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ASSIGNMENT

On

Enterprise Risk Management of Microsoft

Subject: Risk And Insurance Management

Submitted By:
Md.Ziaur Rahman Reg.-1029053 MBA 2nd year

Enterprise Risk Management of Microsoft


Enterprise risk management (ERM) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. (ERM) ERM can also be described as a risk-based approach to managing an enterprise, integrating concepts of internal control, SarbanesOxley Act, and strategic planning. ERM is evolving to address the needs of various stakeholders, who want to understand the broad spectrum of risks facing complex organizations to ensure they are appropriately managed. Regulators and debt rating agencies have increased their scrutiny on the risk management processes of companies. ERM frameworks defined There are various important ERM frameworks, each of which describe an approach for identifying, analyzing, responding to, and monitoring risks and opportunities, within the internal and external environment facing the enterprise. Management selects a risk response strategy for specific risks identified and analyzed, which may include: 1. 2. 3. 4. 5. Avoidance: exiting the activities giving rise to risk Reduction: taking action to reduce the likelihood or impact related to the risk alternative actions: deciding and considering other feasible steps to minimize risks. Share or insure: transferring or sharing a portion of the risk, to finance it Accept: no action is taken, due to a cost/benefit decision

Monitoring is typically performed by management as part of its internal control activities, such as review of analytical reports or management committee meetings with relevant experts, to understand how the risk response strategy is working and whether the objectives are being achieved. Casualty Actuarial Society framework In 2003, the Casualty Actuarial Society (CAS) defined ERM as the discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organization's short- and long-term value to its stakeholders." The CAS conceptualized ERM as proceeding across the two dimensions of risk type and risk management processes. The risk types and examples include: Hazard risk Liability torts, Property damage, Natural catastrophe

Financial risk Pricing risk, Asset risk, Currency risk, Liquidity risk Operational risk Customer satisfaction, Product failure, Integrity, Reputational risk Strategic risks Competition, Social trend, Capital availability The risk management process involves: 1. Establishing Context: This includes an understanding of the current conditions in which the organization operates on an internal, external and risk management context. 2. Identifying Risks: This includes the documentation of the material threats to the organizations achievement of its objectives and the representation of areas to the organization may exploit for competitive advantage. 3. Analyzing/Quantifying Risks: This includes the calibration and, if possible, creation of probability distributions of outcomes for each material risk. 4. Integrating Risks: This includes the aggregation of all risk distributions, reflecting correlations and portfolio effects, and the formulation of the results in terms of impact on the organizations key performance metrics. 5. Assessing/Prioritizing Risks: This includes the determination of the contribution of each risk to the aggregate risk profile, and appropriate prioritization. 6. Treating/Exploiting Risks: This includes the development of strategies for controlling and exploiting the various risks. 7. Monitoring and Reviewing: This includes the continual measurement and monitoring of the risk environment and the performance of the risk management strategies.

Abstract:
Microsoft is the world's best-known computer software company. Microsoft offers a wide range of software products for various computing devices. The company faces many risks. These include technology risks, operational risks, marketing risks, intellectual property risks, regulatory risks, legal risks and financial risks. The case outlines the mechanisms Microsoft employs to deal with these risks, with a focus on technology related risks.

Introduction
Microsoft, founded as a partnership in 1975 and incorporated in 1981 was clearly the world's best-known computer software company. The company's vision, shaped by cofounder, Bill Gates, one of the world's best-known business leaders was to empower people through great software. Microsoft offered a wide range of software products for various computing devices. These included scalable operating systems for servers, personal computers (PCs), and intelligent devices; server applications for client/server environments; information worker productivity applications; business solutions applications and software development tools. During fiscal 2002, Microsoft launched Xbox, a next-generation video game system. The company's online efforts included the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. During fiscal 2002, Microsoft had four defined major business segments: Desktop and Enterprise Software and Services; Consumer Software, Services, and Devices and Consumer Commerce Investments.

Overview of Risks
The software business was inherently risky, as it was subject to rapid technological change. Microsoft anticipated more intense competition as it moved from its traditional core businesses to the new .NET architecture. Microsoft also faced a shift from PC-based applications to serverbased applications or Web-based application hosting services, from proprietary software to open source software such as the Linux operating system, and from PCs to Internet-based devices. Some of Microsoft's powerful rivals, including IBM, Sun Microsystems, Oracle, and AOL-Time Warner, were collaborating with one another on various initiatives, aimed at moving software from individual PCs to centrally managed servers.. Operational Risks There was little manufacturing or logistics involved in the software business. Software could be easily copied on to a medium such as Compact Disc or moved electronically to customers across the world without problems. Maintaining quality was a strategic challenge for Microsoft. Indeed, the presence of bugs in its products was a major risk faced by Microsoft. If a product had a fatal bug that destroyed user data or prevented some critical feature from working, then Microsoft had to send out a product update release to correct the problem....

Marketing Risks Challenges to Microsoft's Business Model Since its inception, Microsoft's business model had been based on customers agreeing to pay a fee to license software, the company developed and distributed. Under this commercial software development ("CSD") model, software developers developed new products through investments in research and development. They offset these costs with the revenues received from the distribution of their products. In recent years, there had been a growing challenge to the CSD model, from the Open Source movement... Intellectual Property Risks Unlicensed copying and use of software represented a significant loss of revenue to Microsoft especially in developing countries. While this adversely affected U.S. revenues, revenue loss was even more significant outside the United States, particularly in developing countries where intellectual property laws were less stringent. Throughout the world, Microsoft actively educated consumers on the benefits of licensing genuine products and educated lawmakers on the advantages of creating a business climate where intellectual property rights were adequately protected... Regulatory Risks Microsoft was a beneficiary of the R&D tax credit given by the U.S. government. The current R&D tax credit was assured until 2004. However, there was no assurance that it would continue thereafter. Microsoft had attempted to mitigate this risk by having more research centers outside USA. But by and large, Microsoft's R&D activities remained highly concentrated in the US... Legal Risks Microsoft was a defendant in a lawsuit filed by the Antitrust Division of the U.S. Department of Justice (DOJ) and a group of eighteen state Attorneys General alleging violations of the Sherman Act and various state antitrust laws. After the trial, the District Court stated that Microsoft had violated Sections 11 and 22 of the Sherman Act and various state antitrust laws. On May 18, 1998, the United States and a group of State plaintiffs filed complaints, alleging antitrust violations by Microsoft and seeking injunctions against the company's allegedly unlawful conduct... Financial Risks Microsoft was exposed to foreign currency, interest rate, and equity price risks. Microsoft hedged its foreign currency receivables and a portion of anticipated foreign currency revenues, primarily with option contracts. Microsoft monitored its foreign currency exposures on a daily basis to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged, were the Euro, Japanese yen, British pound, and Canadian dollar...

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