Lecture RISK 2

8/7/2019 Lecture RISK 2

1/47


2/47

Taking risk Risks will only be takeniftheyare reasonable

And the rewards that come with the riskaresufficientlyattractive

Reasonable here meansin relation to thejudgement made byanindividual with regard tohis/her resourcesand expectationsfrom life:

There isaneed to make adistinction betweentwo aspects ofthe entrepreneurial risk-taking

process risk

uncertainty.


3/47


4/47

Risk quadrant

High

impact

low probability high

Disasters

Fire, storm

Institutional

Low moraleretention

Decision

making

No staples

Daily risks

Occupationalhazard


5/47


6/47

Business/speculative

Business risk-venturinginto the unknown withoutknowing the probability ofsuccess- untestedmarkets, committing to unproven technology

Determines the nature ofthe market and

whether it isagood one to invest in. Natural calamities which are totally unforeseen

but canstrike at any time.

It is practical to insure the businessagainst such

risks. Risk management insuch casesissecondarybut shouldnot be counted out completely.


7/47

Financial risk

Riskissignificantlyinfluenced by how thefinances ofa businessare handled.Financesarethe mainstay ofa businessand one should bevery carefulas to where one is putting the moneyand what sort ofrevenue it isgenerating.

Transparencyisveryimportant and one shouldhave alternativesfor recuperatingfrom alossincase ofa misadventure.

A financial cushionfor dire emergenciesshouldalways be kept ready

Loans, commit alarge portion ofresources


8/47

Business plan

The plan will contain estimates ofsales, profitsand costs that are likely to be delivered by takingbusiness risks.

Such numbers mayappear to be the result ofrationaldecisionsand be capable ofstatistical riskanalysis.

Inaddition, the same numbers mayalso involve a

high degree ofuncertaintyas wellas riskand,essentially, maynot be worth the paper on whichtheyare presented e.g. export to Iraq,Afghan


9/47

Riskanalysis

Breakevenanalysis

Guesstimates

Optimistic Pessimistic

Most likely


10/47

RISK

Risk can be definedindifferent waysdepending

on each unique situationand

your own tolerance for uncertainty e.g.gettingan A

in this course, passing this course , sky jumping,surgeonvs patient ( calculated risk)

Businessman business maynot succeed, vs can

become wealthy, or loose capitalinvestment

Response glad-fully skyjump out ofplane ,adrenaline rush others willnot dare


11/47

Peter Drucker

Successful entrepreneursare not risk takers

Instead they take steps to minimize risks by

carefully understanding them Theyavoidfocusing on riskand remainfocus

on opportunity


12/47

How do you reduce risk

Undertakingfurther research, e.g.sending out

productsfor market testingand other such

activities.

Primary

Secondary

Experimental

Observation

Using techniques that have workedin other

domains e.g.Autobytel usingsuper bowl $1.2m


13/47

Research/funds

Reduction ofrisk processis usually conflict-

ridden,

Allocating resources to reduce uncertaintyinanew ideaimpliesdenying resources both to

other new ideasand to established

organisational operations.

Time consuming


14/47

Riskand time

DicksonandGiglierano 1986

Short term- sinking the boat- new venturesin

short run with lack offinancialslackand backup- businessdies

Long term- what might miss out infuture-

missing the boat, didnot seize the

opportunity whenland was cheap


15/47

Risk taking/severe condt

Under Severe adverse conditions- meltdown

VS

Not routinely happening under normalconditions

Forecastsare based onfavourable outcomesand riskis underestimated which leads to

greater aversion- buryyour head(Staw andRoss 1989)

Only high risk takers go for bust


16/47

Risk

Business riskis the probability that the future

state ofthe business will be lesssuccessful

than planned resultingin the lost ofvaluable

businessassets

No one entersa business to lose money but it

canandit does happen, investment goes

wrong, poor sales, poor quality


17/47

Luke Johnson chairman of one of the UKs main

terrestrial television channels, Channel 4

After studying medicine at Oxford University,

Luke Johnson joinedanadvertisingagency

and then workedasafinancialanalyst in the

City ofLondonsfinancialdistrict. In 1989, he

bought a theatricalscenery businessasan

entrepreneurial opportunity: I wasted three

yearsand made no money. It wasa miserableexperience but you learnfrom your setbacks


18/47



In 1993, Luke Johnsonanda partner, HughOsmond, realised that there might be profits tobe made in the changing tastes ofEngland

specifically, anew taste for Italianfood.Theyidentifieda medium-sized pizza restaurant chaincalledPizza Express and staged a daring reversetakeover of the company.The risk paid offand

they were able to build the new chain to such adegree that itssale in the late 1990snetted thetwo partners many millions ofdollars


19/47



Looking back on the experience, Johnsoncommented: I think that a willingness to breakthe rules [without breaking the law] and punchabove your weight is quite important [forentrepreneurs]. He went on to suggest thatentrepreneursneeded to enjoy the thrill oftakingrisksand cultivate resilience to the inevitablefailures. He pointed out that entrepreneurs were

more likely to amass real wealth by buildingacompanyfor subsequent sale rather than takingahigh salaryand expensesduring the process ofbuilding the company.


20/47


21/47

Risk

Riskier businesses, whensuccessfulit bringsgreater returns , high returns ondeposits,comment CLICO

Riskseeking willing to take the riskfor benefitsfor exponentialgains

Risk-averse- avoid risk , playingit safe , birdinhand, consider what they canloose, family,

reduceslevel ofrisk to where theyarecomfortable

Insure or spread risk


22/47

Common risk

Financial risk capitalstructure andsource

Investment risk accepting or providingdebt

Non payment ofdebts to company

Change in technology obsolete business

Injuryandillnesssuffered by employees

Injuryfrom accidents- customers, vendors

Loss or harm during process

Natural events storm

Violation oflaws

Theft

Unionand employees

UWI new houses


23/47

Riskfactors

Major shift in technology Blind-sided by radical

change in technology;

stayed with old technology

too long

Monitor new technology,

look for new benefits they

can produce ;

continuing education for

R&D

Changesin customer taste Weary ofsubstantialshift

in consumer preference

before product achieves

market penetration

Frequent updating and

monitoring ofcustomer

preferences

Changesin environment Drastic change insome key

areassuch as economic

conditions or price of

materials

Analysis ofenvironmental

conditions especiallyin

opportunityidentification


24/47

Riskfactors

Poor repeat purchases or

no diffusion of sales

Customers purchase in the

introduction stage but

sales never reach maturity

Design stage testing,

market appraisal,

communication mix,

expectations met

Heavyafter salesservice Product complex, not

reliable, cheap brandfrom

China

Service must be part ofthe

addedvalue indesign

stage

Insufficient return on

investment

Poor profit relative to

investment

Carefulselection of

markets,

forecasting ,

design ofproduct/service,

banking constraints


25/47

Riskfactors

Lack of coordination in

functions

Product that does not

meet customer need,

benefits cannot be

delivered, design changes

make production difficult

Input from customer

driven side

Organisational problems Conflictsamongst

departments, inadequate

communicationindesign

and marketing

Solve asneeded

Market too small Forecastinginadequate,

earlydemandand then

decreasedsales

Define market,

market expansion,

market penetration Ansoff

na


26/47

Riskfactors

Poor positioning vs

competition(wrong target

audience)

Benefits compared to

competition,

low value

Use of perceptual map,

value mapping, preference

analysis, gap analysis

relative to competitive

product

Inadequate channel of

distribution ( no support,

pushes competitor goods)

Not available,

after salesservice not

provided

no support from distributor

to push product

Channelan opportunity

identification

Service as part ofproduct

design

Monitor channelin testing

andlaunch

Forecasting error Overestimation ofsales or

vice versa

Unknownfactorsahead

Meltdown

Pretest

Continuousscanning of

environment for changes

that affect sales


27/47

Riskfactors

Poor timing Enter too late in market

Wrong cycle time, too

short too long

Missed window of

opportunity-technology

Strategic planning

Design to get to market

fast

Trade of risks or go for

delay, how cost effective

Competitive response Competitors respond

quickly

Copy

Improve your model

Cheaper

Strategic positioning with

respect to competition

What ifscenarios move

aggressively to establish

first in market

SocialaspectsAffairs-wife finds out

Kidnap

Beyond means

Manyfriends

Charity organisations

Godyour guidinglightNarrow path


28/47

Performance metrics

Metric Components Potential implications

Return on

(innovation)

investment

Cumulative net profitsgenerated

from new products, research cost +

development cost + incrementalproduction cost + commercialisation

pre-launch costs

Single standard measure

for comparing

performance betweendivisions/product over

time

Cumulative profits Cumulative 3-5years profitsfrom

new products

Impacts onincome

statement

Cumulative

revenues

3-5years Impacts onincome

statement


29/47

Performance metrics

METRIC COMPONENT POTENTIAL IMPLICATION

Growth impact Revenuesfrom product

over 3-5years

Contribution to firm

growth

Success rate Number ofproducts

exceeding 3-5year original

forecast.Totalnumber of

products commercialise in

last 3-5years

Indicates quality of

planning

New product survival rate Number ofproducts

remainingin the market

Totalnumber ofnew

productslaunched

Tellsabout the demandfor

new products


30/47

Types ofevents

Three types ofevents that cause business risk

Events related to the property ofthe business

Events related to personnel

Events related to customers


31/47

Property Every business owns things ofvalue- inventory

Production machinery, furniture, equipment

Reputation

Skills

Experience Patents, copyrights, trademarks, secrets

Each one involvessome risk Inventorystolen, spoiled, obsolete

Machinery breakdown ,no replacement parts

Loss ofskills thru death, retirement, quit, competition, orstrategic intent

Land problems, landslides, flood

Trademarks , secretsnot properly protected---public domain


32/47

Personnel

Three risk related to personnel

Theft Miss Appropriation ofbusiness property, illegalact,

direct, pilfering, copies, stationery

Violation ofgovernment regulations Regulation ofwork place hasincreased, discrimination,

osha, physically challenged

Loss ofkeyemployees Few employees essential to operations, corporate

memory, competitionfrom former employees


33/47


34/47

Managing risks Generic strategies- an environment that

minimizes The probability ofa mal event happening

The amount ofloss that canincurredifit happens

This can be done by Making plansfor andarrangements to deal with foreseeable

events

Creating and enforcinganappropriate code ofconduct foremployees (horseplay)

Ensuring that valuable assetsare secured-accountability

Actively working to get rid ofany physical hazards

Flooding ofagriculturallandsyearly


35/47

Managing risk

to tangible property

Landand building cant be stolen but can be

damaged or destroyed byavariety ofevents

Equipment can be stolenvandlized or fallen tostate ofdisrepair

Smallitems ofhigh value can be stolen

Controldepends onspecific asset at risk


36/47

Buildingandland

Fire- smoke alarms, sprinkler, fire alarm

Get rid offlammable ground cover, bush,

water pipes, sewer blockages, activation ofalarm

Protection offlood-location onflood plains

but floodincreases everyyear as climate

changesPOS

Protectionfrom hurricane-buildingstandards


37/47


38/47

Intangible property

Obselesence - deligent watch on businessintelligence concerningdevelopment in theindustry-read magazines , journals relevant toyour business

Listen to customersandvendorsfor info in theindustry- competitivenessis constantly underattack

Adverse possessionfor land-16 years-squatters

Cash-physically protect property or separation ofduties


39/47


40/47

Personnel Internal control aset ofrulesand procedures that

work to limit the opportunityfor employee theft ormalfeasance ensuring honestyin employees

Discoveringfraud- internal control,

accidentaldiscovery, tip-off,

internalaudit/externalaudit

Notified by police

Give examples oftheft- under-pricing , collude to

defraud, checks to fake idinvoices and embezzlement Signfor equipments- in/out date

Shoplifting ,vendor fraud, administrative error


41/47

Personnel

Loss ofkey personnel andformer employees

setting up competitive businesses can be

prevented by contractualagreements

Limit employee freedom to go into competition Promise not to disclose sensitive/secret info

Offer rewardsfor providingadequate info before

leaving- smooth transition

Cross training employees/succession planning

Grooming replacement for key position( yourself)


42/47

Violation oftax regulation

Complex codes- PAYE, NIS,HEALTH

SURCHARGE, VAT, GREENFUND,PROPERTY

TAXES, CORPORATION

Recordsfor alland cash transaction

Dont skim- take cash before recorded

False receipt book, no receipts

Get anaccountant

Payyour taxes


43/47

Employee violation

Equal employment opportunity

Osha

Discrimination EAP


44/47

Insuringagainst risks

Insurance expensive, dunknow-necessary

evil

Right amount ofinsurance at anaffordable

rate

Too little leaves the business open to

unsupportable losses, too much wasting

money will only pay market value


45/47

Types ofinsurance

Liabilityfor damage

Illnessandinjurydue to employment

Unemployment insurance

Vehicle andinjurydue to accidents

Workers compensation

Product liability

Propertyinsurance

Insurance heidi klum,beckham,jlo,


46/47


47/47

Thankyou

SME

Lecture RISK 2

Documents