Financial strategy Essay Example | Topics and Well Written Essays - 1500 words

Financial strategy - Essay Example It is however, critical to understand that such balancing act often depend upon the firm’s choice of the risk level which it attempts to undertake. (Walsh, 1996), As such the growing firms may be more risk loving and willing to take on higher level of risks and therefore all their decisions to expand and develop their markets will be based upon the higher degree of risk firm is willing to assume. Similarly, if a firm is more mature and risk averse in nature, its overall strategies will be relatively different as compared to a growing firm. (De Wit, & Meyer,1998). This paper will attempt to argue and explore that a firm’s overall risk consciousness governs the underlying strategies of the firm. The concept of Risk and firm The question of whether risk is the major factor behind the strategy formulation or not need to be discussed from the different perspectives. Each organization operates in an environment which is both internal and external to it and therefore develops its strategies in accordance with its environment. Firms, to a large extent, develop their capabilities to deal with the risks arising from their internal environment however; it’s the external competitive landscape of a firm which poses it significant and important risks because of the volatile and uncontrollable nature of the external environment. The overall development of the risk consciousness of the firm therefore largely depends upon the kind of external environment faced by the firm and how firm can actually utilize its strengths to withstands such external risks Risk as a concept therefore outlines that the outcome of any decisions or strategies of a firm may not be exactly according to what is perceived by the firm. As such it becomes critically important for the firms to account for and plan risks and develop strategies which can help them to counter risks arising from their internal as well as external environment. It is this uncertainty of the external environmen t which firms need to account for and prepare themselves through proper planning and strategy formulation process. It is also important to understand that the overall risk factors in an external environment can be diverse however; normally firms perform PESTLE Analysis to analyze their external environment. PESTLE Analysis allows the firms to actually evaluate the impact which political, economic, social, technological, legal and environmental factors could have on the firm. (Ellis, & Williams, 1993) If a firm has relatively high tolerance for the risk, it may choose to work in an environment which can be politically volatile and uncertain. For example, any firm willing to operate in Afghanistan now must have relatively higher tolerance for the risk because of volatile and extremely uncertain political environment. As such its policies and strategies will be driven by the volatility of the external environment within which it is operating or willing to operate. Risk and Return Risk and Return criteria serves as the basic premise under which all the economic decisions are made. Every investor as well as the firm attempts to decide and take actions based on their overall risk and return profile.