Risk Analysis and Management of Solar Star Air.
Introduction
Solar star initial launch and success depends on a number of assumptions just like all other
business plans whose probability of success are based on a number of events going exactly as
planned. The assumptions made range from interest rates, market growth, consumer and
competitor’s behavior, exchange rates, etc. These assumptions may have been based on realistic
values and conditions but the actual results may be different from what was predicted initially.
What happens if the differences have very serious impact on the existence of the business? To
provide provision against these unforeseeable factors contingency plans are also included in the
business plans.
Economic factors that may affect the implementation of the Sola Star project include; Recession
and high interest rates may affect the profitability and eventually the growth of solar star project.
During recession the volume of sales may drop significantly just as much as the interest rates
may rise. These events may lead to disastrous effects if they are not provided for in the budgets.
Inflation may also affect the business in the same way. (Duncan, 1996)
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- The large initial capital investment that’s needed by Qantas to develop and implement the
Solar Star project will be challenging to obtain. These funds are meant to be invested in a project
that is targeting a market that is still new and the nature of the projects performance has never
been tried anywhere else before. There is a lot of uncertainty in the market as the project still
under trial. (Crouhy, Galai and Mark, 2001) - The over reliance on Quantas air to fund all the Solar Stars preliminary expenses and initial
investment is a risk that Solar Star cannot afford to ignore. In the event of unforeseen events
interfering with the funds of Quantas, the Solar Star project will be negatively affected. The risks
of overreliance on Quantas to fund Solar Star can be reduced by providing a provision or a
reserve that can be used to finance the operations of Solar Star. - The consumers concerns about safety and reluctance to embrace the concept of using Solar
Stars Planes that are propelled using Solar Cells need to be addressed and their confidence
restored on the use of the these planes that have been specifically designed to conserve the
environment.
3aThe customers have to be reassured that before an airplane is licensed to carry passengers its
degree of safety has to be at par with all other planes in the market just as much the Solar Star
will be using a new technology to fly buts its safety standards remains at par with all other
airlines. All the various parts of the plane have to be independently checked before they are fitted
to the plane.
http://solarmagazine.com.au/news/solar_ventilation_devices_compared_and_contrasted
Political factors may prevent the implementation of the project. For instance if the government
refuses to grant Solar Star a license to operate in Australia or refuses to renew grants that were
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critical to the project, then it would be a serious set-back to the implementation process. Increase
in taxes and exchange control rates may also affect the implementation process.
Issues and public opinion may also affect the ultimate demand of the potential product. Public
opinion can affect the demand of a product and even face off the product from the entire market.
The underlying product technology could become obsolete and be superseded by other forms of
advanced technology hence the need of a very strong research and development department.
3c.The threat of obsolescence can be addressed by reassuring the customers that the Sola Star
technology is a long term project that will still evolve into even better offer in future. The
backing by the government of Australia to fund part of its research and development costs is one
way of assuring the potential customers that its confidence ratings are very high and that the
government is willing to invest its funds in the project.
Lawsuits may arise challenging the business ownership rights in case of trademarks and other
intelligent property rights. These cases may delay the implementation or even cost the
management of the project extra costs that were not budgeted for in the project. These cases can
be handled effectively by insuring against these cases and also by creating a contingency reserve
fund. (Dorfman, 1997)
- Production failures may interrupt the operations of the implementation project. For instance,
problems in obtaining spare parts and other essential components may ground the operations of
the project.
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The quality of service may be below the expectations of the customers who may opt for other
services from the competitor’s side. These may be demoralizing to the staff and the management
who may feel discouraged by the resulting low sales. (Haimes, 1998)
Solar Star investment business plan may require a SWOT analysis to determine its strengths,
weaknesses, threats and opportunities. It will assist in analyzing risks, identifying and adopting a
strategy while also restricting the business processes. (Simmonds, 1981)
Solar Stars major strengths are its strategic partners, its overall profitable venture that has never
been tried before and which may basically gain customers out willingness to be related with the
noble idea of preserving the environment. Its expected low prices and maintenance costs is
expected to give it advantage over the rest of the companies in the same field. While its
weaknesses are the many threats of obsolescence and the threat of customer dissatisfaction with
the overall business idea of using solar to propel huge planes. The opportunities that exist in
Australia are many and diverse. Australia is one of the world’s largest economies sitting at
number thirteen. It has a GDP of $1.4 trillion with an economic growth of 3.25% both in the year
2012 and 2013. Australia has a per capita of $60000. These economic conditions make it a world
class investing destination for any multination corporation. It’s an opportunity that any planned
business can succeed. Also the prospects of environmental protection associated with Solar Star
project make it most customers preferred choice. The major threat to Solar Star existence is the
prospect of obsolescence associated with solar technology and its ever changing advancement
innovations. The rapid changes that keep on developing relegate earlier advancement to the back
seat as the new innovations take effect.
Risk Management Table
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Risk Impact Risk Level Likelihood Risk
level
Risk Treatment Residual
risks
1 safety High Average Average low Creating public Cost
awareness/confidence
2 obsolescence Average Low Average Average New and alternative cost
Markets
3 supplier High Average Low Average Different suppliers obsolescence
4 High Capital cost Average High Very high High Prov/insurance Bankruptcy
5 Overdependence High High High High Diversification/ Unreliability
alternative financing
To conclude, the risks can be summarized as tabulated above. The costly capital that Solar Star
relies heavily on Quanta’s air to subsidize has an average impact on the overall business as
Quanta’s air has assured Sola Star that it will finance the project. The likelihood that the high
capital will affect the business is very high as the loan has to be paid back. The treatment of this
option is to insure the loan plus the interest. The provision of a fund to cater for the unforeseen
extra costs can also be created to reduce the impact of high cost of capital. After the payment of
the loan however the business will operate smoothly as planned unless it’s affected by an act
which is unforeseeable at the moment, currently the residual side effect will be felt on the costs
of finance
Safety has a high impact on the operations of Sola Star at the moment. Most people generally
have a salient fear of new innovations and they may need assurance that the technology is safe
and it’s completely reliable. Once the customer’s confidence is assured then the issue of safety
will be resolved. The residual effects are on the cost of the safety measures and creation of public
awareness of the safety standards of the project. The risk treatment of the safety risks is to assure
the public and the potential clients of the reliability and the soundness of the whole project. The
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confidence the management has on the Solar Star project should be shared among all the concern
on the airplane’s safety.
The risk of obsolescence has an average impact on the overall nature of the business. Solar Star
is a new project. The excitement and the general knowledge people have on environmental
protection and maintenance will boost the public confidence on the project. Obsolescence occurs
when spare parts are not available and other new models have been developed and it’s not
economical for the manufacturers to continue the production of the old and obsolete spare parts.
However, given that the risks of obsolescence are real it cannot be overruled totally and a
provision for its occurrence has to be created. Its residual risks lie on the costs of the provisions
and the diversifications. The risk treatment of obsolescence is found in diversifying the projects
needs as much as it’s possible to prevent the management from relying on a single source for all
its products. In case one source fails then the management can source the required products from
another source instead of abandoning the whole project.
The overdependence on Quanta’s air is also another problem. In the event that the management
of Quanta’s air is replaced with other managers whose opinions are not similar with Solar Stars
philosophies then the whole project will crumble. Solar Star needs to diversify its resources in its
risk treatment and back up plans in case of any eventualities.
Supplier risks are the highest risks in Sola Star’s risk management profile. The Solar Star
concept is a new technology and the management of the project relies heavily on a number of
suppliers who are limited in numbers given that the project is relatively new. The threat of new
development in the ever changing technology may relegate the suppliers to the back seat unless
they also embrace the technology and change according to the new innovations. These events
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may lead to lack of spare parts for the Sola Star project unless they get assurances that they
(suppliers) are committed to the long term existence of the project. Solar Star also needs to
source more suppliers who can also produce the spare parts at reasonable costs in its risk
treatment procedures.
Reference
Crouhy, M., Galai, D., Mark, R. (2001). The Essentials of Risk Management. McGraw-Hill.
Dorfman, S. (1997). Introduction to Risk Management and Insurance (6th Ed.). Prentice Hall.
Duncan, W. R. (1996) A Guide to the Project Management Body of Knowledge, Project Risk
Management, Project Risk Management, Upper Darby.
Haimes, Y., Y., (1998) Risk Modeling, Assessment and Management, John Wiley & Sons, Inc.,
New York.
Simmonds K., (1981) The Fundamentals of Strategic Management Accounting, London.
