk transfer
strategies?
Gain insight and analytical power in the
intersection of Risk, Strategy and Finance
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10. S@R Generic Simulation Model
Economic Regime and
Strategy
Production Specification
EBITDA model
Economic Regime
Financial Strategy
Production Parameters
Cost Variables
Income Variables
Operating Strategy
Valuation Strategy
Market Variables
Simulation
Deterministic and
Monte Carlo Risk
Reports Probability
Distributions
Deterministic
Model
Stochastic Risk
Model
P & L
Balance Sheet
Economic and
Financial Issues
Valuation Issues
We deliver:
A Monte Carlo simulation
model tool that easily links to
your report and consolidation
tools.
A customer tailored simulation
model ready to use for a range
of problems. Or standard
industry models.
Services ensuring
implementation, user
friendliness and training of key
personnel.
We understand, design and
implement with no strain on
the organization – you are up
and running in short time with
our full support.
http://www.strategy-at-risk.com/2009/10/19/
where-do-you-go-from-risk-mapping/ 10

11. P&L and Balance Simulation
Investments
Financing /
Currency /
Macro
EBITDA
Taxes
Equity Value
Enterprise
Value
Profit & Loss
Balance Sheet
0
50
100
150
200
250
90 115140165190215240265290315340365390415
Interval Upper LimitFrequency
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90
100
Probability(%)
0
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Interval Upper Limit
Frequency
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Probability(%)
0
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Interval Upper Limit
Frequency
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Probability(%)
0
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Interval Upper Limit
Frequency
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Probability(%)
0 10 20 80 90 100 110
0
0,2
0,4
0,6
0,8
1,0
USD
Probability
Operating
Income
Operating
Expenses
Profit
Before Tax
Profit for
the period
0
10
20
30
40
50
60
70
80
90
100
-65 10 85 160 235 310 385
Frequency
0
10
20
30
40
50
60
70
80
90
100
Probability(%)
0 100 200 300 400 5000
0,2
0,4
0,6
0,8
1
USD
Probability
Current
Assets
Fixed Assets
Equity
Liabilities
In the S@R framework all items, whether
from the profit and loss Account or from
the balance sheet, will have individual
probability distributions (pdf). These pdf’s
are generated by the combination of pdf’s
for the factors of production. Variance will
increase as we move down the items in
the profit and loss account.
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12. www.strategy‐at‐risk.com
Tore Olafsen
Senior Partner
Email: to@strategy‐at‐risk.com
Paal Fredrik Olafsen
Senior Partner
Email: po@strategy‐at‐risk.com
Phone: +47 90775433
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Strategy@Risk is today a provider of
advanced simulation models and services to
clients.
Our software, models and services are
thoroughly tested, works flawlessly, and are
used with the satisfaction of clients in
Scandinavia and Europe for over a decade.
Our cutting edge services and models
address, analyze and solve a range of client
problems in the intersection of risk, finance
and strategy.
Making customers better capable to reveal,
analyse, plan, communicate and act on
Strategic risk. This will increase profitability
and stakeholder value.
• State of the art analysis incorporating all
risk and uncertainty factors
• Complete and correct simulation models
based on full accounts, financial and
strategic regime, full cost, income and
production structures
• Analysing full effect of strategies on
project level as well as consequences for
entity/group
• More than 60 different financial reports
• Recommendations and conclusions on
designated topics
• Full visualization of findings and results
• Tailor made simulation model for client
use – or standard industry models
• Complete data sets for simulations
Per Åkenes
Partner Sweden
Email: per.aakenes@allevogroup.com
Phone: +46 708‐89 89 59