¶ … risks that can impact upon the success of a strategic initiative. Such initiatives are often based on assumptions about the future, so the risks typically relate to changes in the environment that impact those assumptions. These include project-specific risk, firm-specific risk, industry-specific risk and global risk (Mapsoftheworld.com, 2008). For example, a change in the economic climate can impact customers' desire or ability to pay for the initative. Changes in technology can make the initiative obsolete before it hits the market. Changes in the competitive landscape can reduce the revenue or profit potential of the project. There are internal risks as well. The project may not be as successful as projected -- it may not meet the specifications desired by management or it may arrive late or over budget. Shifts in internal priorities could pull key resources away from the project, extending delivery times and increasing costs. The sum of these risks is the degree of volatility of the expected future cash flows.
The financial impact of the risks ranges from minor to catastrophic depending on the risk in question. Because projects are based on assumptions of future cash flows, the minor risks are generally assumed in the project planning. Major or catastrophic risks, however, must be considered in the financial planning process. Such risks can result in the project delivering no net value to the company, or worse a negative value to the company. The firm must therefore estimate the risks of the project, and the volatility of the cash flow assumptions, prior to pursuing the project. If the project is sufficiently large, risks can compromise the firm's solvency. This is particularly true if the project has been financed by debt, which incurs mandated repayments that the firm would be unable to meet with the flows from the project. For Microsoft, with its rock solid balance sheet, this is unlikely. The project, even if it fails miserably, will only result in Microsoft spending some of its cash. While this is not a desirable outcome by any means, Microsoft is in the enviable position of being able to absorb total failure of the strategic initiative at this point in its existence.
Works Cited:
No author. (2008). Sources and perspectives of risk. Mapsoftheworld.com. Retrieved January 17, 2010 from http://finance.mapsofworld.com/corporate-finance/risk-analysis/sources-perspective.html
