Marshall School of Business
University of Southern California
Entropic Communications, Inc.
Teaching Note
Purpose of Case
The Entropic Communications case was written to illustrate the process of implementing a
Suggested Assignment Questions
1. Why did Entropic implement a formal ERM process?
2. Do you think the company realized the benefits of ERM as envisioned by Committee of
Sponsoring Organizations (COSO)? Why or why not?
3. What changes would you suggest for making the ERM process at Entropic more effective?
4. ERM is currently one of the hottest topics being written about in management, accounting,
and corporate governance practitioner journals. Virtually every company is looking at the
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
377
Questions for Discussion
1. What is the financial reporting approach to risk?
I like to start class by discussing the financial reporting approach to risk. I do this by
directing students attention to Exhibit 5 in the case, which is taken from Entropics 10K
2. Why was Entropic moving toward implementation of an ERM process?
The primary motivation at Entropic was a desire to help the board of directors fulfill its
3. Why was the general counsel driving this effort? Is he the right person?
Lance began this effort because he was the corporate secretary and had frequent contact
with the companys board of directors. He also had experience in dealing with legal risks.
4. What was the implementation process?
a. Sort the risk areas listed in the 10K by department
b. Ask the department heads to augment the list
378
5. Issues
This case raises quite a large number of issues. Here are some of the most prominent:
a. Enthusiasm
Not all of the department managers are enthused about the new ERM process. The HR and
b. Silos
One of the primary purposes of ERM is to break down departmental silos, to get managers
to consider risk interdependencies that occur between and among departments. That did not
c. Links with resource allocation processes.
d. No summary measure.
Developing the Risk Management Matrix requires managers to develop risk scores in each
of the identified risk areas. Interestingly, however, the scores are not added up and the
managers do not track risk score trends over time.
e. Performance reviews.
The risk scores, and even enthusiasm for the ERM process, are not formally linked to
performance reviews. Will managers take the process seriously without that link?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
379
f. Focus only on known risks?
The Entropic process started with the list of known risks, as published in the 10K. Is there a
g. Focus only on downside risks?
ERM processes are reasonably effective at identifying and prioritizing the bad or
downside risks and at organizing the steps needed to prevent the bad things from
occurring. The ERM techniques grew out of the COSO internal control processes.
h. COSO framework
Entropic did not make any use of the COSO framework. For example, the managers just
sorted risks by department, not by COSO objectives: strategic, operational, reporting, and
compliance. Is that a problem? Again, this probably reflects the immature state of the
Entropic process.
i. Discharge of board responsibilities.
Did the ERM process help the board discharge its fiduciary responsibilities in this area?
Clearly, the answer to this question is yes.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
380
> 10 hours
Most students choose either the second or third alternative. The answer is the first. The
board members have an oversight role. They are happy that management has a process to
j. Fit with industry
Does ERM fit a company like Entropic, a small, high-tech company in a fast-moving
industry? The answer to this question is probably yes. The risks are significant, and they
6. Critique
Toward the end of class, I ask the students to step back and consider whether the implementation
of this ERM process was worth the effort. I capture their ideas on the front board.
But then I ask them to do their evaluation in light of the ERM capabilities claimed by COSO,
which were:
2. Enhance risk response
4. Identify and manage multiple and cross-enterprise risks
6. Improve deployment of capital
I ask them to rate Entropics success in each area using the following scale:
A. Realized some benefit
7. What should Lance do now?
More than a year has passed since the writing of the case, and indeed the ERM process at
Entropic has continued to evolve.
a. Department manager buy-in was much improved the second year, perhaps mostly because
new managers were hired in the engineering and sales area. They were more interested in
using the ERM processes for their own purposes than were their predecessors.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
381
b. A third dimension was added to the Risk Management Matrix. It was titled Velocity, and
defined as a measure of how quickly the risk event will crescendo to its maximum damage,
measured by loss of reputation, drop in stock prices, or dollar cost to fix. The scale was
(assuming nothing was done to correct or mitigate the risk):
1 = greater than 1 year
c. Each risk type was classified using the COSO framework (strategic, operational, financial,
compliance, or legal)
I have brought ERM consultants into class to provide their reactions to the Entropic case.
Among other things, they suggest that:
Entropic should focus on a much shorter list of risks, only the really top ones.
8. Is ERM a significant management advance or a fad that will fade away (the fourth
assignment question)?
I dont know the answer to this question. Time will tell. Probably some of the approaches will
Pedagogy
My goal in teaching this case is to be as unstructured as possible while still ensuring that all the