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49006 Risk Management in Engineering Aidrus11125984, Biscan 11021262, Huang 11117987, Hughes 10915926, Yusuf 11792975

Abstract Organisations never grow or improve without taking some form of risk. This report identifies the link between change management and risk management through a review of literature and provides insights into how leaders of organisations can lead their people to achieve growth while retaining their companys unique values and sense of identity through a culture of commitment and performance. Case studies are provided for three Australian-based organisations that have successfully managed to grow by approximately 300% over a five year period, namely MyNetFone, Newcrest Mining Limited and Virgin Blue Airlines. The report also outlines three mirror organisations that did not change and as a direct result have not succeeded, namely One Tel, Pasminco Limited and Ansett Airlines. The report concludes by identifying lessons learnt from each success/failure and the common attributes identified that led to success/failure of these organisations. Keywords Risk management, organisational change, risk culture, structural inertia, rate of change of risk.

I. INTRODUCTION This report has been complied by RM Consulting in response to the Brief of Engagement released by the Australian Federal Government for presentation to the National Press Club in Canberra. RM Consulting is a group of students from the University of Technology, Sydney, currently completing studies in Risk Management in Engineering.

The Brief of Engagement relates to the link between change and risk for organisations and how the effective management of these areas can result in organisational growth and success. This is an important consideration for Australian businesses as global markets evolve and Australian industries look towards the changing future.

This report presents findings from a literature review and case study analysis for three Australian-based organisations that have successfully managed to grow by 300% over a five year period. The report also outlines three mirror organisations that did not change and as a direct result have not succeeded.

II. LITERATURE REVIEW The group has conducted research in four fundamental areas relating to the brief of engagement. Firstly, the concept and approaches towards enterprise risk management and the emergence of the topic of risk culture within organisations. Further, frameworks for change management within organisations and the role of leadership in successfully enacting change, and also the concept of structural inertia for organisations and the limitations that this can have on adaptability for implementing change.

A. Enterprise Risk Management Aven [1] discusses the definition of risk when considering enterprise risk management and identifies that prevailing international standards on risk management provide a focus on objectives as a reference for defining risk. The author notes however that this focus may limit the ability for an organisation to find the overall best solutions and measures from a value creation point of view.

Olsson [2] discusses the concept of risk and explores the potential for opportunity management, looking at the positive considerations of risk. The article argues that management processes for negative risk situations are not fully able to manage opportunities. Rather a holistic approach to opportunity management is warranted.

B. Risk Culture Kelly [3] explores the concept of risk culture within organisations. Risk culture describes the way organisations perceive, think and act upon risk both individually and collectively. It can be shaped by top management through input controls, process controls and output controls, however ultimately lies with individuals to embrace and drive aligned values and behaviours. The key measure of strength for an organisational risk culture is the degree to which similar risk thinking is shared amongst organisational members.

Further to Kellys work, Mauelshagen (et al.) [4] describe two aspects of risk management pervasiveness. The first is the extent to which an organisation is able to influence risk, coordinating risk behaviour across the organisation through the implementation of standardised processes, outcomes and direct management control. The second is an organisations ability to deeply embed a common set of values, norms and assumptions regarding risk management into the culture of the organisation. These two types of risk pervasiveness can drive good risk behaviour within an organisation.

C. Change Management Kotter [5] outlines a framework for change management involving an eight step transformation process. This process involves establishing a sense of urgency, forming a powerful guiding coalition, creating a vision, communicating the vision, empowering others to act the vision, planning for and creating short term wins, consolidating improvements and producing more change, and institutionalising new approaches. Kotter recognises that change management is a process that takes years to successfully implement and identifies that change efforts often fail because managers skip or shortcut stages of this process.

Furthering the link between transformational leadership applied to change management, Eisenbach (et al.) [6] draws parallels between change literature and leadership literature,

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namely linking transformational leadership and the he capabilities required to enact change successfully within an organisation. To successfully enact change, leaders need to engage their people to create a culture of commitment and performance.

Beer and Nohria [7] present two basic theories of change: Theory E emphasising economic value and Theory O focussing on corporate culture and human capability. The first is a hard approach delivering economic outcomes. The second is a softer approach, seeking to patiently build trust and emotional commitment to the company through teamwork and communication. It is important to deliver a balance of both hard and soft approaches to gain trust from employees and deliver financial success. This balance can be achieved through goal setting, leadership, dual focus on both hard and soft sides of the organisation and rewards systems to reinforce change.

Further to the balance between hard and soft change approaches, Sirkin (et al.) [8] identifies that the hard elements of change management should be addressed first, namely the timeframe between milestone reviews, establishing the right project teams to deliver change results, seeking the commitment of management and reducing the effort required by individual employees to adopt new processes. These elements are abbreviated as DICE (Duration, Integrity, Commitment and Effort).

Kegan and Lahey [9] discuss the psychological dynamic called competing commitment for employees. These competing commitments are subconscious hidden goals that conflict with their stated commitments. Competing commitments can exist even for the best of employees and can cause them to be resistant to change. By working to identify and uncover these competing commitments, managers can help employees work through the issues, allowing them to be more effective and make more significant contributions to change in the organisation.

Beer (et al.) [10] identify that successful change requires commitment, coordination and competency. Commitment to change can be achieved through joint diagnosis of problems, development of a shared vision, fostering consensus in the new vision, spreading the revitalisation to all departments through unit management rather than direct push from the top, institutionalising the revitalisation through formal policies, systems and structures and monitoring the process and adjusting in response to issues.

D. Structural Inertia Structural inertia and organisational change is discussed by Hannan and Freeman [11]. The authors observe that inertial pressures on structures are present and the strength of inertial forces varies with the age, size and complexity of an organisation. Organisations with high structural inertial are typically able to perform more reliably and accountably, however are likely to be slower in adapting to capitalise on new opportunities.

This concept of organisational structural inertia is further explored by Amburgey (et al.) [12], viewing organisational change dynamically as both adaptive and disruptive,

increasing the hazard of organisational failure and increasing the likelihood of additional changes of the same type. It is noted that the disruption produced by change can negate the benefits of new attributes for a substantial period of time. The concept of structural inertia, or momentum, of an organisation is applied to changes associated with organisational goals and technical or strategic changes. It was observed that in studied contexts, changes to goals implemented early in the lifecycle of an organisation were more likely to be changed again at a later point in time. Goals that do not change early are less likely to change again. This frequency of change has a direct relationship to the rate of change of risk (dR/dt) of the organisation.

III. MY NET FONE

A. Introduction MyNetFone is a telecommunications company providing voice and data services using Voice over Internet Protocol (VoIP) technology. The company was established in 2004 by Mr Rene Sugo (CEO) and Mr Andy Fung (Non-Executive Director & former CEO) [13]. In the first two years of operation, MyNetFone targeted their products and services to the residential and small business market. The company listed on the Australian Stock Exchange (ASX) in 2006 with the Initial Public Offering (IPO) raising $2.5 million. Between 2007 and 2010, the company expanded its offering to medium enterprises and has more recently expanded into large and government enterprises. During this period the company experienced significant growth, with Revenue increasing from $3.3 million in 2007 [14] to over $12 million in 2010 [15]. This equates to a growth of 400% over a three year period. Gross profit and net profit also exceeded 400% over this same three year period.

The directors of MyNetFone took a risk in introducing a new form of communications technology to the market. Furthermore, the company took a significant risk during infancy, listing on the ASX in 2006. For the first two or three years we were self-funded, but then we got to a point where we said to really make it to the next stage we needed outside funding We had a lot of proof points already. We looked at venture capital, angel funding, and eventually went down the IPO route [16]. The funding raised through IPO enabled the significant growth from 2007-2010.

The MyNetFone organisation is strongly focussed on measuring and reporting on Key Performance Indicators (KPIs). An indication of the KPIs benchmarked by the organisation to measure change can be inferred from the company values indicated in the company annual reports, namely:

1) Superior Customer Service: this is likely to be measured through customer satisfaction surveys and growth in the customer base. In financial year 2006/07, the number of paying customers increased by 180% [14].

2) Excellent Quality: monitored through call quality statistics, service outage statistics and customer complaints. In 2010, MyNetFone reported to have received the least number

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of customer complaints in the industry according to a TIO report, which can be used for benchmarking against the industry [15].

3) Value for Money: offering competitive pricing against traditional telecommunications and measuring customer savings. In 2010, MyNetFone identified that customers had reported savings of up to 60% off their telephone bills [15].

4) Innovation: measured through service and plan offerings, customer tools and interoperability testing [15]. Additionally, with the high level of in-house research and development, innovation could also be measured through the number of patents acquired associated with the VoIP technology and products.

5) Team Work: celebrating diversity and staff engagement levels [15].

B. Management and Organisational Change The vision and need for change began with the directors of MyNetFone. They observed that the telecommunications industry was being dominated by large providers and resellers. Their vision related to starting a new movement towards VoIP, including: to revolutionise the communications market by offering new generation, high-quality and great-value telecommunications services tailored to Corporate, SME and Residential markets; to be recognised by our customers, partners and shareholders as the most innovative and customer focused, IP-centric communications provider in Australia; and to be an employer of choice and provide our employees with ongoing training, career development opportunities and a stimulating environment in which to work. [17]

The human element driving and enabling this change was critical. The risk appetite for the organisation was aggressive: We started everything and I mean everything from the ground up said Mr Andy Fung [18]. The drivers for change were also instilled throughout all levels of the organisation, instilling a sense of ownership and urgency throughout the organisation. The company employed juniors and graduates noting that they were keen, motivated and willing to work extra hours [16] in order to realise the vision of the company. This vision was also sold to investors during the IPO on the ASX in 2006 [19].

It would be difficult to envisage the success of this company without the driving vision of the directors. It was important for MyNetFone to consider this in their formal risk management planning.

C. Risk Management 1) Formal Risk Management: The board of MyNetFone

is committed to recognising and managing risk. The IPO prospectus for the company outlines that MyNetFone takes a proactive approach to risk management. The Board is responsible for ensuring that risks and also opportunities are identified on a timely basis, and that the Companys objectives and activities are aligned with these risks and opportunities. [19]

The Board takes the following approach to ensure that the objectives and activities produced by management are aligned with identified risks:

Review and approval of strategic plans including the vision, mission and strategy statements of the company, ensuring that these appropriately manage business risk and meet the needs of stakeholders;

Review and approval of operating plans, budgets and monitoring progress against budgets.

The company has an audit board committee that is responsible for setting and reviewing the companys risk profile and setting the risk tolerability levels for the organisation. Additionally, this committee assesses the operation of the companys internal control system for managing risk.

Monitoring and reviewing risk assessments allows the company to prepare for unexpected circumstances including actions taken by firms in competition with MyNetFone.

2) Tolerability of Risk: Applied to MyNetFone, a tolerability of risk table and criteria for risk evaluation are included in Appendix A. The categories of risk consequence considered include financial, service interruptions and reputational. This criteria is used for assessing the failure modes identified in the FMEA analysis.

In the evaluation of risk, those classified as low are considered generally to be tolerable and acceptable for the company to take on. Risks classified as medium are also considered to be tolerable if it is demonstrated that these risks have been reduced to levels As Low As Reasonably Practicable (ALARP).

Achieving business objectives for MyNetFone requires a certain level of risk to be taken to generate opportunities. Without such risk, these opportunities would not otherwise be available. Where risks have been reduced to levels as low as reasonable practicable (ALARP), control measures are identified, communicated and managed produce residual risk levels that are acceptable. Risks classified as extreme or high would be considered unacceptable and action would be required to eliminate these risks or reduce to an acceptable level.

One example of the companys tolerability of risk relates to the high level of research, development and engineering capabilities that the company is reported to have in-house [13]. This is an important part of a technology company and demonstrates that the company is willing to accept the fact that some streams of research will bring about findings that are not worth pursuing further. The costs associated with these research efforts are tolerable however as lessons can be learned to improve future research efforts.

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Figure 1 MyNetFone tolerability of risk table

3) Failure Mode and Effects Analysis (FMEA): A Failure Mode Effects Analysis for MyNetFone is included in Appendix A.

The key risks or failure modes for the organisation include: a. VoIP technology b. Competitors VoIP and other emerging technology

companies c. Supply chain device suppliers and network carriers d. Internet access arrangements available to customers e. Coverage (emergency services) f. Government legislation, regulation and policies for

telecommunications g. Customer take up h. Financial liquidity, credit and management of growth i. Loss of directors or other key staff j. Security of information

D. Analysis and Discussion 1) Causal Chain: The causal chain leading to the

success of MyNetFone is included in Appendix A. It is important to note that the human factors of driving change and identifying and managing risks are critical components of the causal chain resulting in the success and significant growth of the MyNetFone company.

Key items in the causal chain is the human factor of understanding the market, developing a vision and communicating this vision to employees and potential investors. This vision was clearly presented to investors who selected to invest through the Initial Public Offering. The company took risks in selecting to list on the ASX and also to invest in research and development for an emerging technology. Through understanding the market, commercialising the product and monitoring quality, the company has been able to expand offerings to residential customers, small to medium enterprises and now large enterprises and government customers.

This causal change started with the company directors, who were instrumental to the success of MyNetFone. It is important to recognise that a key risk for the company today is the loss of these directors or other key staff. Succession planning for these key staff is an important risk mitigation measure looking towards the future.

2) Discussion: An interview with the directors of MyNetFone offers some valuable reflections on business planning, risk management and change management.

A strong focus on business planning is also of critical importance. The directors of MyNetFone identified that unless you have a real definitive plan of where your businesses is going to go, its not the plan to do [16]. The plan was clear from the top of the organisation and communicated to employees who were empowered to deliver on these plans.

For MyNetFone, the decision to list on the ASX was a critical turning point for obtaining funding to allow expansion into the small to medium enterprise market. The IPO route in 2006 was a real eye opener [16]. Without taking the risk of listing on the ASX, the amount of funding available for expansion would have been limited. They would have stagnated supplying services to the residential market. Growth would have been slow in the small to medium enterprise market and the market would have perceived them as being somewhat risky, leading to a lower growth in customer base.

It is important to note however that the level of change of risk in respect to time (dR/dt) was selected in a manner that was sustainable for the stage of the companys growth. The expansion from the residential market into the small to medium enterprise market was the correct step for the company at this stage of growth. If the company instead decided to avoid this market and grow from the residential market straight to large enterprises and government customers, a fundamental step of proving technology scale would have been missed and the efforts would likely have failed.

The growth of MyNetFone from 2007 to 2010 continued further by the strategic acquisition of Symbio networks in 2011. This highlights that the risk culture within the organisation and the fact that changes continues and that the organisation is not stagnating but rather focussing forward into the future.

E. Conclusion for this Organisation MyNetFone experienced significant growth between the period of 2007 to 2010 following the listing of the company on the ASX in 2006. There were strategic risks taken to enable change to be enacted in the telecommunications technology sector. These risks and changes were fundamental to company growth. These risks and changes were strategically selected to provide a level of change of risk with respect to time (dR/dt) appropriate to the stage of the companys development. The human element of change was critical for MyNetFone. The directors of the company understood the market needs, created a strong vision and drove the change initiatives within the company and the industry. Strong leadership and committed employees enabled them to deliver leading products to the market. The board of the company reviews and approves strategy and operational plans to ensure that risks remain tolerable in the present and as the company looks to the next stage of growth through strategic acquisitions.

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IV. ONE TEL

A. Introduction One.Tel was established by Jodee Rich and Brad Keeling in 1995 as a telecommunication company [20]. In its formative years, One.Tel took advantage of the deregulation of the industry by becoming a retailer using the established Optus telecommunications network capacity. One.Tel was able to grow its revenue by a factor of ten between 1996 and 2000 [20]. At its peak, there were more than 2 million customers signed up by One.Tel and was operating in eight countries. The organisation also made significant amounts of money based on market capitalisation through stock market speculation, resulting in the organisation becoming the fourth largest telecommunications company in Australia. However, the share price of One.Tel fell sharply in 1999 due to the financial and business issues in the Company becoming public. Furthermore, the Company expanded too fast creating a liquidity and debt issue. This situation was due to the poor management of One.Tel, and there was no appropriate company structure [20]. The organisation collapsed in May 2001 resulting in one of the biggest organisation failures in Australias history.

Management had stated that their key performance indicators were monitored using internal data and communicated to the public. The performance of the One.Tel operation was used with valuable real time statistics on many fundamental drivers [21] to run the organisation. These KPIs were [21]:

1) Customer Acquisition Costs: These represent the costs for One.Tel to transfer customers from their existing network to One.Tels retail business. This included closing existing contracts with other retailers, as well as dealing with phone numbers and network changes.

2) Customer Numbers: Customer numbers continued to grow throughout the life of the organisation due to the competitive nature of the organisation. This indicator was relevant towards revenue and market share values which were critical information for investors.

3) Number of Calls and Minutes: The service provided by One.Tel and its actual revenue source.

4) Average Cost: The average cost for every customer for One.Tel based on infrastructure costs on the Optus network.

5) Revenue: The key indicator for investors and critical for profits.

B. Management and Organisation Change The management of One.Tel is the key issue that resulted in

the Companys collapse. Since the company structure did not evolve and develop with its growth, a poor communication system was prevalent in the organisation which did not allow interaction between key management personnel to be effective. The organisational structure plays a significant role in the daily management of operations. In the structure Jodee

Rich tended to lead and dominate all aspects of management and the Board, even though he was not required to as joint CEO (with Brad Keeling). As a result he became the dominant figure of the organisation with management and Board members tended to align to his ideas. This created a situation where responsibilities were not clearly defined to a particular person and monitoring processes were poor, limiting the efficiency of the Company. In this case, the poor monitoring of the management by Rich resulted in One.Tel losing the opportunity for survival by not changing operations in time. In management, Rich was promoting individuals based on a personal basis [20]. This resulted in high turnover of staff in the organisation.

Furthermore, during his leadership, he did not accept many suggestions from others and tended to manage the company with large authority. The poor structure made the low complexity of the company and there was no organisational chart so that no clear jobs and responsibilities were identified [22]. This poor structure resulted in the inability to react to changing circumstances in a suitable timeframe. One major issue was customer complaints and problems not being solved in an appropriate timeframe. This resulted in a long term decline in sales. One.Tel lacked a clear formal structure in its operation (as an ASX company should) as there was no appropriate responsibility for developing procedures for financial account control and customers complaint solving.

There were significant issues with risk management as well due to the nature of the industry. As the organisation was in a highly competitive industry with many global competitors, the expense plan of One.Tel was ambitious but it was lacking compelling track record for its leadership [23]. To build a sustainable business, One.Tel did not manage the risks it faced well enough. Risk management should always be a critical consideration of a Companys performance considering the impact it will have on future performance. In Richs management, there were several aspects of risk management and uncertainty that were ignored. As a record, the balance sheet of One.Tel shows that there was $560 million intangibles (assets) value which represented 39% of its assets [23]. However, this ratio is considered dangerous for organisations. Rich did not believe it to be a considerable issue at the time. Since the established leadership in the organisation was also involved in the start-up venture, a more experienced, balanced and execution-oriented team should have been appointed to complement Richs management. Unfortunately, Rich did not identify this as a problem of his management of One.Tel on time, and it was too late to make any changes. The organisation of One.Tel grew rapidly, in a successful manner, but also had a fast collapse. Overall, the major problems were due to the poor and inexperienced leadership required for the organisation, and operation controls (risk management) of the company.

C. Risk Management

1) Formal Risk Management: The improper risk management processes played a major role in the collapse of One.Tel. Since the organisation did not have a good company

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structure and the CEO Rich and his fellow management were well-entrenched, communication for change was poor. Therefore when risks appear, the management process was too slow to react and the risk could not be managed on time to minimise its impact. In this case, the management should have developed a formal risk management process so that risk can be controlled when the organisation is in the bad situation (a search within their annual report for 2000 did not have any sections or words related to risk management). Due to this behaviour, the financial issues within the organisation were not identified. The revenue and expense issues within the organisation that were critical to the Companys survival were not identified and mitigated, resulting in its collapse.

2) Tolerability of Risk: To develop actions to risks, One.Tel should have developed a risk management process and assess risk tolerability. With a clearly defined risk tolerance, risk could be managed easily to identify and minimise the effects of the hazard. The Company did not define its risk tolerability well. Since One.Tel wanted to grow rapidly and get into new markets, it undertook a very aggressive and expansive strategy. However, they did not consolidate their position in the markets that they entered into. Furthermore, One.Tel paid more money for telecommunication licences and spectrum compared to other established competitors in the market.

All of these actions above did not meet the risk tolerability criteria we have established for One.Tel. Through conducting a FMEA analysis, an intolerable RPN value of 100 was adopted based on the Companys values and consequences related to failure. Based on this, the strategy undertaken by the organisation would have been altered due to having too much risk associated with its implementation. Furthermore, the customer service/problems risks were created by events that were too risky. Therefore, it is very important to focus on risk tolerability criteria to manage risk. A tolerability of risk table and criteria for risk evaluation are included in Appendix B. The categories of risk consequence considered include financial, service interruptions and reputational. This criteria is used for assessing the failure modes identified in the FMEA analysis.

Figure 2 One.Tel tolerability of risk table

3) Failure Mode and Effects Analysis (FMEA): A FMEA analysis and table has been undertaken to analysis the risk and their associated effects on the organisation (in Appendix B). The key risks or failure modes for the organisation include:

a. Competitors Pressure b. Supply Chain c. Market of the Monitoring d. Telecommunication License e. Loss of Staff f. Strategy g. Government Regulation h. Personal Information Security i. Emergency Management j. Customer Complaints

D. Analysis and Discussion 1) Causal Chain: The main reason of the collapse of

One.Tel is due to management errors. The organisation grew rapidly to become the fourth largest company in the telecommunications market in Australia. However, One.Tel did not consolidate its existing position in the market and it was engaged in developing its expanding strategy in new markets. This resulted in the Company not paying enough attention to the financial situation in its Australian operations, resulting in failure. It could also be observed that the strategy to expand overseas was incorrect since it did not have the appropriate management with the required skills to perform the operation. Not expanding overseas may have saved the organisation if management had focussed more on domestic financial and operational affairs.

Due to the Company growing too quickly, they had no mature company structure and management. This should have been a priority whilst consolidating existing domestic market share. When the organisation had made changes to its management to set the organisation for further growth, then a potential expansion into overseas operations could have been risk assessed. The company was too young to access into new markets with well-established competitors. Furthermore, accessing new markets resulted in high costs for new telecommunication licenses, resulting in significant debt and financial issues. This was a poor strategy since it had restricted the liquidity of the organisation, resulting in cash flow problems. Furthermore, the organisation should have developed a detailed business plan outlining a strategy for future growth. In this plan, the budget and estimation should have been established and audited. This would have then been risk assessed to determine whether it is suitable to the Companys strategy. In this way, the risk can be reduce and ensure that the strategy conforms to a well-defined risk tolerability. The causal chain diagram in Appendix B shows the relationship of the events leading to failure. A critical aspect of the diagram is the issues caused by management decisions.

2) Discussion: A significant portion of the organisations collapse was due to the poor management of Rich. Since he surrounded himself with managers and individuals with personal links with himself, there was no

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significant independence and professionalism in the management (considering the size of the organisation). Therefore, a lack of formal and professional communication of critical information existed in the company. When the financial problems occurred, Rich was unable to either be aware of the problems, or develop appropriate solutions to fix the problem. One.Tel required a good and professional management team to implement the organisations strategy. Since Rich was an entrepreneur and innovator, One.Tel required a leader/CEO that had more balanced business traits, experience and is execution-oriented to undertake the strategy. If the leadership and management group was improved, the organisation may have expanded and developed sustainably and successfully.

Furthermore, there were some barriers that stoped One.Tel from becoming successful which have been shown in the bow tie diagram in Appendix B. On the left had side of the diagram, there are five identified causes that were not properly risk assessed that contributed to the failure of the Company. One of the causes was a problem with the strategy. Strategy plays a significant role of a successful organisation. However, there were some serious issues with the strategy that were not risk assessed. This could have also resulted from having inexperienced management to identify the correct strategy and implement it effectively. Debt finance was another issue that contributed to its failure. It had spent too much on the telecommunication licenses it purchased, resulting in significant debt and no cash. Furthermore they did not manage their finances well. These events could have been controlled if there was greater financial auditing and a proper strategy to minimise the undertaking of significant risks. The telecommunications industry became competitive at the time One.Tel entered the market. Existing retailers (i.e. Telstra and Optus), had considerable economies of scale advantages. In order for One.Tel to be successful the management of the company should have implemented a strategy that was based on a niche, as well as risk assess all actions to ensure that they were viable. Company structure was another weakness that contributed to failure. A poor strategy did not allow for establishing an appropriate management structure to suit the organisations goals. This combined with the lack of experience in the management personnel to grow the organisation sustainably had severe implications in the daily operation of the organisation and ability to react to situations. A final cause of collapse was its delivery of service to its customers. This included issues with customer service and price. One.Tel should have employed management to review its retail operations and create employee strategies to focus on customer attitudes and provide good service with an appropriate and attractive price. Management with a service delivery background were required.

On the right hand side on the bowtie diagram, the consequences as a result of failure have been identified. After One.Tel collapse there were three main consequences identified including loss of creditor debt, loss of shareholder equity and loss of jobs. For the first two consequences, administration after the collapse would assist in returning

value to creditors and possibly shareholders. But there was no preventative control for the loss of jobs.

E. Conclusion The organisation of One.Tel became the fourth largest telecommunication company in Australia in the late 1990s after being established in 1995. It grew rapidly in the early stages by reselling Optus mobile phone service. The company attracted its customers by offering cheaper mobile calling rates and valuable international and long distance call services. However, One.Tel was ambitious when it tried expanding into new markets without consolidating the existing market on time. Their rate of change and their adoption of risk (dR/dt) was very high and not managed properly. They bought Australian telecommunication spectrum licenses at a very high price that had severe financial implications. Overall, the strategy of the organisation was incorrect. This was critical considering there is very little evidence of successful risk management policies or processes implemented within One.Tel. The One.Tel collapse is a classic case study of strategic mistakes, failed expectations unbridled growth and wrong pricing policy [20]. All change within an organisation requires a certain level of risk to be adopted. The level of this risk needs to be compared to previously specified risk tolerability established by the management of the organisation. The management of One/Tel led by Rich did not undertake proper risk management processes. This could have been avoided if individuals with the skills required within the telecommunications industry were employed within One.Tel.

V. NEWCREST MINING LIMITED

A. Introduction Newcrest Mining Limited (Newcrest) is a company involved in the production of gold and copper in Australia and overseas. It is based in Melbourne and has exploration, mine development and mining operation capabilities. Newcrest began operations as Newmont Australia established in 1966, with operations commencing in the Telfer deposit in Western Australia in 1972. Newmont was listed on the ASX in 1987, followed by the acquisition of Australmin Holding and merger with BHP Gold in 1990. This was followed by a name change to Newcrest Mining [24].

In 1998 Newcrest embarked on a simple and long-term strategy of improving the international cost competitiveness and durability of its gold/copper business. This was to be achieved by lowering the Companys overall cost of production from the third quartile on the world cost curve, where it then was, to the first quartile, and by effectively managing the Companys financial exposures, particularly through the hedgebook [25].

In 2000 Newcrest began the initiative to review operations, minimise costs and increase productivity by closing down and reviewing operations at the Telfer mine and selling the New Celebration operation [26]. This reduced gold output (and therefore revenue), but also removed a high cost component of the business. This was a potential significant

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risk on the business, particularly if the price of commodities had risen during lower production.

The Companys hedging operations were also rationalised over the first half of the 2000s to minimise the losses experienced from fixed pricing. In the 2001/02 financial year, a $53 million loss was expected as a result of foreign exchange positions [25]. Over time, it was observed that the Company minimised hedging activities where possible by observing financial markets more carefully to maximise financial performance. This move was also a significant change and risk to the organisation if conditions were unfavourable.

Newcrests management had changed the business and made decisions to establish its long-term strategy of becoming one of the worlds most efficient and low-cost producers of gold and copper. The focus on low cost remains paramount [27]. This strategy was implemented and resulted in significant growth in the organisation between 2002-2007. Additionally to this, Newcrest aimed to improve shareholder value and improve the quality of the Companys asset portfolio. The measurement of change and meeting objectives was observed through the following key performance indicators:

1) Gold Sales (Ounces): Gold production was tracked at every mining operation. The results are an indication of the size of the organisation. In 2002 at the low point of the organisations production, total ounces (oz.) of gold produced were 646,626 oz. Five years later in 2007 production totalled 1,617,251 oz. This was an increase of 250%.

2) Gold Price ($): Due to the limitation of long-term hedging of gold price contracts and foreign exchange rates, favourable movements in the gold price resulted in financial benefits for the organisation. In 2002, the spot gold price for Newcrest was at a low of $559/oz. In 2007, the price had risen to $682/oz. (a 22% increase, however in 2012 the price had risen to $1,609/oz. a 288% increase in ten years)

3) Sales Revenue ($): Sales revenue is a function of the gold price and quantity of gold sold. In 2002 sales revenues were $479.9 million compared to $1,555 million in 2007 (324% increase).

4) Cost of Goods Sold ($): An indicator of the productivity of operations. The costs per ounce (gold) in 2002 was $426/oz., whilst in 2007 it was $419/oz. However in 2004 costs were as low as $263/oz. Therefore, productivity was significantly improved in the initial years of the transformation.

5) Profit ($): Profit is the underlying indicator of the success of the organisation and its objectives. For the five year period between 2003 and 2007 the cumulative profits after tax were $772.7 million. The corresponding five year period prior to 2003 was $184.2 million a 420% increase.

B. Management and Organisational Change Newcrest faced significant challenges in the mid to late 1990s when the organisations mines forecast of higher

levels of production would not be achievable. At the same time serious operating difficulties began to emerge which impacted on results [28].

The need for change in the organisations strategy began after mining operations matured in the mid 1990s resulting in production falling and costs increasing [29]. This was in conjunction with capital outlays for a new major mine (Cadia Hill) on the site of the Companys first major exploration success. Also in that year Newcrest made an attempt to join with Normandy. This was unsuccessful and the market reaction was strong. Newcrests market capitalisation reduced from almost $1.5 billion to around $500 million and there were significant Board and management changes [29].

In the 1997 Annual Report, Newcrests management established a four part program to revitalise the company [28]. This included:

recruiting a new Chief Executive to guide the Company through its upcoming phase of two major development projects, its focused large exploration program and cost improvement at its mining operations;

funding the new projects by putting in place a $A600 million multi-option unsecured debt facility, to be finalised and then drawn down as required;

changing the culture within the Company towards greater individual accountability with emphasis on cost-consciousness and generating profits; and

undertaking an objective review of the Companys Board and management structure to build world-class performance standards from the top down.

Therefore, the Company commenced the change process in the organisation from the top management (Board), and instilled the new culture required throughout the organisation through upper and middle management. The chairman of the organisation during the early transitional stage (Sir Roderick Carnegie) stated that responsibility for lower costs of production and greater profitability involves every member of the Newcrest team accepting individual accountability for both their own and the Companys total performance [28]. As a result of this new culture of greater accountability and the need to perform better financially, it is assessed that more pressure was placed on individuals to perform. This led to the desired outcomes of the organisation to come to fruition.

The Board of Newcrest recognised its responsibility to create shareholder wealth for the owners of the Company. Furthermore, decisions taken by the Board have not been positive for the Company, and therefore to the creation of shareholder wealth. Newcrest decided to take vigorous steps to correct the situation [28]. As former chairman of Newcrest Ian Johnson stated in his address in the 2006 Annual Report, the aggressive strategy of the past 10 years was recognised as high risk/high reward [29]. The risk appetite of the organisation was very high, and therefore required the implementation of risk management strategies at a fast pace to safeguard the interests of its shareholders and deliver results. This is prevalent in the statement by Mr Johnson in the past 10 years Newcrest has spent almost $3 billion building seven new mines. This money was sourced as debt obtained on

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acceptable terms by hedging future gold production. This strategy created a first-class production base reflected in the Companys current market capitalisation of more than $6 billion [29]. This is a significant transformation from the $500 million market capitalisation ten years prior. Therefore, the rate of change (dR/dt) of the organisation was significant.

C. Risk Management

1) Formal Risk Management Process: Newcrest has a well-defined and established risk management process that is communicated through internal means, as well as published on its website. Many of the key concepts contained relate to the Companys business performance, including continually strive to improve the companys performance and periodically review performance to identify areas for improvement and use risk management techniques as an integral part of decision making [30].

The following is an extract from Newcrest Annual Report of 2003 outlining its risk management strategy and approach:

The Board recognises that risk management and compliance are among its key responsibilities and are fundamental to the sound management of the business. The Company has a formal Risk Policy approved by the Board and a comprehensive reporting system which seeks to identify, at the earliest opportunity, any significant business risks.

The Company also has in place specific reporting and control mechanisms to manage significant risks and a formal compliance program to monitor compliance levels across a range of key areas. An internal audit function, which reviews and reports to the Board on the effectiveness of those mechanisms, is also maintained [27].

With these processes and checks in place, Newcrest was able to evaluate the progress of change, the decisions it made, and evaluate the effectiveness and risks associated with their actions.

2) Tolerability of Risk: A tolerability of risk table and criteria for risk evaluation are included in Appendix C. The principle categories for risk consequence considered for Newcrest are financial, productivity, and reputational. These criteria are also used for the risk assessment using the FMEA method.

Given that Newcrest management placed an emphasis on improving financial performance and delivering value for shareholders, risk tolerability criterion for the organisation are quantified in dollar terms. Risks that are tolerable are considered to have a financial impact of less than 20% of the total market capitalisation of the organisation. This is estimated to be around $100 million dollars at the commencement of the change process within Newcrest. Taking into consideration the likelihood and detectability of the risk, the intolerable limit for Newcrest is considered to have a Risk Priority Number (RPN) greater than 125. Furthermore, risks with an RPN greater than 50 should be reduced to an ALARP level.

Figure 3 Newcrest Mining tolerability of risk table

3) Failure Mode and Effects Analysis (FMEA): A FMEA was conducted on the top ten risk events identified for the Company to determine the most substantial risks facing the organisation. The results of this assessment can be found in Appendix C. The following is the list of most significant risk events for Newcrest whilst undertaking the new strategy:

a. Gold prices b. Foreign exchange c. Hedgebook/hedging operations for gold price and

foreign exchange d. Mining expansion and productivity drive e. Shareholder/stakeholder disagreements f. Government legislation, regulation and policies for

mining g. Financial liquidity, credit and management of growth h. Loss of directors or other key staff i. Lack of management personnel with appropriate skills j. Safety/Environmental obligations

D. Analysis and Discussion

1) Causal Chain: From the assessment of the organisations development between the period of 1997 2007, the three main causes resulting in developing a new strategy and objective for the company were:

Lower productivity; Increasing mining operation costs; Reduced market capitalisation and shareholder

selloff. The new strategy to commence the reformation process involved:

Obtain a new Chief Executive Officer to lead the change process and review the existing Board members;

Change the company culture to adhere to the company objective of reducing costs and increasing productivity;

Fund and expand new low-cost projects through the exploration segment of the Company.

The investment required hedging the cost of gold and foreign exchange rates at higher levels than their market value as collateral to secure finance. As a result, their gold was sold for lower than the market value. This was a significant risk

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considering the potential for the gold price to rise significantly. However, at the time the price was relatively flat and was considered a suitable course of action by the audit committee.

The drive to change led by the management of Newcrest resulted in structural changes to the cost structure and productivity. Unprofitable mines were closed and refurbished to lower unit costs. These changes transformed the company into a strong structural position to operate. Nearing the conclusion of this process, the company recognised improving market conditions (increasing gold price and higher Australian Dollar), which allowed continued investment in exploration and new projects overseas whilst servicing existing debt at a quick rate.

There were significant risks undertaken by the organisation to reach its position at the end of 2007. This includes the initial change process, as well as investment and debt positions undertaken by the company. Throughout this process, all decisions were made through the oversight of the executive committee consisting of three Board members to review the executives decision making process. Furthermore, an audit committee is established to review the risk management process and its effectiveness. Through these controls, the company and its management were able to fully assess the risks the company faced when facing a decisions, as well as quantify the risk and determine whether it is tolerable.

2) Discussion: The Board and management recognised that in order to grow, the company required to make a significant change to the way it operated. This change was significant since it involved billions of dollars of investment and may have been catastrophic if the market conditions had been significantly negative. However, this case study has shown that with great risk comes great reward, as was published in the Annual Report in 2006:

During the last ten years, Newcrest has evolved from within the Australian domestic gold sector to become a major international gold and copper producer with a significant growth profile, through a strong commitment to exploration and development [29].

Although the intended rate of change (dR/dt) for the organisation was not published, it is believed that the intention was for quick and structured change in order to alleviate the concern of shareholders. Furthermore, due to adequately communicating the change, employees and management had a clear new objective of reducing costs which was achieved during the change process.

With hindsight, it is clear that Newcrest would not have become the successful organisation it was during 2002-2007 if it failed to change. The rate of change for the organisation was optimal due to balancing what was desired by investors/shareholders, compared to having sufficient liquidity to operate and pay off substantial investment debts. Any change in this rate of change may have resulted in less positive results. Furthermore, from the oversight of an audit and executive committee, key decisions were evaluated according to the risk management processes implemented at the company.

E. Conclusion for this Organisation The Board and executive recognised the financial and structural issues Newcrest faced and undertook a review to identify changes to the organisation. The plan for change was actively communicated to all stakeholders and implemented with the oversight of an audit and executive committee. Due to the employment of the required personnel to lead the organisation, the change process was implemented and managed to the eventual success of the organisation. This success resulted in Newcrest becoming one of the largest gold mining organisations in the world.

Key components to the successful change include the human component through the experience to manage the risk and develop the required culture. Furthermore, managing the rate of change to balance financial and stakeholder interests was critical to the success. Overall, the appropriate change management framework outlining key objectives was published in every Annual report in the period to clearly indicate the path to be taken to success.

VI. PASMINCO LIMITED

A. Introduction Pasminco Limited (Pasminco) was an Australian zinc and lead producer and supplier with mining and smelting operations based in Australia and overseas. Pasminco was formed through the merger and floatation of CRA (Conzinc Riotinto of Australia currently Rio Tinto) and Norths (formerly North Limited acquired by Rio Tinto) zinc-lead-silver mining and smelting assets in 1988 [31]. A public share issue raised $203 million, with subsequent listing on the ASX in March 1989 [32].

At the commencement of operations, the Board began invested $217 million on modernisation programs [32]. This was followed by a consolidation phase of assessing assets and removing unwanted projects from their portfolio. By 1997 Pasminco had adopted a strategy of becoming a larger operator of zinc and lead mining and smelting operations through mergers and acquisitions. This led to greater investment in operations funded through debt.

By 2001, Pasminco grew to become the worlds biggest zinc producer with over ten percent of global output [33]. However everything that could go wrong, did go wrong, at the same time. Zinc prices crashed to record lows, the dollar did likewise, and the combination of high levels of debt and a disastrously misconceived hedging strategy ensured that a company once valued at $2 billion would implode [31]. In September 2001, Pasminco was placed in voluntary administration.

As part of its requirements as being a listed company on the ASX, the performance of the organisation is published in annual reports. All costs and figures are tracked by internal accountants for the Company. For Pasminco, the key performance indicators representing this performance include:

1) Metals Production (Tonnes): The quantity of metals produced from Pasmincos mines have a direct influence on the revenue of the organisation. In 1989 when production

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record began, the amount of ore produced totalled 4,490,700 tonnes. This reduced to 3,662,800 tonnes at the end of the consolidation period. This increased to 5,140,632 tonnes by 1999. Over the ten year period, production increased by 14%;

2) Cost of Sales ($): The costs associated with extracting the ore, inclusive of research and exploration costs. In 1989, total costs were $1.41 billion. This reduced to $1.38 billion in 1999 (2% reduction). However the lowest costs were incurred between 1994 & 1995 where less than $1.1 billion was spent. The cost of sales had an increasing trend from 1995 onwards;

3) Net Debt to Net Debt + Equity Ratio (%): Representative of the amount of debt the Company holds and an indicator for the level of investment an organisation undertakes. In 1989, Pasminco had a ratio of 23.7%. This was relatively high due to levels of investment being made. In 1993 after the conclusion of the modernisation process, it reached 43.9%. In 1998 and 1999 the ratio was 10.0% and 46.2% respectively. 1999 was the highest the ratio had been for the company. This was due to mergers and acquisitions. The total net debt was $1256 million in 1999, whereas $166.5 million debt was published for the previous financial year (750% increase);

4) Zinc Price ($US/Tonne): A critical indicator for Pasminco since approximately 55% of ore produced is zinc. In 1989 the price was $1609/tonne. The price had reduced by over 38% to $994/tonne in 1999. By September 2001, the price was $801/tonne. When the expansion of the organisation commenced, the zinc price was above $1100/tonne. Critically, in the annual report of 1998, the Companys break even price for zinc was stated at $998/tonne. This had increased from $934/tonne in the previous year due to increased investment in new mines (Century project). Furthermore, the 1999 report state the break even price at $1020/tonne;

5) Exchange Rates ($A/$US): All commodities are quoted in US dollars. Therefore, a lower exchange rate results in lower revenue yields for sold goods. From commencing operations in 1989 to 1997, the price averaged in the high 70s US cents per dollar. This had dropped to 70 cents/dollar in 1998 and 62 cents/dollar in 1999. By the time of collapse, the exchange rate was closer to 50 cents/dollar. All statistics above sourced from Pasminco Annual Reports 1998 and 1999.

B. Management and Organisational Change Significant change in the objective of Pasminco occurred in 1997 through acquisition of projects and rivals. This would result in the Company becoming one of the world's biggest zinc groups. In early 1997 it bought the Century project from CRA for $345 million and raised nearly $700 million of new equity to fund the deal and develop the project [31]. This development would cost Pasminco $788 million with an additional $250 million for project infrastructure. Overall the investment cost for the Century project would total $1.4 billion. This was a significant amount considering the total

shareholder value in the company prior to the acquisition was $778.5 million, and revenue was $1,353 million. This suggests that a new strategy was being undertaken by management, with an appetite to undertake major financial risks to achieve this.

This acquisition had occurred in conjunction with a change of strategy commencing at the top of the organisation. The company, under CEO David Stewart and chairman Mark Rayner, had adopted an ambitious strategic plan to achieve a $5 billion market value and the goal of nearly doubling production to a million tonnes of zinc a year [31]. Therefore Pasminco management had a desire to change, and communicated the primary method to achieve this to stakeholders: Century will reduce our dependence on existing mines and give us more flexibility in their operations and has the potential to contribute significantly to shareholder value [32]. They had further clarified that their top priority and expectation for [1998] is to reduce [the zinc breakeven price] by lifting production and revenue and driving down costs. The development projects outlined in [32] report will assist these objectives [32].

These development projects included information on upgrades of existing projects to increase production and implement new systems for more efficient operation. Furthermore, measures were introduced for employees by providing them leadership training, introducing employee surveys for greater feedback on organisational changes and improvement, and inter-site transfers and promotions to improve employees experience-based skills. These measures would assist Pasminco management in implementing change and meeting their objectives.

The pursuit of growth led to a successful, but hostile and protracted, bid for Savage Resources in early 1999 [31]. Savage Resources was based in the United States with similar capabilities as Pasminco. The takeover was intended to increase production as per Company objectives. It would produce greater mass, a better balance of mining and smelting, a stronger global strategic position and a reduced vulnerability to lower zinc prices [31].

However, due to the quick nature of the acquisition, the poor financial state of Savage was overlooked. $342 million was spent for the organisation, when the true value of assets was valued at $313 million. This value was dependant of cost reduction strategies to be implemented. When they were not, the value was estimated to decrease by a further $50 million. Savage also carried significant debts, estimated to be $US62 million, when the true value was $US50 million greater than anticipated. Hedging operations were employed by Savage with contracts totalling $US800 million; Pasminco had valued them at $US510 million.

Pasminco also had a hedgebook for its own operations involving currency exchange for US dollars due to the majority of income received being in this currency. Hedging value totalled $US1.2 billion with currency swaps between 58.5-66 US cents to the Australian Dollar. It had assumed this value after considering consensus forecasts by 42 banks in January 1998. The dollar appreciated to 73 US cents when the

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bid for Savage was undertaken, and dropped to below 50 US cents at the time of administration. This depreciation resulted in significant losses in hedging operations.

Significant shortfalls in information management resulted in the organisation failing to recognise problems before they became significant. Stephen Bartholomeusz of The Age stated: The chaos outside the group appears to have been accompanied by confusion within. Ferrier says its management information systems contributed to its failure because management was unable to adequately prepare forecasts on a timely basis, particularly of cash flow performance. Pasminco typically performed below forecast, failing to meet targets for controllable items such as production volume and costs. In the three years before the administrators were appointed, the average annual shortfall was $73 million [31].

With the expanding operations of the Company, combined with the fluctuations in the currency exchange and zinc prices between 1997 and 2001, the organisation had significant cash flow problems, resulting in inevitable default and administration. The strategy employed by management between 1997 until its collapse involved significant change and risk taken over a short period of time (high dR/dt). This high rate of change resulted in Pasminco reaching a deteriorating financial position that was too risky for the market conditions at the time.

C. Risk Management 1) Formal Risk Management: Published literature freely

available provides little insight on processes undertaken by Pasmincos management towards identifying, quantifying and mitigating risks associated not only with the change of strategy employed, but also risk management within the organisation in general. Compared to Newcrest Mining discussed previously, Pasminco did not have an individual risk management policy.

A comment about risk management was contained within the Corporate Governance Statement of annual reports: the Board as a whole monitors and receives advice on areas of operational and financial risk and considers strategies to manage business risks [34]. Furthermore, unlike Newcrest, there was no information on the structure of business risk management within the organisation as well comments regarding the significance and importance of business risks to the viability of the organisation. Overall, due to the changing circumstances in the organisation, the existing risk management process was not adapted for this change.

2) Tolerability of Risk: Given the approach management undertook for expansion plans, and the minimal evidence showing risk management strategies implemented in business decision making, the anticipated tolerability for Pasminco is considered to be high. Given the similarities between Newcrest Mining and Pasminco, the categories for risk consequence considered are the same (financial, productivity, and reputational). The tolerability of risk criteria would have been slightly greater than most organisations due to adopting a more aggressive strategy. Therefore, it is assumed that risk

totalling $125 million and with RPN values of 150 or greater would be considered intolerable. Furthermore, risks with an RPN greater than 75 should be reduced to ALARP.

The change processes required to prevent the failure of Pasminco include increasing thorough risk management processes as well as improving information management systems (see explanation and reasoning in causal chain section below). It is assumed that improving these processes to become effective controls would require management to invest in new employees specialising in risk management and information systems fields to improve operations. This would include in executive management and Board level. Assuming two managers and ten additional staff would be required, with average salaries of $1.5 million and $250,000, the total costs of these controls is $5.5 million. Furthermore, potential software packages and workshops to train current employees are estimated to cost an additional $1.5million. Therefore, the total cost of implementing these changes would be approximately $7 million.

In perspective of the financial situation in 1997 prior to the change in organisation strategy, total revenue was $1.352 billion and operating profit was $64.7 million [32]. This is equivalent to 0.05% of revenue, and 11% of profits. Given the low proportion these measures would cost, implementing these controls would not be grossly disproportionate to the effects they would have on reversing the effects of failure.

Figure 4 Pasminco Limited tolerability of risk table

3) Failure Mode and Effects Analysis (FMEA): A FMEA was conducted on the top ten events identified for the Company to determine the most substantial risks facing the organisation. The results of this assessment can be found in Appendix D. The following is the list of most significant risk events for Pasminco as a result of undertaking a new strategy and not implementing the appropriate controls:

a. Financial liquidity, credit and management of growth b. Mining expansion through acquisitions c. Lack of management personnel with appropriate skills d. Zinc prices e. Foreign exchange f. Hedgebook/hedging operations for gold price and

foreign exchange g. Government legislation, regulation and policies for

mining

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h. Loss of directors or other key staff i. Shareholder/stakeholder disagreements j. Safety/Environmental obligations

D. Analysis and Discussion

1) Causal Chain and Bow Tie Analysis: Considering Pasmincos entire operational period from 1989 to 2001, the root causes of failure to predict the oncoming unfavourable financial market conditions or having a sufficient buffer to insulate the business from the poor financial conditions were a result of:

Insufficient risk management processes employed by the Board through the Audit Committee. Additional emphasis should have been placed on examining all transactions undertaken and using advice from different sources regarding the financial markets. Additionally, in-house financial information sources should have performed better at insulating the organisation and predicting potential consequences.

Poor information management methodologies within the business. Consistently failing to meet forecasts suggests an inability to track costs in real time and/or poor forecasting methodologies. Delays associated with publishing financial data were most likely due to insufficient information and/or employees without the resources to conduct the accounting process in the required manner.

Although the failure of Pasminco can be mainly linked to perfect storm of economic conditions unfavourable towards the Company, the impact associated with these conditions could have been minimised if the above two conditions were improved. The barriers to the causes of failure occurring are relevant risk management strategies and sufficient information management systems.

2) Discussion: The ambitious strategy employed by the Board and management was not backed up by the leadership to implement the required controls to mitigate the severity of any hazards. Newcrest had undertaken a Board and management review to determine whether they had the required skills and knowledge within the organisation to manage the expansion process. Pasminco did not undertake a similar review, and therefore did not have the required management experience to undertake their strategy. This lack of knowledge led to the failure of implementing and/or improving the required risk management and information management systems.

Although these controls could have minimised the consequences, it may not have prevented the failure since all mining organisations are heavily dependent on market prices for commodities. Greig Gailey was the CEO of Pasminco that began working one month before the collapse. He gave a speech in 2003 stating the decisions by management that resulted in administration:

It made a hostile acquisition of a company in the USA called Savage Resources. Savage was not worth what Pasminco paid for it. Further there were some uglies

in the Savage closet that Pasminco either didnt fully know about, or didnt correctly evaluate.

Secondly, it hedged a large portion of its US$ revenues forward at A$/US$ exchange rate of between 67 and 63 cents. This is a long way from the under 50s we have seen in the last 12 months.

Thirdly, it brought on major new production capacity at a time of record low zinc prices. At the same time it had to commence principal and interest payments on the monies borrowed to develop that capacity.

With the benefit of hindsight, the first two of these were flawed decisions. The last one was just bad luck. Why do I say bad luck, because the timing of commodity prices is simply impossible to predict [35].

Stephen Bartholomeusz of The Age Newspaper had written that: the combination of the Century development and the Savage bid stretched its balance sheet, introducing too much debt. The directors then, without knowing it, bet the company on the market consensus on the exchange rate and got the call completely wrong. The dollar fell sharply when they had bet that it would rise strongly.

In effect, the combination of the debt and the hedge book meant the group had leveraged itself massively to the zinc price, which promptly fell apart. The inadequacy of the management information system would have complicated the group's ability to understand and respond to the accelerating pressures [31].

The overall failure resulted from not implementing appropriate risk management to review operations as well as determine and analyse risks.

E. Conclusion for this Organisation Pasmincos strategy developed by the Board and management was inadequately implemented due to adequately quantify the risks associated with expansion. The growth in the organisation and the rate of change (dR/dt) was too great for the organisation to sustain. A review of the adequacy of the management and Board to lead the change and assess the business risks should have been conducted. Enterprise risk management and change management are critical for organisations for grow and improve.

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VII. VIRGIN BLUE

A. Introduction Virgin Australia Airlines (formerly known as Virgin Blue Airlines) is Australias second-largest commercial airline which was established in the early 2000s. The Airline was introduced by the visionary and businessman Sir Richard Branson who is the founder of Virgin Group. The Company is listed on the ASX and the company employs more than 50,000 people which operate in more than 50 countries [36].

The airline was established to be a competitor against Ansett Australia and it had established itself as a low-cost carrier during the initial stages of its service. But, as a result of Annetts downward turn, Virgin catapulted into a position where it was one of the leading airlines during those years.

During the late 90s many airlines tried to introduce budget airlines but none were as successful as Virgin Blue [37]. As a result of this success the company survived the turbulent times and prospered. Due to the collapse of Ansett, there wasnt much competition faced by Virgin Blue and with Qantas. These two airlines took up the market share from the downfall of Ansett and profited as well as increased the capacity of their aircraft family. Due to this development Virgin Blue took 30% share of the domestic market at the expense of other airlines which included Ansett and Impulse [38].

Virgin Blues introduction was in the low-cost carrier (LCC) sector where there were a lot of risks involved in the longevity of airlines and the cash flow that hindered many small airlines during the beginning of the millennium. The business plan for the company was simple in terms of providing customers with cheaper options to fly domestically across the continent. As years went on the companys business model adapted to the environment it was facing and decided to react with offering customers the choice of luxury but with extra costs in terms of better services.

Virgin Blues company priority is to grow and be a leader in the Airline industry and they are focused on measuring their Key Performance Indicators (KPIs). The identification of such KPIs of the company can be found on the ASX as part of mandatory reporting requirements. All figures and KPIs have been sourced from annual reports based on measurements performed internally within the organisation:

1) Market Share (%): In 2004, Virgin Blue had more than 35% of the market share of all domestic airlines in the region and it continued to grow dramatically.

2) Genuine Service Culture: Virgin Blues focus was on the service standards of the airline and in 2014, the airline was rated the Best Low-cost Airline (Asia Pacific) by SkyTrax.

3) Cost per Available Set Kilometre (CASK): In the year 2004 The Airlines CASK fell 0.30 cents to 8.16 cents. This allowed cost reduction and the ability to maintain operating profits.

4) Net Profit ($): In the same year the airline recorded a net profit after tax of approx. $158.5 million which is an extravagant increase of 47% [36].

B. Management and Organisational Change Virgin Blues introduction into the market occurred during a difficult period where all other LCC airlines were struggling to keep their costs down. This resulted in a situation where they had to close companies or sell operations to bigger airlines, namely Qantas.

Companys executives were firm in their dictation that they wanted the services which they offered to pay themselves in a manner which was instilled as revenue producers [38]. Risks had and were a requirement during the initial phase of the introduction as examples of airlines such as Ansett and Impulse were present before them. Richard Branson has always been a visionary in his extreme endeavours and has always been able to take risks and not afraid of the risks taken to lead to a huge failure. The organisation structure allowed the top level management and decision makers such as the CEO Brett Godfrey to come up with ideas and instil directives towards the entire organisational branches of the airline.

In 2003, Patrick Corporation acquired 50% of shares in the company and as well as injecting $137m in order to keep the company strong. This resulted in the company listing on the ASX. This allowed more productivity for Virgin as more planes and sectors were introduced to fly on. This led to customer satisfaction as the Airline launched many programs such as the Velocity Rewards as well as Web Check-in services. These services were a first for a LCC Airline and this allowed the company to prosper and grow at a rapid rate with branches created to travel to various destinations under the same flag.

C. Risk Management

1) Formal Risk Management: Virgin Group has always associated itself with a strategy which enables them to prioritise the company with safety and long-term planning. The Groups philosophy for a Risk Management plan is that the risks are segregated in various sections which enables one risk to be separate from the other. Furthermore, if one risk fails then this does not affect the other and when risks are taken, an exit strategy is also planned so a certain small percentage of the group is affected.

Virgin Blue has also in place a Safety Management System which works through being proactive and a risk identification system. The system which is in place monitors and operates so that it exceeds the standards of the Civil Aviation and International safety regulators. A committee is also established to control and maintain the best standards. Safety Performance focuses on three areas:

Safety leadership Training of staff Management of incidents [39].

2) Tolerability of Risk: A tolerability of risk for evaluation has been included below. The principal categories for risk consequences which were considered for Virgin Blue are financial, productivity and reputational. These are also used for the risk assessment when using the FMEA table in Appendix E.

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The top management team of Virgin Blue have placed emphasis on improving the brand name, expanding domestic and international routes and providing best services for its customers. This is in conjunction with keeping the largest market share in the LCC sector and delivering value for the shareholders.

Risks that are tolerable are considered to have a financial implication of less than 10% of the total market capitalisation of Virgin Blue. On the other hand, a risk Priority Number (RPN) greater than 120 is considered intolerable.

Figure 5 Virgin Blue tolerability of risk table

3) Failure Mode and Effects Analysis (FMEA): A FMEA table was developed and can be found in Appendix E. The top ten events have been identified as the most important and critical risks which will affect the company growth:

a. Long-term Planning b. Financing New Ventures c. Brand Name d. New Product Identification e. Competition f. Political or Extreme Scenario (Security) g. Government Legislation h. Expansion of Virgin Blue Into International Markets i. Ageing Fleet j. Fighter Brand of Qantas - Jetstar

D. Analysis and Discussion

1) Causal Chain: A causal chain diagram has been created with a diagrammatic representation of the chronological order of events that led to the success of Virgin Blue and this is (shown in Appendix E). For the success of Virgin Blue during the period of 2000- 2005, some of the main causes of its success are mentioned below:

The introduction of the airline during the downfall of Ansett is one of the main reasons why Virgin Blue was so successful during those years. Mostly due to the fact that not many airlines were operating during that stage which could rival the major airline Qantas.

Secondly, Virgin Blues strategy was to launch a LCC airline and this worked well when Ansett collapsed and the airline acquired more than 30% of the market share of the domestic regions.

Another cause for the success of the airline is the brand name of Virgin and its visionary, businessman Sir Richard Branson. He alone has catapulted the Virgin Group into one of the leading enterprise where he has invested his brand into various companies and regions. This factor led to customers approaching the highly sought after brand title.

Combinations of these factors and many more have pulled the Airline into being one of the most successful during the early years when times were tough for LCC airlines operating in Australia.

E. Conclusion for this Organisation Virgin Blues story is one of the most intriguing as it evolved during the years of an economic downturn in the industry and its introduction was majorly assisted by the downfall of Ansett. This enabled the company to prosper during the harsh times of other LCCs.

The organisational risk taking process was spear-headed by its leader Sir Richard Branson, and they were not afraid to take tough decisions during the years when other airlines were failing to balance their finances. The introduction of various services including its Velocity Rewards and later Web Check-In facilities aided in attracting customers to its airline.

Each and every company requires a certain risk taking approach, even during negative economic times when signs are present that the introduction of a new company would not work well. On the contrary, the success story of Virgin Blue is a clear example as to why risks are important in an organisation.

VIII. ANSETT AUSTRALIA

A. Introduction Ansett Australia was the second largest Australian owned airline operator in the country before its organised liquidation in 2002. Sir Reginald Myles Reg Ansett founded it in 1935. He founded the company when the Victorian state government decided to put private road transport operators out of business in favour of the Victorian Railways subsequently putting the airline out of the reach of the state government. The airline flew domestically within Australia and started flying to international destinations around Asia from 1993.

The airline grew over the years from inception to the point of successfully creating a duopoly with Trans Australia Airlines (TAA). The duopoly allowed both airlines to create and maintain airfares at the amount they deem fit and were ruthless in either dismissing low cost carriers or buying them out.

Air New Zealand bought a 50% stake in Ansett Australia for A$540 million in 1996, though Rupert Murdochs News Corporation had the managerial control. In February 2000 Air New Zealand acquired full ownership of Ansett, buying out News Corporations remaining 50% stake for A$680 million, surpassing Singapore Airlines A$500 million offer. A combination of competition from Qantas and start-up airlines (Impulse Airlines and Virgin Blue) [40], top-heavy overpaid staff, aging fleet and grounding of Boeing 767 fleet due to

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maintenance irregularities left Ansett short of cash, losing A$1.3 million a day.

The partial grounding of the Boeing 767 fleet during the Christmas period of 2000 and total grounding of the same fleet in the Easter period of 2001 due to maintenance problems lead to Qantas and other low cost carriers to overtake Ansett because they could afford to run at a loss on some routes which Ansett could not afford. Virgin Blue was operating at a cost 40% lesser than that of Ansett, which allowed Virgin Blue to offer low airfares [41].

The company was placed in voluntary administration by the management of Air New Zealand as they felt it was beyond their ability to manage on 12 September 2001. On 14 September 2001, the administrators PriceWaterhouseCoopers determined that operations of the company had to be shut down, as it was commercially unviable for operations. The airline resumed limited services with 3,000 employees on 1 October 2001 after receiving a federal government guarantee but this did not last long as the federal government did to attract buyers. However no interested buyers came through with offers. The final closure of Ansett occurred in March 2002 after 66 years of flying Australian skies, retrenching 16,000 employees [42] [43].

As a company was listed on the ASX, the performance of the company was published in the companys annual financial reports. All the costs earned, incurred and expended within any given financial year are monitored and tracked by a team of internal accountants and auditors employed by the company. The key performance indicators used by Ansett Australia to measure its growth and downfall include:

1) Market Share (%): The total market share it controlled in relation to its competitors measured the growth of the company. At the peak of its operation, Ansett held a 40% control of the total aviation market share, which translates to transporting 14 million passengers per annum through the various destinations, offered by Ansett.

2) Price Control ($): Ansett successfully created a duopoly with Trans Australia Airlines (TAA) and with that alliance, they both could fix the price of airfare at any margin they want provided it is approved by the Australian Civil Aviation Authority, which would definitely approve it because the two giants could cause a standstill in the local aviation scene in the country which would translate to a loss on the authoritys part.

3) Sales Revenue ($): Because they could afford to determine the air fare of passengers, they were able to measure their growth based on the sales revenue they made over the years as passengers had little or no choice in determining the air fare until the low cost carriers came into being.

4) Exchange Rate (AUD/USD): The aviation industry is a global industry, which means that all the costs associated with it are expressed in United States dollar (USD). Therefore, a lower exchange rate meant that they would have to either make some sacrifices on their part or they would have to

increase air fare which would take a lot of time to accomplish and almost impossible. By the time of the fold up of the company, the exchange rate was around 50 US cents per dollar.

5) Profit ($): This is the singular indicator of success of the organisation and its objectives. The higher the profit meant that they were performing good and vice versa.

B. Management and Organisation Change In inception Ansett Airways remained a minor player as Australia National Airways (ANA) and Trans Australia Airline (TAA) battled for supremacy in the 1940s and 1950s. Ansett operated around the big two, maintaining budget fares interstate. The airline was backed up by extensive road transport operations, including Ansett Freight Express and Ansett Pioneer Coaches, as well as the Ansair coach building operation.

Ansett bought ANA for 3.3 million in October 1957 after initial resistance from the directors of ANA. The new entity was called Ansett-ANA, the name it retained until 1 November 1968, when it became Ansett Airlines of Australia. Ansett-ANA's excellent profit record was, at least in part, courtesy of the Menzies government's Two Airlines Policy. The policy effectively blocked any other domestic interstate operators by way of a ban on importation of aircraft without a government licence. From 1957 until the 1980s, under the strict rules set down by the Two Airlines Policy, Ansett and TAA operated as virtual carbon copies of each other, operating the same aircraft at the same times, to the same destinations, at fares, which were identical (under strict Federal Government policy). If either airline wished to change their fares, they had to obtain Federal Government approval.

Ansett lost control of the company to Peter Abeles' TNT and Rupert Murdoch's News Corporation in 1979, with Abeles taking operational control of the airline. The airline prospered in the 1980s, however a number of substantial investments performed badly, including but not limited to paying millions of dollars for the right to be official airline of the Sydney 2000 Olympics, an investment generally regarded as unwise. This destabili