Don Company is in the precious metals business. A significant part of Don's success has been its willingness to develop gold and silver mines in parts of the world where it is particularly risky to do business. The Company's mining specialists have discovered a promising gold mine prospect in the Republic of Fiction (a fictitious country name, but it has characteristics to many third world countries). An economic analysis provides that it may cost up to $1 billion to develop the mine. Don's Business Development group learns the following about the Republic:
1. President David has reigned over the country for over two decades and is 88 years old. His position has been solidified through crackdowns on dissent. There is no clear cut successor to his position.
2. The country's•economy has been struggling particularly because of the significant decline of oil production. Taxes on oil production were the primary source of revenue for the education, social welfare and national defense budgets. The Company believes the country will welcome the gold mine investment.
3. The country has been identified by outside consultants as one of the most corrupt in the world.
4. In general, the vast majority of the country's citizens are pooriy educated, with 80% of its population aged 18 to 45 having less than 8 years of formal education.
The Company evaluates risks when deciding to undertake a project similar to this through the following process:
It identifies the risks and ranks them on a scale of 1 to 5 with a 1 representing the lowest level of risk and a 5 representing the highest level of risk. The rankings are based on "likelihood" of risk and the "impact" of the risk.
Once the risks are ranked, the Company considers risk management strategies to mitigate against the effects of the risk.
Please discuss the following:
What is meant by the terms gross risk and residual risk?
What are the ways that companies may respond to risk? In other words, what options are available to manage risks?
Identify two risks that Don should identify for the above described proposal. How would you rank them based on likelihood/impact? How would you suggest they be managed?