13 January 2016

A Case Study in Corporate Risk: What exactly happened to Dick Smith?

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There have been many media reports recently in regards to the large electronics retail chain Dick Smith falling into administration, leaving the future of the company in uncertainty.

The founder and previous Australian of the Year indicated that he has no intentions of buying the business back. Dick Smith sold the 20-store business to Woolworths in the early 1980s for $25 million.

So what was the reason for the fall of the electronics retail giant?

Dick Smith blamed it on “absolute greed” for the downfall of the electronics retail. Anchorage Capital paid Woolworths $90 million to take over the chain, however the business was refloated to the market for $520 million just a year later.

Afterwards, the new management team wrote down the value of their stock by $58 million, stating it was “aged and obsolete”, leaving the business with almost no old stock to start the year of 2014. Although this saw benefits in the consumer electronics market which has rapid product obsolescence, it was an unsustainable decision. 

Following from this, the retail chain has expanded too rapidly in the last couple of years with the opening of 25 new stores.

Despite low returns, Mr Smith believes shareholders knew the risks involved by purchasing highly inflated shares.

Risks to your business can exist anywhere and it can be hard to predict when and in what form they will occur. The downfall of the retail chain was the fault of not analysing the risks and implications involved in restructuring and public offerings.

In an exclusive interview with Bettina McMahon, Head of Risk & Assurance, nehta - National E-Health Transition Authority - she mentioned that risk management isn’t a framework but lens on what level of risk they need to take to deliver their strategic objectives.

Companies should identify the level of risk they are comfortable taking and align everyone’s risk tolerance. The right level of risk taking then becomes part of the organisation’s DNA.

Risks should form part of the management plan as well as a range of other controls including corporate structure, resource allocation, legal contracts, insurance, and cash reserves. By seeing controls holistically this gives an executive comfort a risky decision is moderated on many levels.

For rapidly evolving businesses, executives need to adapt strategies that require emergency response, crisis management, business continuity, disaster recovery plans in a timely manner without changing the balance sheets to make the costs appeal to the board and consumers.

The founder of Dick Smith still has hopes for the electronics retail chain and believes the company needs a good management team to revive the business. 

Being brought up in a typical Chinese family in Australia, Vivian takes pride as an ABC (Australia-born Chinese) where she happily embraces both the Chinese and Australian cultures. In high school, Vivian wanted to become a fashion designer, however she has developed a passion for running events after working backstage for multiple live shows. Prior to starting at Akolade, Vivian worked 4 years in the wine industry and she misses the wine tasting sessions and openly drinking on the job. As the Marketing Coordinator, Vivian enjoys using her creativity to design unique and fun campaigns for each event. In her spare time, Vivian loves to spend time with her two adorable cat and dog. 

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