This report suggests the operational risks related to the business plan of establishment of car washing and fast food café on a piece of company land at the crossing of Victoria Road and James Ruse Drive, Parramatta. While broad diversification, core competency, interdepartmental friction and quality control issues are expected to pose highest operational risks in the implementation of the plan, ‘related diversification’ with complementary strategies for the two separate business units can manage the risks associated.
As advised by the managing director of the company, the purpose of this report is to find an operational risk pertaining from the establishment of new car wash facility accompanied by a fast food café on a piece of land owned by the company at the crossing of Victoria Road and James Ruse Drive, Parramatta. At the same time the report also tries to find out possible strategic remedy of the operational risks associated with the above mentioned business plan and eventually recommends appropriate steps to be taken by the decision makers of the company.
Car washing and fast food cafe, though both are part of service industry, are very different in terms of business categories. This diversification of business can lead to mixed effects on the profit margin of the company. While diversification within the business category or within neighborhoods product and service categories actually influences the profit positively, broader diversifications can lead to negative influences on business performance (Rhoades 1974).Hence the diversification strategy of the company is prone to risks.
Moreover, diversification can result in lack of core competency, which can be a competitive disadvantage for the company in long run (Prahalad and Hamel 2006). It is tough to handle the car washing facility and the restaurant facility with the same managers and workers, which can lead to risky partnership decisions with other companies or inter-departmental frictions within the company itself (Ellinger 2000).
The biggest risk of this diversification is to maintain the quality. Restaurant needs a strict quality control in terms of hygiene and ambience, which is difficult to ensure in close proximity of a car-wash facility (Kramer and Twigg 1966).
Based on the causes, the above mentioned risks can be categorized respectively under the following operational risk categories (Lewis 2003):
Diversification / New product Development
Diversification or new product development is highly risky as it can rarely be controlled and is highly dependent on the external factors, data mining facilities and assumptions etc. which can deviate from the expected values creating tough situations for a company.
- Workforce / Organization
Success of a business plan is highly dependent on the workforce and organizational aspects. Though rules and regulations can control a workforce, they also have a limitation in the amountof control over human resources, their competence level and error-free auditswhich cause huge unexpected loss for a company.
- Control Process
Risks related to quality control can be directly categorized as ‘control process risks’ as lack of capability in technology implementation, parallel collaboration and simultaneous control can pose high risk to the company in near future (Schaller and Helmers 2004).
Risk Management Strategy
- Ensuring ‘related diversification’ (Bettis and Mahajan 1985), the company should deliver the fast food cafe service as a supplement of the car wash service and,with suitable service time and service efficiency, it should mainly target the customers came for car wash.
- The company can recruit two separate specialist unit for car washing facility and fast food facility. Avoidance of inter-departmental frictions should be ensured as the probability of occurrence of the same is high (Walton and Dutton 1969).
- Quality control is one of the biggest issues in this diversified service plan. While the more revenue generating unit deserves more efforts, the other unit should also be used as a revenue generator and revenue reinforce for the combined facility.
- Inventory management of both the units should be done separately. Pleasant ambience and food hygiene has to be ensured for the café, but not in the cost of the minimum facility required for the car washing unit.
Above discussion recognizes the possible operational risks associated with the business model and also suggests the possible strategic remedies for the risks. So, a controlled and well planned departmental operation can ensure efficient risk management for the business plan of the company.
Bettis, A. R. and Mahajan, V., 1985, “Risk/return performance of diversified firms”, Management Science, Vol. 31, No. 7, 785-799
Ellinger, A. E., 2000, “Improving marketing/logistics cross functional collaboration in supply chain”, Industrial Marketing Management, Vol. 29, Issue 1, pp. no. 85-96
Lewis, A. M., 2003, “Cause, consequence and control: towards a theoretical and practical model of operational risk”, Journal of Operations Management, Vol. 21, Issue 2, pp. no. 205-224
Prahalad, C. K. and Hamel, G., 2006, “The core competence of the corporation”, in Dietger, H. and Bernard, T. (ed.), StrategischeUnternehmungsplanung — StrategischeUnternehmungsführung, Springer, Berlin, Heidelberg, pp. no. 275-292
Rhoades, A. S., 1974, “A Further Evaluation of the Effect of Diversification on Industry Profit Performance”, The Review of Economics and Statistics, vol. 56, no. 4, pp. no. 557-559.
Helmers, E. N. and Schaller, L. C., 1982, “Calculated process risks and hazards management”, Plant/Operations Progress, Vol. 1, Issue 3, 190-194
Walton, R. E. and Dutton, J. M., 1969, “The Management of Interdepartmental Conflict: A Model and Review”, Administrative Science Quarterly, Vol. 14, No. 1, 73-84