Market Risk and Operation Risk towards Profitability: Analytical Essay

Abstract

The main purpose of a business unit is to make profit and it should be duly noted that profitability alone is not very helpful in determining the efficiency and performance of the business firm unless it is related to other factors such as risk. In the context of business proliferation, we are witnessing an unprecedented diversification of risk situations and uncertainty in the business world where the whole existence of an organization are being related to risk. Each profit earns are associated to numerous of risk and every company consist different types of risks. Nevertheless, market risk and operational risk are very impactful to every business, as it directly influence business profitability and if it doesn’t manage well, the business will come into a drastic problem. This study was set out to examine the effect of market risk and operational risk management on profitability of Skechers from year 20014-2018. This study in the end halt that effective risk management is very fundamental for business insight and growth. INTRODUCTION

1.0 Introduction

This chapter begins with the establishment of Skechers(SKX), a sportswear industry first manufactured in the United States. It is followed by the discussion of problem statement, research objectives, research questions, and the scope of study.

1.1 Establishment of Skechers

Skechers was founded in 1992 by Robert Greenberg after he left LA Gear. During the days, there were no industry giants controlling both men’s and women’s streetwear, so Greenberg decided to focus on designing and manufacture shoes to be worn by either male or female. It became successful and this reflected the increasing popularity of the ‘grunge’ look in the early 90s. Skechers are well-known for being a brand that were aware of the changing trends among young consumers and that they provided what the people wanted to wear. It was then expanded to the global market and started producing footwear and children clothing. The company became successful enough to be rewarded with its own brand space and released a high fashion line in the global market. It maintains a trendy brand image by focusing on high profile celebrity driven advertising, thus making it one of the fastest growing footwear company in the United States. Skechers focus in three segments, the domestic wholesale sales, international wholesale sales as well as retail sales. The objective is to profitably grow operations in the worldwide while leverage its brand through diversified product lines, having innovative advertising and diversified distribution channels across the market globe.

1.2 Skecher’s governance

Skechers sourcing relates to good governance that helps them to achieve their objectives and giving proficient commercial to guarantee and empower itself to support in a long term. They are prepared to preserve the quality and notoriety of the items, guaranteeing that wrapped up products and all merchandise bearing Skechers trademarks meet the standard of quality. They perform array of inspection procedures in the production process to the final products prior to shipment. It also governed accountability in their product distribution channels serving as an fundamental work in the worldwide conveyance of its product. In the retail stores and online business, the stores are reviewed for impairment annually as required. The summary of cash flows for each retail stores are prepared to evaluate potential impairment of the assets and improvements by the directors. Skechers hold on to achieving success by fair and ethical mean and seek to maintain a reputation for fair dealing among their competitors and the public alike although the success of Skechers depends on their ability to outperform competitors. Skechers prohibits employees from engaging in any unethical or illicit business practices. Rather, employees must rely on good judgment and common sense. Suffice it to say that each employee working in Skechers should endeavor to deal fairly with the customers, suppliers, competitors, and employees itself, and not take dishonest advantage through manipulation, concealment, misrepresentation facts, or any other unequal business practice. In the concept of openness, all employees are expected and required to maintain the confidentiality of any information obtained through the employment of Skechers, except when disclosure is authorized or legally mandated. Skechers employees will be required to execute an agreement known as Confidentiality and Inventions Agreement with Company’s business needs. Besides, Skechers has created the BOBS shoe line to advance their socially responsible agenda. For every pair of shoes in this line sold, they will donate a pair of shoes to a child in need. This business model takes the three P’s into account: people, profit, and planet. They are caring for people by giving away a pair of shoes for every pair sold and are considering the environment by using environmentally friendly packaging and creating less waste” (Miratel Solutions Inc.). In addition, Skechers Foundation was built to support the general public with education and job training, fitness, and health and nutrition guidance.

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1.3 Problem Statement

The main risk Skechers is facing is the market risk compared to other risks such as credit risk, operational risk and liquidity risk. The market risk faced by Skechers are to be considered is the foreign currency exchange rate fluctuations which may impose an adverse effect on Skechers business and results of operations. Foreign currency fluctuations affect Skechers revenue and profitability because Skechers are largely segmented by international wholesale markets. The changes in currency exchange rates may influence the financial result positively or negatively in a period and it will be difficult to compare Skechers operating results from different periods. The third parties manufacturing Skechers product will also be influenced due to cost of raw materials or production cost which are more expensive due to the fluctuations of the currency exchange.

1.4 Research Objectives

In general, this study aims to determine the market risk and operation risk towards profitability for Skecher. Objectives studies included:

1. To analyze the market risk towards profitability.
2. To analyze the operation risk towards profitability.
3. To analyze the market risk and operation risk towards profitability.

1.5 Research Questions

1. Is there any dependency between market risk and profitability?
2. Is there any dependency between operation risk and profitability?
3. Is there any dependence between market risk and operation risk towards profitability?

1.6 Scope of Study

The sample study was taken from Skechers, calculations, and figures obtained from the financial report were based on Skechers company’s 5 years annual report from year 2014 to 2018.

1.7 Organization of the Study

This study consists of five main chapters. Chapter one provides an introduction consisting an overview of how company was established, company’s governance, the problem statement, research objectives and questions, scope of the study, and the organization of the study. Chapter two includes the literature review, highlighting four risks towards the company. Chapter three details the theoretical framework, measurement of variables, research methodology and data analysis. Chapter four discusses the results and findings of the study, includes the descriptive statistical analysis, trend analysis, and diagnostic tests from SPSS result. Lastly, chapter five include the conclusion of the study and further explained with recommendations.