Reebok 2011 Annual Report Download - page 150

adidas Group
2011 Annual Report
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
146
2011
03.4 Risk and Opportunity Report
03.4
To facilitate effective risk and opportunity management, we have an
integrated risk and opportunity management system in place, which
focuses on the identification, evaluation, handling, monitoring and
reporting of risks and opportunities. The key objective of this system is
to protect and further grow shareholder value through an opportunity-
focused, but risk-aware decision-making framework.
We believe that a key component of optimal risk and opportunity
management is the identification and evaluation of risks, risk-
mitigating actions and opportunities where they arise. In addition, a
concerted approach to handling, monitoring and reporting is of key
importance. Therefore, risk and opportunity management is a Group-
wide activity, which utilises critical day-to-day management insight
from both global and local business units and functions.
Our risk and opportunity management process contains the following
components:
– Risk and opportunity identification: The adidas Group continu-
ously monitors the macroeconomic environment, developments in
the sporting goods industry, as well as internal processes to identify
risks and opportunities as early as possible. The Risk Owners have
primary responsibility for the identification of risks and opportunities.
The Group Risk Management department has defined a catalogue of
potential risks (Risk Universe) to assist Risk Owners in identifying
and categorising risks and opportunities. Our broad network of Risk
Owners, which includes senior managers across all functions and
markets, ensures an effective identification of risks and opportunities.
While various Risk Owners – according to their area of responsibility -
actively monitor changes in the overall macroeconomic, political and
social landscape, others closely observe brand, distribution channel
and price point developments as well as changes in other areas
such as input prices, financial market conditions or technological
developments.
The Risk Owners use various instruments in the risk and oppor-
tunity identification process such as primary qualitative and quanti-
tative research including trend scouting, consumer surveys as well as
feedback from our business partners and controlled space network.
These efforts are supported by global market research and competitor
analysis. Through this process, we seek to identify the markets,
categories, consumer target groups and product styles which show
most potential for future growth at a local and global level. Equally,
our analysis focuses on those areas that are at risk of saturation, or
exposed to increased competition or changing consumer tastes.
– Risk and opportunity evaluation: In order to manage risks and oppor-
tunities in an effective way, we evaluate identified risks and opportun-
ities individually according to a systematic evaluation methodology,
which is applied consistently and allows adequate prioritisation as
well as allocation of resources. According to our risk and opportunity
management methodology, a risk and opportunity score is calculated
by multiplying the potential financial impact in the upcoming twelve-
month period with the likelihood of occurrence. The financial impact
represents the biggest possible potential effect on the relevant income
statement metrics (operating profit, financial result or tax expenses).
The financial impact is evaluated by utilising five categories: Marginal,
Minor, Moderate, Significant and Major. Likelihood represents the
possibility that a given risk or opportunity may occur. The likelihood of
individual risks and opportunities is evaluated on a percentage scale
divided into five categories: Unlikely, Possible, Likely, Probable and
Highly Probable.
In order to assess the potential financial impact for each individual
risk, the gross risk score and the net risk score have to be evaluated.
While the gross risk score reflects the worst-case negative financial
impact before any mitigating actions, the net risk score reflects the
expected financial impact after all mitigating actions. This approach
on the one hand allows for a good understanding of the impact of an
individual mitigating action taken, and on the other hand provides the
basis for scenario analysis and simulations. In addition, the respective
Risk Owners are also required to assess each risk from a timing
perspective in order to determine when the risk could materialise.
Whenever a risk materialises, we measure the actual financial impact
against the original assessment. In that way, we ensure continuous
monitoring of the accuracy of risk evaluations across the Group.
In assessing the potential effect on the relevant income statement
metric from opportunities, each opportunity is appraised with respect
to viability, commerciality and potential risks. This approach is applied
to longer-term strategic prospects but also to shorter-term tactical
and opportunistic initiatives at both the Group and, more extensively,
the market and brand level.
– Risk and opportunity handling: Risks and opportunities are treated
in accordance with the Group’s risk and opportunity management
principles as described in the Group Risk Management Policy. Risk
Owners are in charge of developing and implementing appropriate
risk-mitigating actions and exploiting opportunities within their area
of responsibility. In addition, the Risk Owners need to determine a
general risk handling strategy for the identified risks, which is either
risk avoidance, risk reduction with the objective to minimise financial
impact and/or likelihood of occurrence, risk transfer to a third party or
risk acceptance. The decision on the implementation of the respective
risk handling strategy also takes into account the costs in relation to
the effectiveness of any planned mitigating actions if applicable. Group
Risk Management works closely with the Risk Owners to monitor the
continuous progress of planned mitigating actions and assess the
viability of already implemented mitigating actions.