Business risk is an essential part of any enterprise. It is the first step to innovation, which is undoubtedly crucial for success in the business world. The majority of the management decisions made in any company include a consideration of risk. However, better risk management can prevent catastrophic consequences. To create suitable conditions and effective management strategies for the long-term success of the organization, the risk committee must focus its efforts on identifying and analyzing the scope of possible risks as well as the effect these risks may have on the welfare of the company.
Risk Evaluation
Economic Risks
The Peruvian economy has grown by 5.5 percent on average from 2009 to 2013 with a steady exchange rate and a low level of inflation. The growth has been primarily driven by high international prices for Peru’s natural resources. The growth of Peru’s economy stopped in 2014 due to a reduction in the prices of minerals and metals. Due to the country’s dependence on the exportation of natural resources, the economy of Peru is especially vulnerable to changes in world prices. However, Peru continues to have one of the highest economic growth rates in the Latin American region. Despite the fact that poverty in Peru has been reduced by 28 percent since 2002, social inequality remains one of the most critical problems for the country. In the last few years, domestic demand has been the primary reason for Peru’s economic growth, due to the financing and boosting of this branch. A period of steady inflation and high appreciation of the national currency have made the economy of the country stable (The World Factbook, n.d.).
Today, Peru exhibits a strong macroeconomic performance and high levels of productivity in the financial and labor markets. According to Gov.uk (2015), “The Constitution and associated legal framework guarantee private property rights, the fulfilment of contracts, free capital transfer and remittance of earnings, unrestricted access to internal and external credit and unrestricted access to most economic sectors with only a few exceptions” (para. 15).
Environmental Challenges
The main environmental issues that Peru faces today are water and air pollution, soil erosion, and deforestation. The issues that can particularly affect the growth of All Star company in that country are water and air emissions and deforestation. These environmental problems have an impact on business because the laws of Peru require companies to use equipment that meets the standards of the country—equipment that of course costs money. Thus, the company has to pay for any protective environmental measures required by the government (Franks et al., 2014).
Deforestation has a significant impact on the business because the building of a plant requires space, and it is very likely that space for the plant will be created through deforestation. As a result, the company risks angering local and international environmentalists and getting a bad reputation. In June 2015, 210 social conflicts were registered in Peru, sixty-seven percent of which were caused by environmental protection issues (Gov.uk, 2015).
The manufacturing processes of the toothpaste plant will produce air and water emissions that include hazardous smoke and chemical substances that could enter the groundwater. As mentioned previously, Peru’s environmental protection laws require the use of special equipment and procedures to minimize pollution; in this case, the smoke stacks must be covered with screens of specified gauges, the wastewater must be filtered, and the retention ponds must be lined with clay. All of these measures are very expensive (Franks et al., 2014).
The company will have to pay for all of these required environmental protection measures and hope for positive income gains from the environmentally harmless policy.
Political Atmosphere
Regular changes of the Prime Minister and key Cabinet members during President Humala’s governance have not significantly affected the working of the Peruvian government. The Ministry of Finance and Economy, which is headed by Minister Segura, continues to improve the macroeconomy of Peru. There are also no restrictions on free and fair elections. However, campaign financing in Peru is not transparent. Campaigns are mostly financed through private means, and financing is highly unregulated. The government’s decisions are strongly influenced by business. The armed forces of Peru are mostly under civil control (Gov.uk, 2015).
Cultural and Social Risks
The company must take into account several important cultural and social risks including corruption and the features of Peruvian constitutional law.
The Constitution of Peru guarantees the right to strike. It also states that “all people have the right to equality before the law and that no one may be discriminated against by reason of national origin, race, sex, language, religion, opinion, socio-economic or other status” (Gov.uk, 2015, para. 18). The Constitution prohibits compulsory labor of children.
It should also be mentioned that in recent years, the number of public protests seeking environmental protection has grown. Primarily, these protests have related to the impact of large-scale mining projects on rural communities.
The problems connected with educational inequality and gender discrimination are still widespread in Peru’s highlands and the Amazon basin. Peru is also experiencing internal conflict caused by the government’s cruelty towards rural populations in the 1980s and 1990s (Gov.uk, 2015).
Peru has very high level of corruption in business, even though the most important business alliances of Peru have signed the Integrity Compromise, which unites businesses and the government to combat corruption in the country. Since 2002, the government has taken measures to fight corruption and in 2006 introduced harsh penalties for those involved (Gov.uk, 2015).
Conclusion
To achieve long-term success for the organization, the risk committee should focus on identifying and analyzing possible risks and their impacts. The economy of Peru has grown over recent years, and today it holds the highest growth rate among the countries of Latin America. However, Peru remains dependent on changes in world prices for metals and minerals, which are the primary sources of the country’s income. Today, Peru has a stable economy. Among all of the environmental risks, deforestation and air and water emissions should be given special attention. People in Peru are very concerned about environmental protection, and the company’s plant will require expensive special equipment to protect the environment. The political situation in Peru is stable, and the Ministry of Finance and Economy is doing well to keep the macroeconomy of Peru on a high level. However, the government often makes decisions under pressure from business leaders. Peru has a strong democracy and fights for the rights of citizens, but there are still significant issues with educational inequality, gender discrimination, and corruption on all levels of business and politics. Despite the measures that have been taken by the government, corruption remains one of the biggest business risks in the country.
References
The World Factbook. (2017). Web.
Overseas business risk – Peru. (2015). Web.
Franks, D. M., Davis, R., Bebbington, A. J., Ali, S. H., Kemp, D., & Scurrah, M. (2014). Conflict translates environmental and social risk into business costs. Proceedings of the National Academy of Sciences, 111(21), 7576-7581.