risk analysis

Description Quantitative assessment

Quantitative assessment is a method of risk analysis, which determines the size of the impact in the form of numerical risk and provides a basis for determining contingencies. It can help companies determine the potential risks of a project, which can determine whether the project is worth completing for the company. Understanding the risks that exist can reduce the likelihood of some risks and prepare for future risks.Before performing quantitative risk analysis, we need to complete qualitative risk analysis to determine the priority of risks. Usually we apply quantitative risk analysis to the most important risks. The advantage of quantitative risk analysis is that it can assess the expected cost of each potential risk. Companies can focus on the most likely but least costly risks. At the same time, companies can abandon risky and expensive projects. Second, quantitative risk analysis provides detailed risk values through professional analysis models. Unlike qualitative risk analysis, its results are objective. On the other hand, quantitative risk analysis also has some limitations. First, it requires reliable data. Because quantitative risk analysis requires the use of models to calculate results. Second, quantitative risk analysis needs techniques and tools. This has high technical requirements for the analysis team. For examples: I&W analysis, regression analytic, Decision Tree analytic and so on.

I&W

Risk 1: Government Effectiveness

Indicator 1

The government can take the initiative of investing in some of the real-world simulations such as in the field of medicine and related areas. Availability of money by the government is a crucial indicator that may showcase the willingness to adopt a given idea. NetEase need to be creative when contemplating government effectiveness. The success of most enterprises is related to the amount of government support that can be attained at any given time. Consequently, the show of willingness to support NetEase might look like a viable option considering that there are other areas of interest where the government might have diverted the money. Innovations reflect positively about the impact that government might have on the ability to support upcoming companies in China and globally.

Indicator 2

NetEase stands to gain from the government input based on the input of the National Endowment for the Arts. Hence, an uptick in the game wages might be another aspect that fuels increased demands for the products.

Warning 1

The introduction of the government input might give the company a false hope of profitability. Further, it has to realize that overreliance in such initiatives might lead NetEase to believe that such deals might last forever. Inasmuch as the company would be expanding its market share, it will be exposing itself to an uncertain future in case they have already relied on the market that will be created on clusters such as teenage players. Games are highly popular in the teenage segment. Consequently, it is advisable for the management of the company to acknowledge that things might not be the same in the future.

Warning 2

However, the company must ensure that it matches the expected increase in demand. A shortfall in supply might bring its corporate name to disrepute because of the fears that the grants that the government might offer could trigger a massive in increase in demand. And because government funding is limited to games that meet the requirements. This shows that NetEase needs to invest a large number of personnel to develop relevant games, so the company is likely to face a shortage of developers. If it takes a long time to develop games that meet the requirements, NetEase will lack the output of new games in the game market, which means there will be a game fault.

Risk 2: Competitors:

Indicator 3

A reduction in revenue injection can be occasioned by the increase in competing companies. More small and medium sized companies are likely to publish similar games, and players are likely to be more willing to play the same type of game for free. Hence, their products can reduce the projected revenue base.

Indicator 4

A reduction in players. This problem is highly possible in case NetEase faces the pressure of substitutes from the industry. More interesting games might compel players to shift to the other companies that they might find interesting. Hence, a reduction in the number of players will be an open sign that the company needs to rethink its approach to completion in the industry.

Warning 3

The management of the company will have to think about strategies that will keep it afloat concerning the games that are released in the market. Once NetEase releases new games, small and medium-sized game companies may draw on NetEase’s creativity to release games of the same type to attract players. NetEase must realize that players will be aware of these companies’ other games and may be attracted to other free-to-play games. This will cause long-term losses for NetEase. More likely, players will download legitimate games through other illicit means. NetEase can consider that players can download the game for free for a period of time to offset the losses caused by competitors.

Warning 4

If the company fails to diversify, it might fail to meet its expected prospects. Riot Game Company not only had its own game, it also released the same anime based on the game’s backstory. Blizzard Games also has different types of games, FPS,MMO or SLG. The freshness of any game has a period of players, so NetEase must develop diversified market. The reduction in the number of players is supposed to show the leadership that highly differentiated products might help in keeping clients satisfied and avoid shifting to other companies.

Risk 3: Debt Crisis on GCP

Indicator 5

A low funds base occasioned by accrued debts from GCP.GCP already has a debt of $450 million. NetEase’s acquisition of GCP will bear this debt, which is not a small amount. Massive outflow of funds may lead to insufficient fund supply for NetEase’s operations. On the other hand, most of NetEase’s cash flow is used to develop games or maintain the company’s operations, so it is highly likely that NetEase cannot spend the current amount of $450 million in a lump sum. Hence, there needs to be  a master plan to cushion from any further losses.

Indicator 6

Loss of staff members because of diversification to medical games as a way to get more funds. However, NetEase has not developed related types of games. Developing a medical game requires professionals to have some understanding of the medical aspects of the game. There should be no professional medical errors in the game content, which could mislead the player. The medical games that may come up might trigger the need to acquire other staff members and offload others.

Warning 5

The company has to be thoughtful on the strategies it deploys when handling its activities. It might fail to operate because of budgetary constraints. Money has to be managed effectively.On the one hand, GCP needs to manage the use of funds in medical treatment and increasing sales. Huge debts could lead GCP to become inoperable and declare bankruptcy. NetEase shall reasonably arrange funds for game development, staff, advertising, subsidiary companies or IP purchase. Any failure of the capital chain will lead to the subsequent steps can not be followed and cause huge losses. For example, NetEase published a new game but it didn’t have enough money to spend on advertising. NetEase will lose a lot of new players.

Warning 6

The company must restructure its employee base to reflect the goals. The development of a company is inseparable from the support of professional and technical personnel, but if there is not enough space for advancement or prospects in the company, the technical personnel will choose to work in a better company.

Even though giving them shares might work, it might have its repercussions in the future. Allocating some shares to keep technical employees might have to be properly considered.