Data Driven Decision Making MGT334Module 2 Assignment 2 Cloud.docx

Data Driven Decision Making MGT334
Module 2 Assignment 2: Cloud
Solution
s
Cloud-based computing allows businesses to store and access
large amounts of data over the Internet rather than on in-house
computer hard drives. There are several cloud-based data
solutions currently available in the marketplace.
Using the Argosy University online library resources and the
Internet, research the latest cloud-based data solutions in the
marketplace today. Select at least 2 scholarly sources for use in
this assignment.
Assume you are evaluating vendors providing cloud-based
solutions for your current organization or a hypothetical
organization. Complete the following:
· Identify three potential vendors.
· Compare the three different vendors. Be sure to consider the
services, data solutions, and security features they provide.
· Based on your analysis, provide a recommendation about
which provider or solution you think would work best.
· Provide a justification explaining why it would be the best

product for your selected business to use (using your current
organization or a hypothetical organization). Support your
recommendation with up-to-date knowledge of business
practices and technology use. Be sure to provide a little
background about the organization to help justify your
recommendation.
Utilize at least 2 scholarly sources in support of your assertions.
Make sure you write in a clear, concise, and organized manner;
demonstrate ethical scholarship in appropriate and accurate
representation and attribution of sources; display accurate
spelling, grammar, and punctuation.
Write a 3–4-page report in Word format. Apply APA standards
to citation of sources. Use the following file naming
convention: LastnameFirstInitial_M4_A2.doc.
By the due date assigned, deliver your assignment to the
Submissions Area.
Grading Criteria
Assignment Components
Proficient
Maximum Points
Compared the services, data solutions, and security features
provided by the vendors.
An accurate comparative analysis of each vendor is provided
including services, data solutions, and security features.
32

Provide a recommendation about which provider or solution you
think would work best.
Recommendation is based on accurate vendor information and it
explains which provider would work best in the specific
situation.
16
Provide justification about why you feel it would be the best
product for a business to use.
Justification is supported using up-to-date knowledge of
business practices and technology use.
32
Academic Writing
Write in a clear, concise, and organized manner; demonstrate
ethical scholarship in appropriate and accurate representation
and attribution of sources (i.e., APA); and display accurate
spelling, grammar, and punctuation. Use of scholarly sources
aligns with specified assignment requirements
Wrote in a clear, concise, and organized manner; demonstrated
ethical scholarship in appropriate and accurate representation
and attribution of sources; and displayed accurate spelling,
grammar, and punctuation. Use of scholarly sources aligns with
specified assignment requirements.
20

Total:
100
Fall of Enron
This is the section 1 part that i wrote before

Introduction
Enron Company was formed in the year 1985 as an American
energy company. The company was opened in Houston, Texas to
unite with Houston Natural Gas and Intermonth. Enron was
formed as a communications and energy trading company. Its
main aim was to transmit electricity and gas. The distribution
took place all over the United States. Additionally, Enron was
involved power plants and pipelines development and
operations in the whole world. Enron became one of the largest
and fastest growing industries in the country. It is worth noting
that Enron Inc. became independent producing and distributing
gas and electricity in the United States. The electricity was from
wind and solar renewable energy. Enron Company, therefore,
became an innovative company trading natural gas and
electricity both in retail and wholesale mostly in northern
America. Enron company was said to be doing completely well
in the business for at least six years. It performed well in the
electricity and energy industry and emerging market. Due to the

great sales, it made in the energy industry in Africa, America,
and Philippines, Enron made a good reputation for its business.
however, the business seemed to perform well through this was
not the case. Therefore, its collapse came in 2001 when their
strategies failed to work (Dibra, 2016).
Competitive Positioning
Every company or organizations aims at differentiating their
products and services in order to remain competitive in their
market. Enron Company was not an exception to this. The
company was founded and involved in the business with the aim
of being unique in the services it offered to its customers. The
management of the company understood that in order to remain
competitive in the market, there was a need to come up with a
unique strategy. Therefore, the company indulged in
differentiation. This strategy enabled Enron to involve in the
businesses of trading different assets. Rather than concentrating
on energy production, Enron company also operated other
services such as the pipelines, broadband services, water plants,
electricity plants and paper plants. The company ensured that it
was active in all the businesses surrounding the industry.
Therefore, it continued to do great in the energy industry since
it was able to obtain high revenues, unlike its competitors.
The differentiation strategy created a good image for Enron
company which in turn attracted many investors. Within a short

period of diversifying into trading energy, water, and
electricity, Enron company was considered a high-tech global
organization. It became recognized all over the world. To keep
on blooming, Enron would publicize the actions it made to
achieve the high profits after formulating every strategy that it
came across (Lemus, 2014). Additionally, Enron’s culture
involved installing a competitive advantage for every employee.
The employees recruited and maintained in the company had
various educational backgrounds as well as experiences.
Through the employees, Enron company was able to remain at
the top of its competitors. The bankers, advisors and also
auditors played a significant role in maintaining the public
image of Enron company. These employees would work hand in
hand with the managers to ensure that the shoddy businesses
practices of the company were not revealed. Due to this strong
management strategy in Enron, the company was able to reflect
huge profits which were termed as a success for the company
(Rantanen, 2007).
Potential Causes of Failure
Enron’s rise in the energy industry was a mystery. The
competitors did not understand how Enron was able to keep up
with the business in the growing industry. However, the
company would soon face a tragedy that led to its collapse and
eventually failure (Lemus, 2014). Although the failure of Enron

cannot be accredited to any specific issue, it can be connected
to various reasons.
One of such reasons was the use of mark-to-market accounting
strategy. This means that the company used the market value to
measure its security. In this strategy, Enron company would
come up with an expected profit for an asset it produced. The
expected profit would then be included in the books without the
asset even being sold. Unlike the method of book value which is
used by most businesses, the mark-to-market accounting
strategy would hide the financial losses incurred by the
company. This is because the losses achieved by the company
were not included in the balance sheet, instead, once the
expected profit was projected in the books, the amount would
not be tampered with or changed (Rantanen, 2007). The losses
achieved therefore always went unreported. The strategies very
good at making the company seem more profitable than it
actually was. Although the mark-to-market accounting strategy
worked to maintain the public image of the company, it later
backfired. Most of the profits that Enron Inc. had been only in
papers. The losses had become extreme and the little revenue
and profit that the company was could not maintain it to that
level. This lack of enough money to keep on trading meat a cash
crisis which led to the sudden collapse of Enron company
(Dibra, 2016).
Enron company was also involved in serious accounting

irregularities. The management involved in irregularities that
enabled them to fabricate earnings. Additionality, the financial
misconduct enabled the company to hide its losses from
investors as well as the public. The misconducts also went a
long way in that the company failed to account for the owns and
debts it had. Most of the capital that used to run the Enron
company came from investors. Therefore, when the debts and
accounting misconducts of the company became revealed, the
investors and employees stopped involving in the company’s
activities. It is worth not that Enron was not independent and
therefore it was dependent on the investors. The withdrawal of
these investors thus meant there was no capital to run the
businesses hence leading to the collapse of the company
(Barreveld, 2002).
The other issue that contributed to the failure of Enron company
was its culture. The company was recognized for having pride
in its employees. Therefore, the management would give awards
to employees randomly. The employees in Enron company were
worth any kind of incentive if they were considered to bring in
an extra amount of money into the business. The employee
would therefore always compete with each in order to obtain the
rewards, the bonuses that were in the form of stock or cash
would flow into every employee who closed their deals at a high
speed. Due to this fact, the employees did not care about the
results achieved but rather about the rate at which they worked.

Instead of working as teams to achieve specific objectives, the
employees in Enron company worked solely. The employees
were used to competing with each other (Li, 2010). The
competition among the employees in Enron meant that the
services and products being offered to the public were not of a
high quality. This, in turn, led to a decrease in purchase of the
good and services. Moreover, the high amount of bonuses and
incentives given to the employees increased the expenditures of
the company. This would mean that the company did not have
enough money to run it businesses hence causing bankruptcy
which contributed to the failure of the company.
Enron’s Competitors
There are many companies that operate in the energy industry.
Therefore, Enron company has a lot of competitors. However,
Enron did not consider its competitors a threat that would bring
its business down. Some of Enron’ competitors included
Dynegy Inc., El Paso, Duke Energy, Reliant Energy, and
Williams. All of these energy companies had the desire to reach
the top and beyond Enron. Therefore, most of the companies
would come up with strategies that would see them obtain more
customers to purchase their products and services. Some of
these strategies used by Enron’s competitors included the use of
the new technologies to come up with innovations in their
businesses. Consequently, Enron competitors would provide

cheap energy products and services to attract and retain more
customers. Additionally, these competitors would indulge in
research of how Enron was working so as to develop in a better
way than Enron. Despite being Enron competitors, these
companies would try to copy Enron in its businesses. Enron had
registered a big margin in the revenue obtained as compared to
its competitors (Li, 2010). Therefore, the competitors would try
to copy the ideas from Enron and in turn develop those ideas
and make them better. Through this strategy, the competitors
aimed at putting to an end Enron’s competitive force. However,
the strategies would not work until Enron faced the tragedy and
collapsed.
Growth of the Energy Industry
It is worth noting that the energy industry is rapidly growing.
The increase in the use of electricity and other energy services
has led to an increase in energy demand in the whole country.
Additionally, the production that is done by the existing
companies in the industry is not enough to meet the consumer
needs. Every other industry uses energy for its manufacturing
and production of goods. Additionally, many other industries
are also emerging. This thus means that the energy produced by
the companies in the industry needs to be increased in order to
cater for all other sectors that require energy for their
operations. However, the energy industry may be considered to

have matured. This does not mean that the energy produced is
enough. Instead, it reveals that the energy industry keeps on
changing from time to time. New innovations and developments
are made in the energy sector and therefore the production of
energy is increased (Lemus, 2014). This facilitates the
continuous growth of the energy sector. Due to this growth,
there is also an increase in the number of companies developing
in the industry. This increases the competitors available to
compete with Enron in the market.
Position of Enron
Enron is ranked as the highest performing company in the
United States the energy industry. The company was so
successful that the revenues it obtained were much higher than
those of any other company in the industry. Enron Inc. took
advantage of all available opportunities to expand its business.
Unlike its competitors, Enron was in a unique position to
provide the services and products required by customers from
the energy sector. The management of the company used
distinguishing strategies to facilitate the flow of revenue as well
as profits for the company. The use of these business strategies
placed the company in a higher position than its competitors.
Additionally, the company was able to reach to and maintain
more customers than any of its competitors. The company was
also known for hiring the best employees since it chooses the

most skilled and qualified persons (Barreveld, 2002). This, in
turn, facilitated a better performance for the company hence
increasing the amount obtained to keep the business running and
performing. The company was doing great and registered at
least shares worth $90. It was considered to be America's m
most innovative company. Every investor wanted to be
associated with the businesses taking place in Enron. This
meant that it had a great advantage over its competitors which
meant it was at a higher position than its competitors. This,
thus, led to the transformation of Enron into the world’s largest
energy trading company.
Enron’s Products and Service
Enron company involved in a wide range of operations. The
initial business of the company was to provide and supply
pipeline gas to customers. However, it sought to diversify into
various other products and services so as to have many ways of
obtaining revenues. Enron company involved in the sale of
natural gas, electric power as well as other energy products.
Consequently, the company involved in energy plant, paper
plants and water plants services production. This meant that
unlike its competitors which only concentrated on energy
manufacturing and production of natural gas, Enron provided
extra services and products such as the production of electricity
and supply of wind and solar energy (Barreveld, 2002). The

company also use the Enron online platform to sell its products
and services. The online platform helped the firm to reach a
larger market hence facilitating its growth. The diversification
and involvement in the gas futures and weather futures also
enhanced the growth of Enron Inc. therefore, the various
business platforms it involved in led to its development.
Enron’s ERM
Enron company was regarded to have a great the enterprise risk
management program. The society believed in the ERM of
Enron to protect the company against all risks. The progress of
the company showed that the company was perfectly
performing. However, the collapse of the fir in 2001 showed a
different perspective. The collapse revealed that the risk
management of Enron was weak and did not have the
capabilities to assess the risks in the energy industry. The
collapse of the company was a significant corporate and
financial failure that revealed all the weak points of the system.
It would have been important if the management of Enron
company had evaluated the risks present in the industry. This
would have helped to avoid the risks by using and implementing
all the strategies that would work towards the prevention of
business risks occurrences (Dibra, 2016).
Overview

Most companies emerge with the aim to bloom and stay at the
top of the industry. This, in turn, calls for the implementation of
various strategies that work in a competitive industry. Enron
company is no exception. Enron Inc. entered the energy industry
with great hopes. It ventured into the business and succeeded in
its operations. This saw the company rise above its competitors.
However, the strategies used by the company were not the best
to keep it progressing. Enron used strategies that would only
lead to its success for a short while and later one cause a
tragedy. The tragedy then led to the failure and finally collapse
of the company. Therefore, it is important for businesses to use
the best strategies for running their business to facilitate long-
term success.
Failure Audit and Root Cause Analysis
Undesired Outcome
Enron’s broadband business, which was forecasted that would
add $40 billion to Enron’s stock value, only created $16
million in revenue in second quarter of the second year, then
was closed.
Contributing Factors
On March 2001, Blockbuster terminated the deal with Enron
about providing video-on-demand through using Enron’s energy
giant’s infrastructure network. Because it did not make any

profit.
The price of fiber-optic circuits dropped sharply, which made
Enron tried to attract telecommunications giants that used
broadband, like MCI WorldCom Inc. and Verizon
Communications Inc., to trade with it and create a true market.
However, Enron failed.
Enron broadband trading did not become the main income of
Enron revenue. It calculated for only $408 million of Enron's
total $100 billion in reported revenue.
Proximate Cause
Enron executives and directors sold $924 million of company
stock in 2000 and 2001, in order to gain the profit of share price
appreciation.
Enron sold its dark fiber to the private partnership----LJM2,
which run by its then-chief financial officer, to gain a large
profit. LJM2 sold part of its fiber to other private partnership
created by Enron. Therefore, Enron could act as banker to the
new partnership and underwrote the purchase. In fact, Enron
still had $61 million of original $70 million debt.
As broadband prices continued to fall, Enron still insisted it was
not influenced by the problems. The officials thought that the
company would gain profit from the glut by buying surplus
space cheaply and reselling it at a profit.
Enron accounting models would decide a future date when the

fiber would be upgraded from "dark" to "lit," and thus
multiplying the revenue that the circuits would generate after
they became operational. Even though no person could make
sure when or if the circuits would become operational, the
increase in expected value would be added to Enron's current
income.
Intermediate Cause
Enron broadband gained large profit through trading with
private partnerships it had set up itself. This situation was
similar with trading with themselves. Thus, it could use
enterprising accounting practices to exaggerate the value of its
broadband contacts and greatly increase its actual revenue and
profit.
Enron broadband continued to lie that its trading operations
were growing rapidly.
Enron had Two-Path Strategy for its broadband trading. It
bought or leased cable in USA and abroad to create and connect
its Internet lines tied in with other major networks. Meanwhile,
Enron’s traders would start to buy and sell space on those
broadband networks, in deals including both Enron and its
competitors.
Enron was not about patience. In the company's hard-driving
corporate culture, compensation and bonuses were inextricably
tied to constant gains in revenue and stock market value,

particularly for top executives.
Enron used the "mark-to-market" accounting method, which
recognized the total value of a multi-year contract at its
beginning and then recorded any gains or losses in value over
time as the market dictated. However, this kind of contract is
only suitable for ready market. But there's not an active and
ready market for broadband, so Enron assigned values and
recognized revenue upfront as it wishes.
The main objective of Enron’s strategy was not to enhance the
long-term sustainable growth of its company and to increase
shareholders’ value, but to enrich its executives.
Root Cause
Enron’s management was heavily compensated using stock
options. This can motivate managers to make decision that
pump up short-term stock performance, but not a long-term
value. That compensation structure created a myopic vision that
focus on short-term profit rather than long-term sustainable
growth. And the executives tend to play down the underlying
risk in this situation.
A conflict of interest. The CEO and executives’ goals were to
enrich themselves, not acting on behalf their shareholders. This
risk flowed from Enron’s top management to the lower in the
hierarchy. This was because the Enron lacked independent
management framework. This lack of independence resulted in a

conflict of interest allowed for fraudulent activity to occur.
The speculative nature of Enron made the company face high
market risk and economic risk. Enron mainly acted was
becoming an intermediary and getting profit by arbitraging
price differences. However, financial instruments were highly
volatile, so it is hard to forecast its price accurately. Most of
ventures were too dependent on the dot-com bubble. So, when
the bubble was exploded, Enron started to widely use market-to-
market accounting to cover losses and high debt in broadband
field, in order to maintain its share price at a high level.
A firm usually has two auditors, one external and one internal.
In generally, Internal auditor prepares the balance sheet of the
company and the external auditor would review the work of
internal auditor and determine if it is correct and provide a fair
view of the firm financial conditions. However, Arthur
Anderson acted both as advisor and external auditor for Enron.
That seems like Arthur audit its own works. That’s exactly
disadvantageous for audit of corporation.
Corporate Audit committees were infrequent and covered lots of
agendas. As external directors, they only could rely on
information from management as well as internal and external
auditors. It was difficult for audit committee to find the
malpractice of company and challenge the strategy of company.
Therefore, the audit committee was more of a formality than
being an effective risk control.

US accounting standards were mechanical and unable to capture
intricacies in newly devised synthetic derivative products. This
motivated tailored financial engineering designed specifically to
bypass these rules. In accounting for some of its SPEs, Enron
was able to design transactions that satisfied the regulations
without reflecting its true financial risks.
Framework Selection
Based on the RCA mentioned in the last section, three
frameworks are recommended to help Enron in terms of
strategic decision-making process, risk management process and
compensation structure.
Strategic Decision-Making Framework:
Enron should establish an effective strategic decision program
that consists of three pillars. The first pillar is that greater
integration of Risk Management and the business to help Enron
take smart risks. The second pillar is that enhanced strategic
tools and methodologies to help Enron better identify strategic
and emerging risks. The third pillar is that understanding the
impact and uncertainty to the strategy, business, product
offering (Mok, 2017).
First pillar: integration of risk management and strategic
planning (Mok, 2017)
Construct a strategic development group that are consist of both

chief strategic officer and chief risk officer, (Enterprise risk
management is normally also one of the responsibilities of
CRO). Therefore, whenever chief strategic officer proposes new
opportunities, strategies, CRO could provide his/her insights on
the inherent risks in each proposed strategy. Furthermore, CRO
who also runs the ERM program, would know whether strategy
is acted in line with Enron’s objective, risk capacity and risk
appetite.
Also, in order to ensure the strategic meeting subject does not
favour one particular area, and to consider every possible
aspects, the strategic development group should have senior
executives from different areas to avoid convergent thinking
and to provide useful inputs.
Strategic development group members are required to conduct
certain strategic planning process such as the SWOT analysis, a
complete strategic planning process before developing any
strategies. For example, In the case of Enron’s broadband, the
entire strategy was developed and decided solely by their CEO,
Jeffrey Skilling. The main reason why Skilling decided to take
this strategy was that he believed that the old strategy that
worked for Enron, a old strategy which was emerging as the
biggest player in each field, could also work on this new
markets. That belief itself is a classic logic fallacy as everyone
knows that what worked in one field does not guarantee success
in another due to the differences in operating environment.

SWOT Analysis (Behr.P, 2002)
Strength
Diversify away the risks taken from energy trading sector.
Ideally, broadband service that trade communication bandwidth
would have a relatively high demand due to the internet boom in
2000.
Enron had a valuable brand name as well as its reputation. Such
a reputation was good for Enron and would have continued to
attract investors and it would also have drawn the trust of
clients and their loyalty. That is one of the strongest
comparative advantage Enron had.
Enron had an extensive base of capital and investment in
broadband telecommunication, it would allowed its expansion.
Weakness
Extremely costly. The optical fibre network itself cost Enron
around $1.3 billion to build. After the establishment of the
network, people could then buy and sell bandwidth on this
network.
The initial cost was too high that Enron had to charge customer
extremely high to recover from the initial cost.
Enron did not have any expertise in Broadband service, not to
mention establishing a continually R&D team. In order to gain
the technology, Enron had to either take-over broadband service
providers or entered joint venture. But Enron did not have
expertises and methods to identify which venture had the

potential to be the dominant one in the future. Enron also
bought multiple ventures at one go, instead of taking on a step
by step approach , and all those ventures were strongly
dependent on the doc.com bubble burst, which coupled losses
that were un-recoverable.
Enron overestimated the demand of bandwidth at that time.
While broadband internet access increased rapidly, the vasts
majority of consumer continued to surf the internet using dial-
up connections.
Due to the technological deficiencies, there was not a huge
differences in terms of transmitting data, but the price was
totally different. Therefore, demand for broadband service was
small.
Enron’s main weakness that lead to its failure was the
concealment of failures and misshapes that were occuring
within the company. Failed ventures and losses were hidden
instead of being exposed and as a result there were no remedial
measures taken in time to alleviate future problems
Opportunities
Sharp rising user of internet surfing due to the internet boom.
Based on the statistic, % of internet user per household rises
sharply from 21.2% to 41.5% from 1999 to 2000.
Threat
Enron were way too aggressive in terms of expansion without
careful and well-paced consideration of expansion.

Apart from SWOT analysis, a throughout strategic planning
process can be conducted, in order to help better developing
decision. Strategic planning process can help Enron see a set of
both risks and opportunities more broadly. Enron needs to focus
on the following areas to complete its strategic planning. The
detailed processes to address following areas are included in the
Appendix I.
If Enron is heading the right direction
If Enron has the right talent and capabilities needed to execute
If the chosen strategies create unintended new risks
Also, conducting strategic risk review jointly and in concert
with strategic planning processes will improve management’s
decision making process by enforcing a disciplined approach to
considering the continued relevance of set strategies, reduce
uncertainty and human bias.
Second Pillar: Enhanced tools and methodologies (scenario
planning and assumption test)
Enron should conduct scenario planning and assumption testing
to help Enron manage
potential futures or alternative scenarios that might challenge it
current strategic assumptions, and to spot potential sources of
risks that may not surface in other ways.
Scenario planning is basically considering various likely future
scenarios that broadband

service industry may be facing, so that Enron could have came
up with various controls and plans in place to deal with those
adverse scenarios. Enron should have prepared to manage the
scenarios individually and collectively. The detailed possible
scenarios are included in the Appendix II.
The greatest source of risk to a strategy is often the assumptions
underlying it (Mok, 2017). Making choices and assumptions
about the state of the market is inherent in the strategy-setting
process, but conditions will eventually change, potentially
dislodging an initial set of assumption. Assumption test is
needed to test how strong the underlying assumptions are. The
following are the necessary steps needed to construct an
assumption test.
The first step of this process would be to articulate all the
assumptions used in the proposed strategy. Clearly, the biggest
assumption in this strategy is that the strategy worked in one
field would guarantee success in another. This biggest
assumption does not hold even without testing, but still, Jeff
Skilling still relied on that assumption.
The second step of this process would be to put all assumptions
into a model and change its assumption value and see how it
would have impact the final results. For example, in the case of
broadband service, Enron may have made an assumption that the
percentage of customer are willing to buy their broadband
service was 20% and may have projected profit based on that

underlying assumption. Keeping changing the demand
assumption and seeing how much it would have impact the
projected profit. By doing this, Enron would have determined
whether this is a significant factor to their profit and would
have developed metrics to monitor them in the future.
The last step is to identify key assumptions and establish
monitoring practices to Enron when those assumptions change
This test allow Enron to establish indicators/triggers that can be
monitored over time to alert Enron before those assumptions
have been invalidated by external competitors or events.
Also such assumption testing need to be continually and certain
roles and responsibilities need to be assigned in the beginning.
Pillar 3: understand the impacts of change and uncertainty
(Mok, 2017)
Executives need to understand how external trends, business
models innovation, new approaches used by competitors and
new products could threaten Enron’s broadband business. By
asking and answering the following questions, executives could
assess the impact of changes.
Enron needs to qualitatively and quantitatively assess the
impact of changes on the three key variables: revenue, asset,
and assumptions.
Asset: Enron should know the impacts of fast expansion would
affect their asset and impacts huge investment in network would

affect their asset. Enron should also know how their assets
would be affected if it enters different fields.
Revenue: Enron should know the extents to which future
economy would affect the broadband revenue; Enron should
know the extents to which new entrants affect its revenue;
Enron should know the extents to which future inflation,
technological improvement affect its productivity and revenue.
Enron should know the extents to which future change in
customer behavior would affect their revenue; Enron should
know the extents to which future retaliation from competitors or
increased competition level in broadband industry would affect
their revenue.
Assumptions: Enron should know that the confidence level of
their assumptions; and the likely future events that would
weaken, strengthen or even invalidate their assumptions. Enron
should know the likelihood of those future events occurring;
Enron should know what assumptions they do not have right
now, but they need to include in the future as due to change in
external environment.
Risk Appetite Framework
Based on the RCA in part two, Enron’s top management created
a excessive risk-taking culture, inadequate strategic planning
and risk management process in place so that Enron tend to
jump in high-risk business activities without fully

understanding the risks involved. Those root causes can be
remediated by implementing a through risk appetite framework.
No business can thrive without taking on risks (Deloitte, 2014).
A key benefit of deploying a risk appetite framework is that
these risks are identified and quantified in a structured way that
relates them to the firm’s business objectives and strategy. By
deploying a properly embedded risk appetite framework, a firm
can choose to take on particular amount of particular risks, in
line with its overall business strategy and in contrast to
proactively or passive risk-taking.
The following steps are proposed to turn Enron around:
First, Enron must establish a strong independent risk function
that has the confidence and capabilities to design, build, launch
and embed risks language and concepts across the firm
(Deloitte, 2014). Although Enron had all the infrastructure of
proper management control, a risk assessment and control
group, a big-five auditor and conventional powers of boards and
related committees, the lack of independences in those areas
invalidates the intended used of those elements. To improve its
effectiveness of those elements, the structure needs to be
changed. To reduce conflict of interests and maintain
independent, internal auditor cannot serve their client for too
long; employees in audit firms cannot work for their client and
external auditors cannot be their internal auditors. Moreover,
CEO cannot be both the chairman of the board and executives,

which means CEO cannot be in multiple committees at the same
time.
Second, board members and executives need to be replaced.
Senior management and
board must buy-in the risk appetite framework concept enough
to make risk appetite the way that Enron approaches risks. The
tone from the top must appreciate such framework and that is
the reason why Enron had proper risk management policy, but
still excessively take risk. At the same time, hiring board
members and executives are willing to lead and are capable to
articulate and recognize financial and non-financial risks in
Enron business model and strategy.
Third, under the help of their independent risk functions, board
members and executives
need to establish Enron’s risk capacity, the maximum level of
risks at which Enron can operate, while remaining within
constraints implied by capital and funding needs and its
obligation to stakeholders.
The next essential step for board members and risk functions is
to establish risk
appetite statements to various risks after considering their
objectives and strategies. Risk appetite statements are a set of
statements that articulate the various risks Enron is willing to
take in the pursuit of their strategy. Risk appetite statements
should be in the forms of qualitative and quantitative statements

as some risks can be quantitatively expressed and some cannot.
A useful quantitative risk appetite statement for Enron could be
allowing a 5% chances to receive total loss of $2m in broadband
service business. A useful qualitative risk appetite to Enron
would be that Enron has zero tolerance to internal fraud.
Next, using both Top-down and bottom-up approach to identify
risks within each
business unit, controls in place, residuals risks in each business
and aggregate them together to form an enterprise-level risk
profile, the total amount of risk exposures Enron has at the
moment.
After setting up risk capacity and have identified risk profile,
Enron should now set
different risk appetite limits. Having established risk limits,
Enron would be able to know where has gone wrong and take
corrective actions in time. Enron can set upper and lower risk
appetite limits, different levels of attentions are needed when
Enron’s risk profile breach different risk limit level. For
example, Enron might set their upper limit on business risk as
$15m loss. So, if Enron loss more than $15m on broadband
service due to the fact that Enron’s competitor launched a much
quicker bandwidth services, then all current broadband business
needs to be shut down and losses need to be reported to all
board members.
For internal fraud risk appetite limits, Enron could set the

following (KPMG, 2016):
If Enron should not have non-independent of auditor
If Enron have compromised quality of audit work due to
reduced fees
If Enron has deliberate actions and misrepresentation by
management to delay or divert auditor’s attention from
problematics areas
If Enron have a person who is in charge of multiple position
that gives him/her too much influences in company
If Enron leaders have excessive interests in maintain stock
process
So if Enron breached 3 of them, immediate board meeting
maybe needed and remediate actions need to be given in the
board meeting. That would reduce Jeff skilling’s and Kenneth
Lay’s capabilities and opportunities to committee internal fraud.
Moreover, after setting up risk limits and corresponding actions
when Enron’s risk profile
breaches the limits, Enron need to establish the monitor
practices and reporting lines. Also, owner of risks need to be
assigned so that employees in Enron know who to talk to when
different risk trigger events occur. The Key Risk Indicators, risk
drivers and measures and limits need to be agreed at the outset,
so that employees in Enron know what to monitor. Also, the
frequencies of monitoring need to be set up. The monitoring
frequency cannot be too short that would waste too much time

and resources, but not too long that risk profile has breached the
upper risk limits.
In addition, Enron’s risk management framework needs to be
constantly reviewed and validated by independent third parties.
Enron could invite external auditor to regularly check the
effectiveness of their internal control, structure, risk
management policies, process, risk governance, culture and
refer to the best practices in industry and give
recommendations.
The last but the most important step to be that Enron must
aware that a risk appetite framework is just one piece of the
puzzle. In order to ensure effectiveness of their framework,
Enron must watch out other pieces of the puzzle, which are risk
culture, risk governance, risk management tools and risk
infrastructure. Once Enron has improved all of the pieces, they
then can integrate risks into their decision making process and
take appropriate amount of risks.
Compensation Structure Framework
From the broadband service failure, one of the key incentives
for Enron’s executives to enter into this industry was that they
know that they would definitely be able to gain personal
advantage as long as they could figure out a way to boost the
current price under the current compensation scheme.
In 1999, the US CEOs with top 50 income had average about

94.52% stock income
from their annual income, and this structure made CEO to
maximize the profit of the company.
Especially in Enron, roughly 80% of CEOs’ total compensation
came from cashing in stock
options. “In the report of 12 highest paid oil & gas CEOs,
Enron’s CEO Rex W. Tillerson was
ranked 6th. His income is $28,138,329, and his salary is
$2,717,000” (MIL, 2015). The CEOs only wanted to make the
profit to be maximum, no matter in what way, and with how
many
risks. And this was what they told their employees to do. All
they want is increasing
company’s short-term profit and boosting stock price so that
CEO will have higher income from the bonus and shares.
To begin with, Enron needs to do research of its current
situation, then to definite the compensation principle and
strategy. First thing to do is to collect information of Enron’s
current situation, including organization structure, setting of
every functional department and its starting point, function,
responsible to whom. Second thing to do is to recreate Enron’s
performance measures. The key problems with the previous
performance measures were that Enron was only using single,
simple performance measures in evaluating executives’
performance (short-term profit or share price rise percentage).

That would lead to executives solely focus on the profitability
and downplay other aspects, such as risks, working capital
utilized when making strategic decisions. To change that, Enron
needs to use multiple performance measures to evaluate
executives’ overall performance. For example, RAROC (risk
adjusted return on capital) can be a good performance measure
to use, as it not only looks at profitability, but also looks at
profitability after taking how much risks this project has taken
and how much working capital it utilized into account. In the
case of broadband service project where Enron utilized over $2
billion working capital with only around $20 million revenue,
this project provides a incredibly low RAROC and no
executives would have pass that project if RAROC was one of
the performance measures. Also, the information of how to
locate every functional department, and their existing staff’s
assessment criterion and relevance of their system of rewards
and penalties. Then, to grasp and analyze the framework of
Enron’s compensation structure that currently in effect.
Including the estimation of the total amount of income, which is
the relationship and ratio of annual gross compensation and
Enron’s profit. Also, the allocation proportion of every
functional department, perspective every functional
department’s highest, lowest, and the average income, the
structure of income if there are any different structures between
different department. Enron should consider what are in the

compensation structure, how is the ratio, how is the bonus, and
so on. Also, to analyze every employee’s hire date, education
background and some factors that relate to income. Then, Enron
needs to know its current position on market and their target,
also the feature of its development stage and themselves’
strategic needs.
Secondly, Enron needs to proceed the work analyze for
formatting the instruction of
every position in company. Thus, it can provide valuable basic
information for the whole human resource management
including the compensation management. If there is existing
position instruction available, Enron can use it to classify, then
analyze again based on its strategic direction and new principle.
To make sure the compensation structure is fair, Enron can
score every functional department based on categories of every
position and the qualification requirement of taking office.
Based on the order of the scores, it will have a hierarchy of
every functional department. Then Enron can estimate the
limited income of every department. Especially for CEOs, their
income should be limited and lower.
When confirm the wage level, Enron needs to reference the
wage level of labor market.
Enron needs to entrust professional consulting company to
research the compensation for solving problems of its external
competitiveness. Enron can use American Chamber of

Commerce, William Mercer, Watson Wyatt, or Hewitt. Enron
needs the consulting company to provide a whole statistic data
of salary and welfare, and the research report of compensation
practices.
Next thing is compensation positioning. After analyzing other
industries’ compensation
data, Enron needs to choose different wage levels based on its
current situation. Different positions will have different
compensation structures. For sell department, is salary plus
deduction percentage from a sum of revenue; for CEOs, is basic
salary plus floating wage; for producing technology, is metering
system. Enron’s problem is on CEOs’ compensation structure,
so it needs to rebuild CEOs’ compensation structure. For
compensation design, there are 3 types of strategies, they are
25P, 50P, 75P. These strategies that stand for 25th (low value),
50th (mid value), 75th (high value) if there are 100 companies.
If a company use 75P as their strategy, it needs deep pocket,
perfect management, and excellent product quality as supports.
Now, Enron is facing so many problems, and it don’t have deep
pocket or perfect management. For recovering itself, Enron
should not choose either 75P or 50P. It should choose 25P as its
strategy right now for a good beginning. At the most important,
Enron needs to adjust the ratio of CEOs’ compensation structure
to increase the basic salary and decrease the floating wage such
as bonus, stock profit, and so on.

Framework Evaluation
Options
Losses saving
Cost
Time needed to construct
Total Score
Strategic decision-making Framework
0.5 (5)
0.3(4)
0.2(5)
4.7
Risk Appetite Framework
0.5(5)
0.3(2)
0.2(1)
3.3
Compensation Structure Framework
0.5(4)
0.3(5)
0.2(4)
4.3

Rating
Loss saving
Cost
Time needed to construct
1
Save more 10%
$6m
4 Years
2
Save more 20%
$5m
3 Years
3
Save more 30%
$4m
2 Year
4
Save more 40%
$3m
1 Year
5
Save more 50%
$2m
0.5 Year

The following assumptions are made for the above charts:
The first value is the importance weight that we think that
specific dimension should have; the value should add up to 1
Loss saving account is the most significant dimension; cost of
framework is the second most significant dimension, and time
needed is the least significant dimension.
The second value in the parenthesis is the rating assigned on a
scale of 1-5
Strategic and risk appetite framework save us around 50% more
losses, with compensation framework save around 40%
Cost needed on strategic framework is around $3m, risk appetite
framework need $5m, compensation framework needs $2m.
Strategic framework can be established in half year, risk
appetite framework needs at least 4 years and compensation
structure need 1 year.
These three above-mentioned frameworks are useful and crucial
to help Enron recover and turnaround. Given that strategic
decision-making framework option scores the highest with
limited resources and time. The most appropriate and helpful
framework after thorough consideration selected for Enron
would be the strategic decision-making framework. Statistically
speaking, weak strategic decisions and internal controls were

identified in 60% of corporate failure cases (KPMG, 24). Since
strategic risk is the most typical risk, it would be better for
Enron to first consider and resolve strategic problems to avoid
further losses. In addition, Enron is innovative, ambitious, and
risk-taking. The company prefers to explore and enter new
fields to maximize its profits. Hence, it is essential for the firm
to develop a comprehensive and well-structured strategy
program to prevent its recklessness. Furthermore, most of
Enron’s decisions are solely made by its CEO, Jeffrey Skilling,
who is also Enron’s president. Skilling, one of Enron’s senior
management, has too much decision-making power and fails to
discuss strategies with other management and board of
directors. Thus, it is more necessary for Enron to have this
framework to alter its decision-making modes. Lastly, this
selected framework takes the least amount of time and money
when compared to the other two. However, these three
frameworks are not replaceable to each other. Although
strategic decision-making framework is selected as the most
vital and appropriate framework, these three frameworks can
supply and rely on each other to generate better outcomes.
Missing any one of the three would deteriorate the overall
effectiveness. Therefore, it is strongly recommended that Enron
should adopt all of the three frameworks if they have enough
resources. Overall, switching the new proposed frameworks
from the old should be Enron’s top priority.

Appendix I
Is Enron heading the right direction?
What are the objectives of the strategy? What are we trying to
achieve? Are the objectives of the proposed strategy consistent
with Enron’s business objectives?
What is the future trend of internet surfing and broadband
service?
How likely is the broadband service going to be the dominant
trend for future internet surfing? Why do you think customer
would choose broadband service instead of free dial-up
connection?
What are the unique advantages that Enron had in terms of
broadband service that could make Enron the market leader
Is this strategy achievable in the given time? What are the
initial costs? How long can Enron start to make profit?
What are the needs of customers? Can we meet their needs and
their future needs in the foreseeable future?
Is the demand for internet surfing elastic or inelastic? What is
the ideal price we should charge on our broadband service that
it would not lower our demand?
Does Enron have the right talent and capabilities needed to
execute?
What expertise and technologies do we have?

What is the maximum speed of data transmitting at the moment?
What is our speed of data transmitting can we achieve at the
moment?
How much time and money do we need to invest in order to be
the technology leader in broadband service?
Who is responsible for Enron’s broadband service and what
unique talent he could bring to the project and help our project
to succeed?
Could the chosen strategy create unintended new risks?
What are the critical uncertainties shaping the future of internet
and broadband service?
What are the potential risks of taking the strategy? What are the
new risks if we decide to take the strategy?
What are the estimated likelihood and severity of the risks and
uncertainties?
What controls, mitigation plans, contingent plan and exit
strategies do we have in place to reduce our risk exposure?
How effective are those? What are the residual risks? What do
we do with the residual risks?

Appendix II
What if the future Economy worsens? What if the demand for
computer and broadband service reduce as a result of reduce in
income level?
What if the Internet bubble burst?
What if Enron could not develop the quickest data transmitting
speed?
What if Enron is out of R&D funding?
What if Enron is out of cash flow?
What if computer manufacturers decide to develop their own
internet surfing service?
What if Enron do not generate enough revenue to cover its
initial cost and ongoing costs?
What if Enron’s other business suffer a lot and most of the
profit earned from broadband service needed to be fill the hole
in other business? Where can Enron find other ways to support
R&D?
What if all the above scenarios occurred at the same time?

References
Barreveld, D. J. (2002). The Enron Collapse: Creative
Accounting, Wrong Economics Or Criminal Acts? : a Look Into
the Root Causes of the Largest Bankruptcy in U.S. History.
iUniverse.
Behr, P. (2002, January 01). Broadband Strategy Got Enron in
Trouble. The Washington Post
https://www.washingtonpost.com/archive/business/2002/01/01/b
roadband-strategy-got-enron-in-trouble/86ce87f6-33e6-4efe-
90c5-067c795e9e8c/?utm_term=.aaff93077bb0
Chorafas, Dimitris N. (2004). Risk Management: The
Bottleneck is at the Top of the Bottle. Online E-Book. Palgrave
Macmillan, 2004. Page 111-117.

Deloitte US (2018) Audit, consulting, advisory, and tax
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https://www2.deloitte.com/
Dibra, R. (2016, June). Corporate Governance Failure: The Case
Of Enron And Parmalat. European Scientific Journal, 12(16),
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https://eujournal.org/index.php/esj/article/viewFile/7580/7307
KMPG. (2016). Corporate Failures. Forensic. Kpmg.co.za
Lemus, E. (2014). The Financial Collapse of the Enron
Corporation and Its Impact in the United States Capital Market.
Global Journal of Management and Business Research:
Accounting and Auditing, 4(1), 41-50.
https://globaljournals.org/GJMBR_Volume15/E-
Journal_GJMBR_(D)_Vol_15_Issue_1.pdf
Li, Y. (2010). The Case Analysis of the Scandal of Enron.
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418&rep=rep1&type=pdf

Miller, Thomas. (2015) “The 12 Highest Paid Oil & Gas CEOs.”
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General/The-12-Highest-Paid-Oil-Gas-CEOs.html
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inancial-
services/Banking/lu_inside_issue14_strategic_risk_management
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Collapse in Enron. In R. Hämäläinen, & E. Saarinen, Systems
Intelligence in Leadership and Everyday Life (pp. 171-185).
Helsinki University of Technology.
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Shen, Yang. (2017)“Compensation Design Thoughts and
Methods.” Baidu,
http://jingyan.baidu.com/article/915fc414d70dc151394b2015.ht
ml

Step 7: Recommendations based on the findings of all previous
steps of the Failure Audit, and mainly the
RCA, incorporating all important issues into three action plans:
(1) an ERM plan to implement a full
functioning ERM program in the company, (2) a strategic plan,
addressing trends and shifts in consumer
preferences/demands as well as e-commerce challenges and
growing competition, and (3) a management plan
intended to improve management practices, labor relations, and
Walmart’s image/reputation respectively.
These action plans will be subject to Failure Modes and Effects
analysis in order to reveal potential risks
embedded within them, and therefore will be further adjusted as
necessary. Key process functions of the action
plans are presented within the FMEA spreadsheets. The detailed
action plans are provided in Appendix 6.
FMEA
A forward-looking analysis of the effectiveness of the action
plans recommended in step 7 of the Failure Audit,
quantifying the severity of potential risks embedded in the
plans. By following the FMEA flowchart (Appendix
7), we conducted an FMEA for each of the three action plans

and presented the process in three individual
spreadsheets: (Rating tables are provided in Appendix 8)
1. FMEA for ERM Plan:
Process
Function
(Plan)
Potential Failure
Mode
Potential Effects
of Failure
Severity Potential Causes/
Mechanisms of
Failure
Occurrence Current
Process
Controls
Detection RPN Recommended Actions

Primary:
Establishment
of program for
proactively
managing
critical risks.
Secondary:
Involvement
of CRO and
hiring the
qualified
ERM team
members.
The ERM program
failed to follow the
designed process.
The risk Inventory
failed to update the
substantial risks.
The risk steering
committee failed to

oversee the
implementation plan.
Implantation plan
takes more time than
expected.
Leadership
committee failed
to account
substantial risk
into
consideration,
and Walmart
exposed to
unacknowledged
risks.
8 Poor risk steering
committee oversight.
5 None 5 200 Emphasize on three
lines of defense.
Outsourcing legal

and ERM
implementation team
failed to collaborate
with internal
environment.
8 None 6 384 Establish policies and
procedures.
The ERM program is
over budget.
6 Internal
Audit
monitors the
budget
monthly.
4 192 Monitor budget
regularly and set an
ultimate objective and
timeline of ERM
program.

2. FMEA for Management Plan:
Process Function
(Plan)
Potential
Failure Mode
Potential
Effects of
Failure
Mechanisms of
Failure
Occurrence Current Process
Controls
Primary: Improve
management
practices, labor
relations, and
Walmart’s

image/reputation.
Secondary:
Implement a
training program,
conduct an
observational
study, and run an
advertising
campaign.
The training
program does
not carry all the
necessary
content for its
employees and
managers.
The observation
study does not
truly reflect the
management
problem.
The action plan

takes more time
than expected.
The advertising
campaign failed
to create value
for Walmart.
The
employees act
negatively
towards the
action plan,
and the
management
failed to
conduct the
advertising
campaigns. As
a result,
customers and
community
further demote
Walmart’s
public image

and
reputation.
6 Risk of atypical
activity by the
participants in front of
the observers that
create bias and
discrepancy between
the reality and
observation.
5 None 8 240 Conduct both direct and
indirect observation study to
avoid potential bias from
participants’ awareness of
observers and obtain a less
biased result. Generating
research questions to be
explored via quantitative
methodologies.
Employees see the
training program as a
negative event and

decrease employees’
job performance and
job satisfaction.
6 None 6 216 Create the positive events to
result in positive emotions.
For example, an enjoyable
work-day and work-
environment can increase
employee’s performance
and satisfaction.
Walmart’s employees
and managers do not
sync with the
advertisement for all
the new changes.
5 Marketing
Department has
the policy to run
advertisement
campaign

5 150 Walmart should test the
action plan before running
the advertisement campaign.
Liang Yu
3. FMEA for Strategic Plan
Process Function
(Plan)
Potential
Failure
Mode
Potential
Effects of
Failure
Mechanisms of
Failure

Occurrence Current Process
Controls
Primary: Increase
total revenue,
profit, and market
share in e-
commerce
section.
Secondary: Make
an aggressive
integration of new
products
according to
consumer’s
emerging
demands and
shifting
preferences and to
develop essential
competitiveness

of e-commerce
platform.
The total
revenue,
profit, and
market
share in e-
commerce
section
cannot
meet the
target
settled.
Walmart will
lose its
competitiveness
among
successfully
transformed
retailers which
are oriented by
consumers’

innovative
preference and
embedded with
e-commerce
business model.
7 Poor selection of the
new products.
7 R&D team conducts
research on
customers’ preference
of new products and
their demands of
certain brands.
7 343
Conduct split research,
keep the research update,
and pre-launch the new
products.
Loss of contribution

of traditional
customers loyal to
cheap products
despite quality.
6 Distribution of the
shelf space is carefully
designed according to
research of Walmart’s
customers.
3 126
Keep signs and relative
percentage of shelf space
of products. Integrate the
shelf-space percentage into
EWS.
Relatively high cost
of contracts with
new suppliers and
shipping carriers.

4 None 2 56
Compare with external data
of cost. Set a threshold of
cost ahead of contracts.
Low return on
investment in
advertisement
campaign.
8 None 8 448 Set up surveys among
customers to detect the
effectiveness of
advertisement.
Early Warning System
1. EWS for Strategic Action Plan
Step 1: The assumptions

1. Retail industry will continue to grow due to increase in
population, increase in GDP and increase in
consumer spending in retail sector, so that Walmart would not
suffer retail recession during the payback
period. (Indicator: Customers spend/trip)
2. R&D team will accurately identify most of the trends and
shifts in consumer preferences in the retail
industry so that Walmart knows exactly which new product they
will be integrating into their food
offerings, and they will make relevant decisions regarding
contracts with suppliers, pricing, and
distributing in-store shelve space. Thus, the average customer
spending per trip will increase.
(Indicator: Customers spend/trip)
3. Walmart is highly confident that its main competitor will not
introduce a new product or change sales
strategy this year so that Walmart would have the advantage to
launch an advertising campaign for the
new products. Thus, Walmart's advertising campaign would
generate new customers. (Indicator: Ad
Rank Position)

4. The retail industry is moving toward e-commerce and e-
commerce market will continue to grow, so
that Walmart's advertising campaign for their e-commerce
platform would change the common
perception for the online shopper and generate new customers.
(Indicator: Ad Rank Position)
Evidence for the assumptions:
● With broader retail market growth at a pace of three percent
annually, many companies are searching
for ways to increase profit while expanding growth and market
share, so that in this project, we will
assume that the retail industry will continue to grow.1
● Walmart would apply the use of robotics to inform
enterprise-level decision making, maximize
opportunity, and reduce potential risk. 1
Liang Yu

● Walmart.com regularly monitors the prices of items on our
site and compares them to the prices of
those same items on competing websites. 2
● Online Retail Forecast, 2017 to 2022,” Forrester writes that
ecommerce will account for 17.0% of
retail sales by 2022, up from a projected 12.9% in 2017. 3
1. https://www2.deloitte.com/us/en/pages/consumer-
business/articles/retail-distribution-industry-outlook.html 1
2.
https://marketplace.walmart.com/knowledgebase/articles/Article
/Automatic-Pricing-Rules-Overview 2
3. https://www.digitalcommerce360.com/2017/08/09/e-
commerce-grow-17-us-retail-sales-2022/ 3
Step 2: Available Data (Please see Appendix 9 for all the
available data used in designing EWS)
Step 3: Categorize each variable as Either Leading or Lagging
“Lagging indicators are those that follow an event, and leading
indicators are those that signal future
outcomes and those that feed directly into the performance of an
outcome (lagging).

Leading Indicators Lagging Indicators
Ad Rank Position Forecast Ad Rank Position
Number of Customers Number of Customers Obtained
Customers’ Spend per Trip Forecast Spend per Trip
Step 4: Add the “Connector” Assumptions
Connectors are those values, often expressed as percentages,
that translate leading indicators into lagging
indicators as shown in the table below. We want to quantify the
advertising campaigns on new products and
sales strategies to forecast the number of new customers as well
as revenues. Also, by catching up with
customer preferences and introducing new product lines,
Walmart would be able to increase revenue, so we
want to forecast the new average of customer spending per trip
as translated into a lagging indicator. The
table below provides evidence and reasoning behind each
number.
Leading Forecast Connector: % increase in
indicator

Lagging Forecast
Ad Rank Position 1.5 Conversion rate: 10% New customers
26 million/year
Current Customers
spend/trip
$55 Spend/trip: 20% After-plan Customers spend/trip $66
• The highest Ad Rank position is "1," and there is no "bottom"
position. An average position of 1-8 is
generally on the first page of search results, 9-16 is generally
on the second page, and so on. Average
positions can be between two whole numbers. For example, an
average position of "1.7" means that your
ad usually appears in positions 1 or 2 of the search results. 1
• Walmart has over 260 million customers each week, and we
use current data to forecast the number of the
new customers 2
• Customers spend $55 per trip in Walmart on average, and we

use this data to forecast the revenue when
implementing the new strategic plan. 3
1 https://support.google.com/adwords/answer/14075
2 http://www.walmart.com/
3http://247wallst.com/retail/2016/03/02/where-do-people-
spend-more-wal-mart-costco-or-whole-foods
Step 5: Variance Calculation
The “Actual” are the results (numbers) that come in after we
complete our different campaign initiatives, so
in this case, we would estimate the “Actual” to demonstrate the
use of the EWS. Also, the “Variance” will be
calculated as [Actual-Forecast]/Forecast.
Leading: Promotional driver Laggings:
Forecast Actual Variance
in the
Leading

Forecast Actuals Variance in
the Lagging
Average ad rank position 1.5 2.2 -47% New customers 26
million/year
10 -61%
Customers Spend/Trip $66 $60 -9% After-plan Customers
spend/trip
$66 $60 -9%
*Average ad rank position is about maintaining a certain
position or ranking and thus a lower number is better.
Therefore, we add a negative number when the higher position
shown in the table above.
Step 6: Calculating a Weighted Scored/ EWS Dashboard
• Each leading indicator has been assigned a weight due to the
level of importance and total add up to one.
Weight Calculation:
Leading Variables Based on

Forecast
Lagging Variables Weights
Average ad rank position New Customers obtained 0.6
Customers Spend/Trip After Plan Customers Spend/Trip 0.4
EWS Dashboard:
Promotional Leading Drivers Lagging
Forecast Actual Variance Weights EWS Weighted
Variance
New Customers Obtained 26 10 -16 0.6 -9.6
After-plan Customers Spend/Trip 66 60 -6 0.4 -2.4
Step 7: Troubleshooting: When the EWS Shows
Underperformance

Negative Variance for Troubleshooting
Variance Leading
Indicators
Variance
Conversion
Variance Lagging
Indicators
EWS Weighted
Variance
New Customers Obtained -47% -20% -16 -9.6
After-plan Customers Spend/Trip 9% -25% -6 -2.4
EWS provides us granular detail of where the problem resides.
In the table above, for the “New Customers
Obtained” negative variance could be due to many causes, some
of which would be easy identify (e.g. a lower-
than-expected conversion rate), whereas others may be less

obvious (e.g. a lower-than-expected shipping
speed). Also, for the “Customers Spend/Trip” negative variance
could be due to that new products are less
aligned with customer preference.
2. EWS for Management Plan
Step 1: The assumptions
1. The tendency that the public cares more about ethical labor
practices and modern management style
than in the past will continue. Thus, the management plan will
generate customer loyalty and will align
with customers’ preference so that the revenues will increase.1
2. Walmart’s reputation has a lot to improve and such
improvements will lead to increase in revenues.2
Evidence for Assumptions:
• Millennials Customers - born from 1980 to 2000 - become the
principal force of consumers, since they
have grown from financially dependent teens to young adults in
their 20s and 30s. Nowadays there are
roughly 80 million Millennials in the United States, and each

year they spend approximately $600 billion.
They care about the ethical practical as the inherent tradition
from their predecessors and value more on
faces behind the brand, such as the labors’ relationship. 1
• Walmart has been criticized for its child employees use,
discrimination of genders, bias on racism, unsafe
environment, and so on. Walmart has been pointed to be the
“worst retailer” or even the “most-hated
retailer”.2
1. https://www.entrepreneur.com/article/250609 1
2. https://thrivehive.com/why-is-having-a-good-reputation-
important/ 2
Step 2: Available Data (Please see Appendix 9 for all the
Step 3: Categorize each variable as Either Leading or Lagging
Leading: Promotional Indicators Lagging Indicators：
# of Seminars Revenue

# of Employees Involved in the Training Program Market Share
Increase in Wages Profitability
# of Ads Attached to Different Websites ROI
Investment in Ads
The Number of Employees Applying the skills
Learned in the Seminars
Leading Forecast Connector: Lagging
The Number of Employees
Applying the skills Learned in the
Seminars
126k Conversion Constant: 238
dollars/people

Forecast Revenue increase: $30
million
Raise Wages of Labors/week $75 Conversion Constant: 400,000
$30 million
Investment on Ads (million) $840 Conversion Ratio: 4.7% $40
Connectors’ Assumptions:
• In order to protect the effectiveness of the EWS, we break the
causal forecast into short time frames. Hence,
the causal forecast is weekly based and updated.
• As for the increase in revenues, our forecast is based on the
current data. From 2016 to 2017, the revenues
increased by $197 million. We assume that the increase in
revenues due to management plan is $100
million total.
https://www.statista.com/statistics/269403/net-sales-of-
walmart-worldwide-by-division/
• The work day is assumed to be 5 days per week, while the

work hour is assumed to be 8 hours a day. The
training program aims to all the employees (1.5 million people
of Walmart US), and there are 70 percent
of them finally attending the training program, while only 12%
of which apply what they’ve learned into
work.1 Also, we assume that every employee fully applying the
skills will generate more around $5.95
dollars per hour due to higher efficiency and better practice,
which turn into $238 dollars per week.
1https://corporate.walmart.com/our-story/locations/united-
states#/united-states
https://www.shiftelearning.com/blog/statistics-on-corporate-
training-and-what-they-mean-for-your-companys-future
• We forecast the raise of wages of labors based on the current
data that Walmart's efforts so far have
translated into a pay raise of about 16% to $13.69 per hour for
non-managerial full-time employees, thus,
the raise per week will be $75. 2
We assume that the non-management employees are 80% of all
of the employees.3 Then, there are 1.2
million non-management employees in Walmart. We assume
that each dollar increment will improve the

additional revenues for $0.33 dollars the non-management
labor can make per week, which turn into
around additional $400,000 dollars all the non-management
labor in Walmart US can make per week.
3https://www.quora.com/How-many-people-work-in-a-single-
walmart-target-or-box-store-location-And-how-many-floor-
associates-and-cashiers
2http://www.businessinsider.com/walmart-is-investing-more-in-
employees-2016-10
• The Ads mentioned here are the ones specifically presenting
Walmart’s improving management. The
investment on ads was $2.1 billion in U.S, and our forecast is
based on the current data and assume ads
specifically presenting Walmart’s improving management is
40% of total investment.4
The more investment in ads will disseminate the improvements
of management of Walmart, improve the
reputation of Walmart, and attract more consumers’ attention.
Thus, more loyalty the existing customers
will be and more preference of the new customers will be
addressed to Walmart. We assume that 4.7% of
the investment will turn into additional revenues.

4https://www.statista.com/statistics/192068/us-ad-spending-of-
walmart/
Step 5: Variance Calculation
Leading: Promotional
Driver
Forecasts Actual Variance in
the Leading
Forecasted
Increase of
Revenues
Actual
Increase
of
Revenues
Variance in the

Increase of Revenues
The Number of Employees
Applying the skills Learned
in the Seminars (unit:
thousand)
126k 110k -16k (-12.6%) $30 $25 $-5 million (-16.7%)
Increase Amount of Wages
of Labors (million)
$75/person $65/person $-10(-13.3%) $30 $25 $-5 million (-
16.7%)
Investment on Ads(million) $840 $700 $-140(-16.7%) $40
$35 $-5 (-12.5%)
Step 6: Calculating a Weighted Scored/ EWS Dashboard
● The weight is calculated as a percentage of the total increase
of the revenues.
● The weighted score is calculated by multiplying the weights
with the variance.

Weights Calculation:
Leading Variables Based on Forecast Weights
The Number of Employees Applying the Skills Learned in the
Seminars 0.3 (30/100)
Increase Amount of Wages of Labors 0.3 (30/100)
Investment on Ads 0.4 (40/100)
EWS Dashboard:
Promotional Drivers
Lagging: Increase of Revenues
Variance
The Number of Employees Applying the skills
Learned in the Seminars 30 25 -5 0.3 -1.5

Increase Amount of Wages of Labors 30 25 -5 0.3 -1.5
Investment on Ads 40 35 -5 0.4 -2
Step 7: EWS Dashboard/ Troubleshooting: When the EWS
Shows Underperformance
Promotional Leading Drivers Variance Leading
Indicators
Variance
Conversion
Rate
Variance Increase
of Revenues
EWS Weighed
Variance Score
The Number of Employees Applying the
skills Learned in the Seminars
-12.6% -4.6% -16.7% -1.5

Increase of Wages of Labors -13.3% -3.8% -16.7% -1.5
Investment on Ads -16.7% 6.4% -12.5% -2
*The table of different variance conversion rates is in Appendix
11.
EWS of management plan provides us granular detail of where
the problem resides. In the table above, for the
“Increase of Revenues” negative variance could result from
causes which can be easily identified by following
the table:
• A lower-than expected number of employees apply the skills
learned in the seminars, a lower-than-
expected efficient per application of skills as the conversion
rate.
• A lower-than-expected increase of wages of labors, a lower-
than-expected incentive the increasing wages
bring to labors.
• A lower-than-expected investment on ads, a lower-than-

expected return the ads bring to Walmart.
3. Early Warning System for ERM plan
Step 1: Assumptions:
1. The ERM program has been established and implemented in
time at Walmart by the risk steering committee.
2. The ERM team followed the designed process and updates the
substantial risks frequently.
3. The ERM program kept losses from risk scenarios within the
risk appetite set by the board.
4. Walmart implemented ERM program to improve the internal
and quality control.
Evidence:
• In this project, we assume that Walmart adopted the action
plan and followed the suggestions purposed
in the previous part of the project. Walmart established the plan
of ERM implementation and finished the

processes on time.
• Walmart’s inventory was updated quarterly by adding
substantial risks/risk scenarios and subtracting
existing risks with smaller impacts.
• Here we assume that ERM at Walmart works efficiently and
keeps that losses due to risk scenarios within
the risk appetite set by the board.
• Walmart received fewer complaints from customers and labors
after the implementation since ERM
improved the internal and quality control.
Step 2: All available data (Please see Appendix 9 for all the
Step 3: Leading versus lagging indicators
Leading Indicators Lagging Indicators
Risk appetite Losses after mitigation
Stock Price, 500 common stocks Revenue
Forecast GDP Number of customers

Number of complaints received annually Forecasted complaints
received in the coming year
Leading Forecast Connector: % changes in
indicator
Lagging
Risk Appetite ($Million) 850 The losses being mitigated as a
percentage of risk appetite: 20%
Losses after mitigation: 680
Number of complaints
received annually （＃）
3650 Percentage of complaints
decreased: 20%

Forecasted complaints received in
the coming year: 2,920
• Walmart has just started the ERM program and still adjusting
and improving the processes. Therefore,
we assume that ERM helps Walmart to prevent 20% more of the
losses from risk events in the first year.
• We assume Walmart receives 3650 complaints per year and we
use this number to forecast how ERM at
Walmart helps to reduce the number in the following year.
Step 5: Variance Calculation / EWS Dashboard
Leading: Promotional
Driver
Forecasts Actual Variance
in the
Leading

Forecasted
change in
indicators
Actual
change in
indicators
Variance in the
change in
indicators
Losses after mitigation $680M $750M -10.29% $170M $100M -
$70M (-41.18%)
received annually
2920 3100 -6.16% 730 550 -180(-24.66%)
• The number of losses covered by ERM shows a preferable
outcome when the number is lower. Therefore,
we make the variance negative when the actual outcome is
higher than the forecasted one.

• The number of complaints shows a preferable outcome when
the number is lower. Therefore, we make the
variance negative when the actual outcome is higher than the
forecasted one.
Step 6: Calculating a Weighted Scored
• Each leading indicator has been assigned a weight due to the
level of importance and total add up to one.
Promotional Drivers Lagging
Variance
Losses after mitigation 680 750 -70 0.7 -49
Number of complaints received annually 2920 3100 -180 0.3 -54
Leading Variables Based on Forecast Weights
Losses covered by the ERM program set by risk appetite 0.7

(70/100)
Number of complaints received annually 0.3 (30/100)
Step 7: Troubleshooting: When the EWS Shows
Underperformance
Promotional Drivers Variance Leading
Indicators
Variance
Conversion
Variance Lagging
Indicators
EWS Weighted
Variance
Losses after mitigation -10.29% -41% -90 -63
Number of complaints received annually -6.16% -25% -180 -54

EWS provides us a granular detail of where the problem resides.
In the table above, for the “Losses covered
by the ERM set by risk appetite” negative variance could be due
to many causes, some of which would be
easy identified (e.g., unexpected weather condition and natural
disaster), whereas others may be less obvious
(e.g., an uncommon risk scenario which has not been identified
before). Also, for the “Number of complaints
received annually” negative variance could be due to that the
internal control has not sufficiently covered all
the layers of Walmart and part of the ERM processes need
adjustments.
Final Recommendations
According to our semester-long research and analysis by using
various models and methodologies, we
conclude the following aspects as our final recommendations:
1. Appropriate strategic movements toward trends and shifts in
consumer preferences/demands and
advertisements:
Our research revealed that Walmart failed to address the trends

and shifts in consumer preferences. We believe
that Walmart needs to make an aggressive integration of new
products to current offering by assigning an R&D
team to identify the consumer preferences and trends in retail
industry regularly. Once Walmart decides the
new products to offer, they should contract with suppliers and
other relevant business partners along with
advertisements to the new offerings. We recommend focusing
and investing in a social media platform,
company’s website, and purchasing new google ad-words
related to these new foods.
2. Appropriate strategic movements toward e-commerce
challenges and growing competition:
Walmart set foot in e-commerce platform to develop its online
shopping market; however, Walmart’s primary
competitors are showing stronger performances. We recommend
Walmart to enhance shipping offers to
include groceries and provide same-day/two-hour options and
improve partnerships with carriers such as UPS,
FedEx and so on.
3. Improvements in management practices, labor relations, and
Walmart’s company image:
We recommend Walmart to implement a new training program

for managers and employees of all levels. The
training program includes seminars, conferences, and activities
to improve labor practices and labor relations.
Meanwhile, senior management and the CFO at Walmart should
also consider raising wages as another option.
Together, the improvements should be combined with an
advertising campaign to improve Walmart’s image.
4. Development of an entire ERM program in the company:
We recommend Walmart to develop a companywide ERM
program by hiring a CRO and an ERM team first.
The program will manage risks proactively and allow Walmart
to make risk-based decisions, by having a risk-
aware culture as well as risk policies and procedures. An
efficient ERM team will help Walmart achieve its
strategic objectives and translate risks into opportunities.
Liang Yu
5. Our final recommendation for Walmart is to learn from past
mistakes, always look back and figure out root
causes and reasons behind failures. Although Walmart is the

biggest employer in the world, the company is
not invincible, especially considering the rapidly evolving
environment in which they operate. Constant
ongoing adjustments and improvements are critical for a
company to survive in this era.

Appendix 1
Source: US Retail Sales Trend
Appendix 2
Framework selection process flowchart:
Step 1 Identify Symptoms Closing stores & slow growth
Step 2 Identify phase of failure Pre-Failure
Step 3 Identify industry & company position
Industry growing;
company in
leading position
Step 4 Hypothesize on failure & potential
root causes
5 hypotheses on

root causes of
failure
Step 5 Discuss possible frameworks
BCG; Ansoff;
Porter; Custom;
SWOT
Step 6 Eliminate Frameworks BCG; Ansoff; Porter; Custom
Step 7 Choose a framework SWOT
Step 8
Apply the
framework's
metrics to address
the failure
Strengths;
weaknesses;

opportunities;
threats
Appendix 3
Weaknesses; Unethical labor practices and relations: Walmart
faces around 5,000 lawsuits a year from
workers and has shut down five stores in four states due to
“union problems.” Also, Walmart underpays women
and neglects pregnant workers and discriminates against
workers with a disability and against elder
employees.11 Nowadays, consumers base purchasing choices on
such factors. With no consideration of the
good of its employees, Walmart could suffer a severe
reputational damage.
Appendix 4

Failure Audit Flowchart
11 "10 Reasons Walmart is the Worst Company in America"
Step 7: Generate actionable recommendations
Step 6: Create a fault tree with all the causes of Walmart's
failure based on outcomes of RCA
Step 5: Root Cause Analysis: conduct research for our
assumpotions
Step 4: Create a timeline of Walmart's failure/actions to help
our discovery processes
Step 3: Identify the undesired outcome using specific metrics
Step 2: Proceed to form the audit group. Identify, request and
preserve the data when possible
Step 1: Signs of failure triggering the audit due to under-
performance

A
ppendix 5
Appendix 6
Action Plans
1. ERM Plan: Develop an entire ERM program in the company,
including the appointment of a CRO and
hiring an ERM team. The primary purpose of an ERM team is to
proactively manage risks and allow
Walmart to make risk-based decisions, by having a risk aware
culture as well as risk policies and procedures.
An effective ERM team will help Walmart achieve its strategic
objectives and translate risks into
opportunities.
2. Strategic Plan: The strategic action plan will be composed of

two parts.
Part 1: Addressing trends and shifts in consumer
preferences/demands
In order to address consumer demands we believe a necessary
action plan is to make an aggressive
integration of new products to Walmart’s current offering. This
plan includes:
• Assigning an R&D team to identify trends and shifts in
consumer preferences in the retail industry. For
example, based on our research we know that consumers are
shifting towards organic, healthier, and
ethical foods, but, what are the exact brands that provide these
foods? Do they have any exclusive
contracts with competitors? Can Walmart maybe sign an
exclusive contract with these companies? These
questions and more are what the R&D team will be responsible
for in their part of the plan.
• Once Walmart knows exactly which new products they will be
integrating into their food offerings, they
will make relevant decisions regarding contracts with suppliers,
pricing, and distributing in-store shelve
space.

• The final step of the plan is to advertise these new changes.
Our recommendation is to advertise mainly
on social media and the company’s website, as well as,
purchasing new google ad-words related to these
new foods, for example, a quick Google search for “organic
food” will result in many advertisements for
Whole Foods Market. We believe Walmart should start
competing on that space once these foods will be
offered in their stores.
Part 2: Addressing e-commerce challenges and growing
competition
The plan for improving competitive standpoint on e-commerce
platform should include:
• Enhancing shipping offers to include groceries and same-
day/two-hour shipping options
• Improvement of transportation department, including
purchasing more trucks, hiring more drivers, and
owning more storage space in many regions across the country.
• Improving contracts with shipping carriers such as USPS,
UPS, FedEx, etc.
• Once these features have been improved, Walmart should
conduct an aggressive advertising campaign

for their e-commerce platform, in order to change the common
perception that Amazon is the go-to when
buying online. Walmart should thrive to be known for selling
“everything” and also to have all types of
shipping options, so therefore Amazon will not be the default
website for the online shopper.
3. Management Plan: This action plan should improve
management practices, labor relations, and Walmart’s
image/reputation respectively.
The management action plan should include:
• A new training program for managers and employees of all
levels, provided by an outside business
consulting firm that will first evaluate and observe management
practices over a period of two months.
The observation will be conducted on three levels:
Store managers ←→ Regional managers ←→ Executive
managers
• Once observation is concluded, the consulting firm will begin
to conduct relevant seminars, conferences,

and activities in order to improve labor practices and relations
• Simultaneously, Senior management and the CFO should
evaluate optional wage raises.
The final step of this plan should include an advertising
campaign to improve Walmart’s image. We
recommend in-store signs as well as vast online ads, showing
the company in a positive light, informing
about these new changes.
Appendix 7
FMEA Flowchart
1.Functions
2.Failure Modes
3.a) Potential Effects or
Consequnces if the failure Occurs

3.b) Severity Rating
4.a) List Potential Causes of
Failure
7. Recommendations
6. Calculate the RPN
5.b) Likelihood of Ability to
Detect the Failure
5.a) List of Controls and
Detection Systems
4.b) Occurence
Appendix 8
Rating Tables:
1.Severity:

1 2 3 4 5 6 7 8 9 10
No
Impact
Very
little
Impact
Little
Impact
Moderate
impact
Stock
price
decline
1%
Stock
price
decline
2%

Stock
price
decline
3%
Stock
price
decline
4%
Stock
price
decline
5%
Loss 5%
or more
(1=low severity, 5= moderate severity, 10=high severity)
2.Occurrence:

The rating table based on the occurrence per month.
1 2 3 4 5 6 7 8 9 10
Never Very
rare
Rare Not
Often
Maybe Often Very
Often
Once per
month
More than once per
month
Always
(1=low occurrence, 5= not often, 10=high occurrence)

3.Detection:
1 2 3 4 5 6 7 8 9 10
Very
Easy
Easy Relatively
Easy
Somewhat
Easy
Moderate Somewhat
Hard
Relatively
Hard
Hard Very
Hard
Impossible
(1=easy to detect, 10=impossible to detect)

Appendix 9
All Available Data for EWS
Revenue ROI GDP/Forecast GDP
Market Share Ad Rank Position Observations study statistic
Population Data Competitor Data Unemployment Rate
Number of Orders Economic Data Retail Industry Index
Number of Customers Customers’ Spend per Trip # Customer
Complaints
Investment in Ads The Number of Employees
Applying the skills Learned in
the Seminars
Stock Price, 500 common stocks

# of Seminars Increase in Wages # of Ads Attached to
Different Websites
# of Injuries due to unsafe work
environment
# of Managers/Employees
Involved in the Training
Programs
Time of Observation Conducted
by the Third Party
Forecasted complaints
received in the coming year
received annually
Risk appetite
Losses due to unexpected risk
events

Revenue
Appendix 10
Additional Tables for EWS
Spreadsheet of EWS for Strategic Plan:
Spreadsheet of EWS for Management Plan:
Spreadsheet of EWS for ERM Plan:
Leading Connector Assumptions Lagging
A B C D E F G H IJ J K L
Promotional

Drivers
(C-B)/B
Conversion
(Forecasted)
Conversion
(Actual)
Variance
(F-E)/E
I-H
Weights EWS
Weighted
Variance
Losses after
mitigation
850 750 -12% 20% 12% -40% 680 750 -70 0.7 -49

Number of
complaints
received
annually
3650 3100 -15% 20% 15% -25% 2920 3100 -180 0.3 -54
The variance conversion rate for EWS of Management Plan
Conversion Rate of
Forecast
Conversion Rate
of Actuals
Variance Conversion
Rate
The Number of

Employees Applying
the skills Learned in
the Seminars
238 227 -4.6%
(227-238)/238
Increase Amount of 400000 384615 -3.8%
Wages of Labors
(384615-400000)/400000
Investment on Ads 4.7% 5% 6.4%
(5%-4.7%)/4.7%
Additional sources used as evidence in Management Plan EWS:
http://spendmatters.com/2016/02/15/ethical-sourcing-do-

consumers-and-companies-really-care/
https://leadingincontext.com/2014/11/26/5-trends/
https://www.accenture.com/us-en/insight-outlook-who-are-
millennial-shoppers-what-do-they-really-want-retail
https://www.forbes.com/sites/micahsolomon/2015/11/14/2016-
is-the-year-of-the-millennial-customer-heres-how-to-be-
ready/#648e539b5ffc
https://www.dailydot.com/via/walmart-labor-unions-bad-
company/
https://www.marketwatch.com/story/4-reasons-walmart-is-the-
most-hated-retailer-in-america-2015-02-18
The company that I chose is Enron, and I've done the Section
1(don't care about Section 1 too
much when you write Section 2, because I didn't write well on
Section 1), now you need to writer Section
2 (below are the requirements, and I also attached textbook , ppt
about FMEA, EWS part,
and paper that can help you understand the paper requirements
better). Other information
you can search online. Thanks! Total page should be 27, not

including reference.
Students will form groups to conduct research on a firm that is
experiencing failure or has failed. The
purpose of the research is to understand the causes of failure
from public information including news
accounts, SEC records, and any reasonable approaches available
to students. Students will use the
methods in the text book, Breaking Failure, to identify the
causes of failure and ultimately develop a set of
recommendations.
Definition of Research Firm
Pre-Failure Firm — a firm that has experienced a string of
failures but has not yet completely failed. These
failures may or may not result in the complete collapse of the
firm.
Failed Firm - a firm that has completely failed.
Life-support Firm - a firm that has experienced a string of
failures or is close to failing and needs to take
immediate action to survive.

Note: Students may use a 5 — 10 year time period to select a
firm with a string of failures related to
regulatory, financial, technology, product, business or other
causes.
The research project involves the completion of two sections of
work. Each
section contains subsections outlined below. The findings for
each section are summarized into a
professional document, and are presented to the group using a
professional medium such as PowerPoint.
Each section will be graded separately resulting in a final grade
that represents 50% of the final course
grade.
Section #1
Students must select one research firm and get instructor
approval. Section #1 must include these
subsections.

1.a Company Background & Competitive Positioning (INTRO)
• Identify the research firm and its failure(s).
• Identify potential causes of failure.
• (The above two points should be discussed briefly in a short
justification for selecting the
company before the selection is approved by the professor.)
• Provide an overview of competitors in the firm's industry.
Describe, as best you can, whether
the firm's industry is growing, contracting, or mature and no
longer growing and explain how
these factors are impacting your firm's business.
• Rank your firm's position in the industry in which they
compete.
• Identify the products and services your firm offers and
compare its products and services to
its competitors (high level overview; not detailed).
• Provide an understanding of the ERM program the firm has in
place.
1.b Failure Audit and Root Cause Analysis (RCA)

• Develop a proposed business failure audit (refinements can be
made later).
• Outline a fault tree, including a deeper discussion on
immediate/proximate causes,
contributing causes, intermediate causes, and importantly, root
causes.
• Outline your Root Cause Analysis Tree using the steps
outlined in the book.
1.c Framework Selection (FRAME)
• Develop a framework to help the company recover.
• Use the steps outlined in the book for selecting the right
framework to address the problem.
• You may evaluate more than one frameworks and choose the
most appropriate one.
• Articulate the business initiative you propose to turn the
company around.
Section #2
Students are expected to develop a risk assessment and an early

warning system for the new
business initiative.
2.a Failure Mode and Effect Analysis (FMEA)
• Develop a FMEA analysis using the steps outlined in the book.
• Create a spreadsheet that summarizes the assumption inputs
(i.e., severity, likelihood,
occurrence, detection ratings) to arrive at your Risk Priority
Number.
• Justify the ratings for the metrics associated with each of the
risks.
• Discuss qualitatively risk mitigation mechanisms, both
preventive and detective.
2.b Early Warning System (EWS)
• Develop an early warning system for the proposed initiative.
• Use no more than 10 leading and/or lagging indicators (high
level; e.g. Revenue, Sales,
Market Share, etc.). Use connector metrics as appropriate.
These indicators should relate to

the risks identified in FMEA.
• Develop a management report containing these key indicators
and respective early warning
levels, indicating proposed audience, content, production
frequency, and the groups in
charge of such a report.
• Discuss preplanned exit strategies if early warning levels are
breached for key indicators.
2.c Executive Summary (SUMMARY)
• Pull all the findings together for a set of formal
recommendations presented to the Board of
Directors.
Notes
Each of the subsection should preferably average 9 pages
including texts, graphs, and/or
tables;
double-spaced, 12pt.
Please use professional English with clarity and articulation.
While correct use of grammar

is expected, it is not part of the grading rubric.
Please reference all sources used in your research as footnotes
at the end of the document.
Students are encouraged to use graphs, spreadsheets and other
methods to demonstrate
work. Details may be included in an appendix.
FRAME SELECTION
(CH 2)
19

FRAME — INTRODUCTION
• Everything is becoming more complex; a frame (or
framework)
helps tease out the most important factors to consider
• Having a process to deliberately identify the relevant
framework
helps avoid many well-known human biases
• Action basis
• Gut-based thinking (Type I thinking)
• “Hammer looking for a nail” — the “default” frame
20
FRAME — EXAMPLES
• Key to a successful framework is to identify 2 to 3
critical factors among the many in a complex system
• Most frames end up being a 2 by 2 or 3 by 3 matrix

(both with two factors)
• Ansoff matrix, BCG matrix, Porter’s 5 forces
• Personal decision frames
21
FRAMES — ANSOFF MATRIX
• Products and markets
• Existing and new
22
FRAMES — BCG
• Profitability
• Growth

23
FRAMES — FINANCIAL RISK
FRAMEWORK
• Capital and liquidity
• Severity of environment
24
FRAMES — PERSONAL
DECISIONS
25
FAILURE MODE AND EFFECT
ANALYSIS

(CH 2)
26
FMEA — TERMINOLOGY
• Broadly speaking, a risk assessment attempts to identify key
risk
factors and their potential impacts
• Risk assessments range from enterprise in scale (company’s
annual
top risk assessment; CCAR for large banks; ORSA by insurance
companies) to focusing on a particular project or initiative.
FMEA is
the latter
• Risk assessments can be performed by second-line of defense,
or
by the first-line, which is often called RCSA (Risk and Control
Self
Assessment)

27
FMEA — KEY STEPS
• Identify risk factors (“failure modes”)
• Probability of adverse events occurring (“occurrence”)
• Impact of such occurrences (“severity”)
• Mitigating mechanisms and controls (“control”)
• Likelihood of detection (“detection”)
• A risk score summarizes these metrics into one number
• Risk Priority Number (RPN) is such an example
• Best practices identify a “gross” or “inherent” risk metric
(before mitigation and controls),
and a “net” metric (after mitigation and controls)
28

Data Driven Decision Making MGT334Module 2 Assignment 2 Cloud.docx

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