Abstract
The focus of the paper is to carry out an investigation of fundamental risks that may lead to volatile situations in the Pepsi Company. Three main situations chosen are fraud and misconducts, water, and health and safety.
Methods of qualitative and quantitative measurement of these situations are proposed and discussed in the context of their impacts of the situation’s capacity to impact organizational goals, culture and more crucially, the Pepsi stakeholders. Recommendations to solutions for mitigation of the risks are then considered.
Executive summary
Many Asian countries have many operational beverage-manufacturing companies following the ease of the capacity of such companies to penetrate the market. Even with such ease, such companies face many risks ranging from availability of quality raw material, the process of production, as well as the management of the entire company. In the current paper, water stands out as an essential raw material accounting for about 75% of the raw materials used in the manufacturing of beverages.
Fraud, as well as health and safety are also other two additional volatile situations that may put beverage companies at risk. However, the paper focuses on the mechanisms of mitigating these risks particularly in Pepsi Company established in Philippines. In the first volatile situation, the products of the Pepsi Company are the subjects impacted by the event of utilization of polluted water for their manufacturing.
This event results from factors such as increased utilization of water that require treatment in the company, following the reduced quantity of fresh water because of the impacts of global warming. In the second volatile situation, shareholders are the main subjects while the event is the probability of occurrence of a fraudulent or misconduct within Pepsi company.
A subtle factor leading to this event is reluctance of fraud and misconducts of monitoring and control systems. Finally, under the health and safety volatile situation, the employees of Pepsi Company are the key subjects. The event is failure of a production or packaging machinery contributed by factors such as negligence of conducting preventive maintenance of the machineries.
Introduction
In the normal operational environment of any business, several risks are evident. Organizations have to address them to ensure their future presence. In the business planning process, it is crucial for management to incorporate concepts of risk management. This is necessary in the attempt to minimize organizational risks that may influence the performance of an organization negatively.
For the purposes of discussions of this paper, risk management is “a process for identifying, assessing, and prioritizing harmful conditions (risks) of different kinds” (Alexander and Sheedy 10). Depending on the nature and type of risk that an organization may anticipate to face, a number of strategies may come in handy to help in mitigating them.
Some of the risks that organizations endeavor to mitigate include undue lawsuits, theft, fraud financial markets uncertainties, credit risks, and confidential information leak risks amongst others. Proper management of these risks lowers the degree of vulnerability of an organizational.
Even though, it is crucial for organizations to concentrate on reducing financial risks, risk management has an important function towards aiding in protecting customers, public, and employees from negative impacts including fires and terrorism amongst others. It also entangles the protection of organizational physical assets, records, data, and other physical facilities.
From this perspective, the paper utilizes Pepsi Company to describe three volatile situations showing how one can apply risk management to resolve them. The situations are fraudulent activities, which may result into the shareholders losing their long-term investments, as well as health and safety risks for both workers and consumers of the organization. Since water is an important raw material in the manufacture of beverages, the paper treats the risks of water pollution as an additional risk to Pepsi Company.
Organizational Background
Pepsi Company limited is a Philippines-based soft drinks bottling company specializing in canned products. It manufactures, sells, and distributes soft drinks belonging to the non-carbonated (NCB) and carbonated soft drinks (CBDs) category. These comprise the main two business segments of the company.
The products of are distributed to wholesale, retail outlets, bars, and restaurants. With each segment of the products being manufactured by the company, varieties of product brands exist. In the CBDs’ segment, brands such as 7Up, Mug, Mountain Dew, Pepsi cola, and Merida exist. Pepsi Lipton, Gatorade, Propel Fitness Water, Twister, and sting energy drinks comprise the NCBs segment.
Given the wide range of products that the company produces, it is significant that the organization determines the most appropriate product mix in an attempt to attain optimal profitability. Achieving optimum profitability implies optimal mitigation of risks to investors (shareholder). This means that one of the plausible risks that Pepsi Company endeavors to mitigate is protection of the shareholder against encountering undue losses of the investment.
In this extent, Pepsi states categorically in its mission statement that it “seeks to produce financial rewards to investors providing opportunities for growth and enrichment to its employees, business partners, and the communities in which it operates” (PepsiCo Inc Para. 1).
Additionally, disability and risk managers within Pepsi Company have come up with strategies for mobilization of all resources with the organization over a long time to ensure that the organization improves its profitability continuously. Consequently, they have “discovered that respecting employees can have a positive impact on workers’ comp and disability costs” (Myshko 122).
It stands out that, equal treatment of employees; strict observance of justice coupled with inculcation of strong organizational ethics of integrity within the organization can hike the levels of accountability of all Pepsi workers right from those in the production floor to the top management officials.
Risks Context
In Pepsi Company, immense measures get plausible attention to ensure that the organizational goals and values articulate with anticipated stakeholders’ benefits. The values of the organization form the frameworks upon which specific goals cling. These include vision statements and objectives of all departments that must work collaboratively to deliver high quality beverage products, while not negating the overall corporate strategies coupled with managerial tactics.
In the quest to mitigate risks within any organization, organizations determine quantitatively or qualitatively the extent to which they have accomplished their visions, values, evening anticipating performance strategies. In the formulation of such values, attention goes to strategies and visions to ensure that the organization in question can reduce the degree of its susceptibility to risks.
For this purpose, before continuing with the analysis of risks facing Pepsi Company, a consideration goes to the scrutiny of Pepsi’s organizational goals and values. However, the scope of this paper does not warrant consideration of departmental objectives, goals, and/or how they contribute to the overall mechanisms of risks reduction with Pepsi Company.
Organizational Goals
Pepsi’s main goal is to ensure the fulfillment of its vision is realized of “put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable company” (PepsiCo Inc Para 2). As stipulated in this goal, it is clear that Pepsi recognizes that its main reason of being in operation is to confer benefit to its owners (shareholders).
Therefore, any impediment to this goal is an immense organizational risk that needs mitigation by deploying concepts of risk management in its corporate governance strategies. Further, goals of the Pepsi Company are enumerated in its philosophy statement. The company endeavors to ensure that it grows sustainably by empowering people, acting in a responsible manner, and building investors’ trust.
To build trust, accountability is relevant, as it amounts to a critical organizational goal. In this extent, any event or act such as fraud that may erode the force of accountability constitutes an organizational risk that needs mitigation. In fact, incorporation of appropriate measures for mitigation of fraudulent activities within the organization constitutes one of the strategies that ensure the realization of sustained growth of the organization.
With sustained growth, more innovation can be done through research and design with a consequence of even more enhanced growth of both the employees and the company in terms of increased organizational performance. For Pepsi, empowering people is particularly critical since “freedom to act and think in ways that we feel will get the job done, while adhering to processes that ensure proper governance and being mindful of company needs beyond our own” (PepsiCo Inc Para 3) is realizable.
For Pepsi to realize its goals, as argued before, it is significant that the organization practices utmost responsibility coupled with retention of perceptions of trust among all its stakeholders. This is the foundation of healthy growth. For this reason, the company ensures that all its employees are personally and corporately accountable.
In this context, PepsiCo Inc informs, “by acting as good stewards of the resources entrusted to us, we strengthen that trust by walking the talk and following through on our commitment to succeeding together” (Para. 6). The company strives to achieve this endeavor by deploying six guiding principles enumerated as:-
- Care for consumers, customers and also the entire word where the company’s products are used
- Focusing on sales of products which can only make the company proud
- Speaking with both truth and candor
- Ensuring that long terms and short terms strategies are balanced
- Utilize the organization diversity coupled with inclusion in manner that would make the organization competitive
- Ensuring that people respects each other for them to succeed together
Organizational Values
Organizational values may be stipulated in a number of ways. One subtle way is to break the values into some weighted “triple bottom lines” (Kallman 23). This concept extends beyond the native bottom line, which only seeks to address fiscal issues to include environmental stewardships coupled with social justice.
Pepsi operates under foods and beverage industry. Therefore, consistent with this breakdown, the company has to comply with both environmental concerns in its production processes ensuring strict compliance with social issues such as health, supply chain, and safety in the development of new beverage products.
As a core value of Pepsi, the company appreciates that more fragmentation of supply chain impairs the organization’s capacity to control its production activities. Hence, myriad of challenges affiliated to its products’ safety levels and quality coupled with abuse of human rights are likely to arise. This perception makes it clear that Pepsi organization values extend beyond the deployment of organizational values pegged on fiscal issues in the quest to enhance and maintain long-term profitability of the organization.
Pepsi Company produces a wide variety of products, which have high consumerism across Philippines. It is significant to ensure that it produces products of high quality in order to induce product loyalty among its consumers. In the umbrella of social justice, health consideration comes first.
During the production process, workers operate with production and packaging equipments that may cause bodily injuries to them. Hence, safety is an imperative organizational value that every worker within the company must observe. Failure to do this may plunge the organization into hefty risks amongst them compensations for preventable accidents. Furthermore, environmental hazards are worth incorporating in the concerns of Pepsi organizational values.
For this reason, the company endeavors to ensure that it conducts its business, not only in a safe way to the employees, but also the surrounding communities. More important to note is that the company deploys proactive strategies to ensure that it protects natural environment to meet the organizational needs of every day without impairing the organization’s future capacity to meet ardently the needs of its clients.
Organizational Risk Position
An organization may take a valid position in the quest to ensure that it responds ardently to risks exposures. A means of responding to risks is critical since no organization is principally immune to risks (Borodzicz 115). However, before deriving such a means, it is necessary to qualify the organization’s capacity to tolerate risks.
This happens by determining the company’s position on either side (tolerance and appetite) of the neutral point of risks scale. “The objective value of an organization’s faith in a positive outcome is its risk appetite” (Borodzicz 128). On the other hand, tolerance is the extent to which a particular organization attempts to make transfers of its risks volatilities to external parties among them being the insurers.
Fundamentally, companies approach volatile situations that may result into exposure of the company to risks from the dimension that no negative impact may result. However, the volatility of the situation, depending on the degree of the volatility, may produce varying impacts to the organization- both positive and negative.
With incorporation of innovative strategies, Pepsi has always anticipated positive volatilities for some situations such as the likelihood of professional malpractices such as engagement of fraudulent activities, particularly with the overwhelming embracing of integrity as both organizational culture and value.
Arguably, for Pepsi to ensure that all its stakeholders are subtly protected from imminent risks, it is crucial that the organization prevents them from the action of all volatile situations. Unfortunately, this is widely improbable during the normal business practices. For instance, by merely starting the production process, workers are exposed to health and safety risks.
Additionally, for every product produced, some waste products are released into the environment, and may find its way to water sources. This increases the risks of using contaminated water in the company’s future production processes. Thus, it is crucial that the organization employs a strong culture of safety. The worst part is that probability of exposure to negative volatilities can never reduce to zero. Concepts of risks management can never be left out in the daily business activities of the company.
Risk Analysis
Water
Risk Identification
One can utilize various ways to determine various volatile situations that may truncate into risks that may cause undue outcomes. Through conducting an intensive research on beverages manufacturing processes, availability of clean water comes out conspicuously as an incredible risk that may pose enormous risks to the Pepsi’s normal line of business. Water is an essential ingredient in the manufacture of beverages.
It is also used in the cleaning and cooling during the manufacturing process of Pepsi beverage products. As Pepsi Company has its headquarters in Philippines though constituted in India. The perception that “India’s current water supply is approximately 740 billion m3, but it has been estimated that by 2030 demand for water in India will grow to almost 1.5 trillion m3” (Carmody 387) implies that water pollution is an incredible risk that Pepsi would get required to mitigate proactively to maintain its levels of profitability in future.
Similar argument may be extended to Philippines, china and even the entire Asian continent. In particular, change of weather patterns due to global warming increases the risks of clean water security for use in the beverage industry, which is a lucrative industry in Asia perhaps due ease of its market penetration.
With the declaration that about 75 percent of water flowing in the natural stream and rivers, which passes through urban centers across Asia, is unsafe for both fishing and drinking (Carmody 389), it is apparent that Pepsi faces risks of water security issues.
Description
In the quest to describe any volatile situation that may result into organizational risks, it is crucial to segregate it into its constituent components: subjects, a factor and events. Subject refers to the asset, stakeholder, a liability and even any other form of equity that is critical to the organization.
Since the focus here is the risk of clean water security, the subject at risk is the products produced using the water as an ingredient. Events are those things that produce variations in the values of the subject. The event described here is that of both intentional and unintentional pollution of water sources of the Pepsi Company. Factors are conditions, which have the power of affecting the probability of the event to truncate into change of subject’s value.
In this context, factors may function as drivers (results to positive volatility) or comprises the hazards (leads to negative volatility). Hypothetically, a possible factor would be reduction of water quantities due to global warming. Apparently, despite the narrow focus of this risk, it is clear that almost every stakeholder of the Pepsi Company is influenced by it and hence the risk is worth giving consideration.
Measurement
Every firm that is engaged in a manufacturing process measure the magnitude of its water requirements in terms of either gallons or m3 to produce a certain quantity of products. Further, one can express this quantity in terms of its sources. Stream water is the most readily available source of industrial water.
With the increase in pollution of this water, it is anticipated that the water obtained this way need to undergo intensive screening and purification process. The process is dependent on the source of the water as highly polluted water is anticipated to have the highest cost per unit.
Impacts
Evaluation of the overall effects of a volatile situation comprises one of the most essential strategies towards remaining vigilant for the volatile situation. In this particular scenario, it is release of polluted water into streams from where Pepsi Company obtains its water. Pollution as an environmental risk to Pepsi Company is critical in that, the beverage industry is open to water risks due to a number of reasons.
In the first place, to conduct its business, the industry demands to have large water supplies. Secondly, the largest proportion of this water needs being extremely pure for the organizations in the industry to produce products of high quality and which meets the requirements of foods and drinks safety standards.
Most importantly, the perception of risks of reduction of supplies of clean water to the company impacts it negatively in the sense that it has to consider improving its efficiency levels (utilizing less water quantities per product), increase and maintain accessibility to clean water and also deriving mechanisms of dealing with the waste water from its production processes. All these considerations have financial element tied within them. Consequently, the risk of dwindled company’s profitability becomes even more amplified.
Mitigating the Risk/Solution
To help deal with the risks of water pollution in future, Pepsi needs to derive strategic measures that would ensure that it becomes risk resilient. This starts by risk acceptance. After accepting that the risk is eminent, Pepsi should then adopt mechanisms of minimizing the severity of the risk.
Risk acceptance is inevitable since elimination of the risk in totality is a nightmare because factors beyond human control such as the harm already done on the ozone layer, and hence the global warming amplify the risks.
Attempts to reduce risks of using polluted water in the production process in the Pepsi’s beverage production process is so critical to the extent that, should such a situation occur, the organization’s long culture and goal of ensuring high quality products delivery to its consumers would get negatively impaired. A number of possible solutions exist to help the company mitigate or reduce the probability of its occurrence some time expressed in future time domain.
- Pepsi needs to consider and measure the extent to which its supply of water is dependent on risks associated with stream water pollution. In this endeavor, all stakeholders have to be consulted.
- The organizations water footprint is essential for measurement and scrutinizing ways in which process enhancement coupled with water related infrastructure may contribute in more effective and efficient water resources management.
- To mitigate the risks of utilization of contaminated water in the beverages production process, the company needs to put in place rigorous water monitoring and also testing equipments whose sensitivity levels depends on perceived risks of exposure.
- Pepsi Company needs to evaluate and rate its contribution to pollution of watercourses. Upon doing this, it needs to put in place mechanisms to reduce both the level of this form of pollution and other industrial effluents. When the company does its part and other companies’ follows suit, it is likely that the chances of exposure of the company to clean water insecurities in future would be reduced in multifold.
Fraud and Misconducts
Risk Identification
Many management scholars contend that fraud constitutes one of the most important ways in which the investors can get deprived off their right to reap the benefits of their investment optimally. This is why regulations have already been incorporated both in Philippines and across the globe to curtail internal corporate misconduct and fraud. Fraud is “broad concept that generally refers to an intentional act committed to secure an unfair or unlawful gain” (Garner 18).
It is important to note that no particular methodology of mitigating fraud risks fits ardently in all organizations. Thus, it is necessary to narrow down to the case in context: Pepsi Company. On the other hand, acts of misconduct in the context of organizational susceptibility to risks entangles violation of set out regulations, market anticipations, business conducts that are ethical and just, laws and internal policies of an organization.
The discussion of fraud as risk worth mitigation does not imply that Pepsi Company experiences or employees people who engage in fraudulent activities. The emphasis is that, fraud is undue risk that may occur within the organization and hence some mechanism of mitigating it is necessary if Pepsi is to develop resilience to fraud risks.
Description
In the occurrence of fraud, the main subject impacted by such a risk is the shareholder, who is also the owner of the organization. Several events may lead to surfacing of the risk of fraud within Pepsi Company. One of such events is occurrence of a financial reporting system intoxicated with fraud.
This entails assets overstatement, liabilities understatements and recognition of revenues in an improper way (KMPG 7). Another event is assets misappropriation including external theft, embezzlement, counterfeiting, payroll fraud, loyalty fraud and fraud in procurement process among others. The third event is gaining of assets and or revenues in an illegal manner. This entangles consumers overbilling, bogus revenues, deceptive behaviors while selling, and revenue acceleration.
An event of the case of liabilities and or expenses avoidance illegally through tax fraud and falsified information provided to law regulators and enforcers is also tantamount to exposure of the organization to fraud risks. In the context of Fraud risk, a factor would entail relaxation of the fraud monitoring system within Pepsi Company. This would create the chances of loopholes through which the fraudulence would take place.
Measurement/Risk Assessment
All organizations encounter some sort of risks associated with fraud and/or misconducts. Pepsi Company is not immune to this kind of risk.
It is thus vital for the company to conduct fraud risk assessment to help the “management understand the risks that are unique to its business, identify gaps or weakness in control to mitigate those risks and develop a practical plan for targeting the right resources and controls to reduce those risks” (KMPG 12). Therefore, the Pepsi Company should utilize the following procedure in assessing risks of fraud.
The process of assessing fraud risks
Source: (KMPG 10)
Impacts
For an organization to remain competitive, it needs to maintain its shareholders confidence and security of their invested funds. However, this is improbable without appropriate strategies of mitigating fraud risks. This is because incidences of fraud create a phenomenon favorable for loss of the Pepsi owners and other stakeholders’ levels of confidence to the performance of the organization both in short term and long term.
Mitigating the Risk/Solution
Since cases of fraud within Pepsi Company having not been reported on mega scale, it is important that risk management team of the company prevents their occurrence in the first place.
This noble duty is particularly the responsibility of the audit committee. Together, with the management, the board of directors has the responsibility of proactively mitigating acts of misconduct and fraud by deployment of appropriate fraud monitoring and control strategies.
This leads to establishment of “‘tone at the top’ and ensuring that institutional support is established at the highest level for ethical and responsible business practices” (KMPG 9). For this reason, Pepsi company has established an audit committee that has among other duties the following responsibilities:-
- Conducting a review and discussion of issues that come up during misconduct and fraud risk assessment
- Discussion and review of results obtained during the assessment of the company’s quality of various antifraud programs coupled with their controls with both external and internal auditors
- Establishment of the procedures that are appropriate for treatment coupled with receipt of queries emanating from matters of accounting audit
The above responsibilities are arguably an attempt to put in place a mechanism of fostering accountability. The fact that these responsibilities are coordinated by the top managements makes is possible to mitigate fraud. Indeed, “ a robust fraud strategy is one that is sponsored at the highest level within a firm and embedded within the organizational culture since fraud threats and fraudsters consistently develop new techniques to exploit the easiest target” (Robison 13).
Therefore, senior Pepsi fraud risks management and oversight committee needs to ensure that acts of fraud and misconduct are mitigated through
- Coordination of the Pepsi efforts of risk assessment
- Enactment of necessary standards for accepting preferred business practices
- Design and oversee the mechanisms of antifraud programs implementation and control
- Report to the audit committee and or the board on proceeds of the company’s activities of risk assessment
Health and safety risks
Risk identification and description
While employees interact with machinery in the Pepsi production floor, they are exposed to a variety of risks. By mere pressing of the start button of a machine, the risk of experiencing undue and harmful condition due to the operators’ perceived level of safety rises from zero. It increases with time in which the operators take control of the machinery.
Thus, it is vital to ensure that employees work both in healthy and safe environments since “all assets can be replaced, but the employees are one asset that an organization wants to retain for a long time” (Jones 91).
Additionally, increasing number of middle class people who have magnificent concerns over their health depicts that purity is an essential health risk that Pepsi Company needs to mitigate. In case of a volatile situation involving incidences of impurities in Pepsi products, the magnitude of consumption of the products may eventually reduce immensely.
Risk Measurement
Health and safety risks are measurable in a variety of ways. One way is direct observation of the myriads of conditions that are likely to cause injuries as people execute their tasks in the production floor. The second approach is examination and analysis of written records, reports and documents on instances and the number of injuries encountered in Pepsi Company.
From this analysis, a subtle strategy can be derived to help mitigate such risks in future. Thirdly, one may “talk to people to elicit facts and their experiences as well as gauging their views and opinions” (Health and Safety Executive 16). These approaches yield both quantitative and qualitative data.
Impacts
Philippines imposed strict liability on the manufacturing companies for the injuries caused on the employees while working. This infers that safety and health issues in the production floor and in products entangle an immense risk that Pepsi Company needs to mitigate.
Reduction of such risks also has a significant impact in increasing the profitability of the organization since the magnitude of compensations would reduce. Reduction in the number of health and safety risks is also necessary to avoid or reduce the number of legal suits, which may paint the image of the company negatively.
Solution
For Pepsi Company to ensure that it attains ‘no injuries outcome’ or a health risk affiliated to the work environment in the quest to satisfy its stakeholders, it is necessary to facilitate cute and effective control of safety and health risks. Effective and efficient health safety and health risks mitigation strategy has its premise on effective and efficient safety and health system management. This system is depicted below.
Effective Risk Control System
Source: (Health and Safety Executive 10)
In the endeavor to ensure that health and safety management system shown above translate into reduction of volatile situations; three key levels of control are critical for implementation at Pepsi Company. These are:
- Level one encompasses the crucial elements for safety and health management system. It entails management arrangements such as objectives and plans that are essential in the control, organization, design, monitoring, planning and implementation of various risks control management system (Health and Safety Executive 12).
- Level two is risks control system. It forms the fundamental base on which sufficient precautions of work place safety is provided and maintained.
- In level three, work place precautions are provided coupled with maintenance. The precautions aid in preventing harm to employees at the place of work or point of risk.
Conclusion
Every activity of an organization comes with some risks to the subjects. These risks are attributable to the existence of certain events, which give them some values. Moreover, certain factors must exist for a volatile situation (event) to take place. Combination of these three elements manifests themselves as risks, which organizations must endure and mitigate in the attempt to meet the needs of all the organizational stakeholders.
In the paper, three volatile situations were considered as presenting risks to Pepsi Company. Hence, the paper finds it vital to mitigate them. These are water; which comprise about 75% of the raw materials required in manufacture of beverages, health and safety, together with fraud and acts of misconduct.
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