Exam (elaborations)
Formative Assessment 1
- Course
- Bcom Business Management
- Institution
- University Of Johannesburg (UJ)
BMA 3B Formative Assessment 1
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Question 1International business is the same as globalization, and globalization is not without
risks. The moment Royal Dutch Shell undertook international business, it is where
they were constantly exposed to four major risks. These four major risks that must
be managed to avoid financial loss or reputation loss are cross-cultural risk, country
risk, currency risk, and commercial risk (Cavusgil, S.T., Knight, G. & Riesenberger.
J.R. 2020, Pg 44). Royal Dutch Shell has had to face the following risks:
Cross-cultural risk
This is a situation where there is a cultural miscommunication or misunderstanding
that puts some human values at stake. It occurs from differences in language,
lifestyles, mind-sets, customs, and religion (Cavusgil, S.T., Knight, G. &
Riesenberger. J.R. 2020, Pg 44).
The protestors that accused Shell for extracting wealth from the region without
adequately compensating the local residents in the case study is an example of
the how Shell did not carry out the communities values and ethical practices as
standards of right and wrong vary considerably around the world.
Country risk
Country risk (also known as political risk) is the potentially adverse effects on the
company operations and profitability triggered by the developments in the political,
legal, and economic environment in that particular foreign country. It includes the
possibility of the foreign governments intervention in the firms business activities
(Cavusgil, S.T., Knight, G. & Riesenberger. J.R. 2020, Pg 45).
Royal Dutch Shell may have came under pressure to divest its Nigerian operations
and pay the reparations to the local people by the government of Nigeria after the
company suspended its operation in the country due to the sabotage of its facilities.
Currency risk
It is also known as the financial risk. It refers to the risk of adverse fluctuations in
exchange rates. Therefore, the currency risk can be referred to as exchange-rate
risk, which arises from the change in price of one currency in relation to the other
(Cavusgil, S.T., Knight, G. & Riesenberger. J.R. 2020, Pg 45).
As an example, As the management of Shell has instituted various community
development programs in the region, budgeted at $50 million per year in the case
study. The allocated budget itself faces the risk of adverse fluctuations in exchange
rates and because the international transactions are often conducted in more than
one national currency, when Shell runs the community development programmes in
Nigeria, they will have to pay in Nigerian Naira. The cost of the community
development programmes can therefore increase dramatically if the value of the
currency of the foreign country rises sharply.
Commercial risk
This risk refers to a firm’s potential loss or failure from poorly conceived or executed
business strategies, tactics, or procedures (Cavusgil, S.T., Knight, G. &
Riesenberger. J.R. 2020, Pg 46)
, As an example, Shell’s drilling and refining activities, which harmed the natural
environment and reduced the amount of available farmland which resulted to the
community protests, is an indication of poor business choices, poor execution of
strategy and procedures made by Shell. The consequences are generally damaging
when committed in foreign countries and can also damage Shell’s reputation and
profitability in that country.
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