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EN6502

Introduction to Entrepreneurship
BIT 3nd Year
Semester 6

EN6502 - Introduction to Entrepreneurship

Section 8:
How to Manage the Risk of a Business
(2 Hrs)
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EN6502 - Introduction to Entrepreneurship

Lecture Outline
1. Types of business risks
2. Types of risk attitudes of an entrepreneur
3. Basic concepts of risk management

UCSC-2016

EN6502 - Introduction to Entrepreneurship

Learning Outcome
After successful completion of this course students will be able to:
Define and explain the nature of risks face by an
entrepreneur
Identify types of risk attitudes of an entrepreneur
Explain the strategies in minimizing the risk

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EN6502 - Introduction to Entrepreneurship

1.

Types of Business Risks

Risk means that there is a chance that you o t receive a return


on your investment. It is an exposure to danger to your bottom line.
When you are in business, you need to consider the kinds of events
that could pose a risk to your business and take steps to mitigate
them.
Types of risks are categorized below:
i. Strategic Risk
ii. Compliance Risk
iii. Financial Risk
iv. Operational Risk
v. Reputational Risk
vi. Other Risks

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EN6502 - Introduction to Entrepreneurship

1.

T pes of Busi ess Risks Co t

i. Strategic Risk
Strategic risks result directly from operating within a specific
industry at a specific time.
So shifts in consumer preferences or emerging technologies that
make your product-line obsolete, anyone--or other drastic market
forces can put your company in danger.
To ou tera t strategi risks, oull eed to put easures i pla e
to constantly solicit feedback so changes will be detected early.

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EN6502 - Introduction to Entrepreneurship

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T pes of Busi ess Risks Co t

ii. Compliance Risk


Risks associated with compliance are those subject to legislative or
bureaucratic rule and regulations, or those associated with best
practices for investment purposes.
These can include employee protection regulations like those
imposed by the Occupational Safety and Health Administration
(OSHA), or environmental concerns like those covered by the
Environmental Protection Agency (EPA) or even state and local
agencies.

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EN6502 - Introduction to Entrepreneurship

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T pes of Busi ess Risks Co t

iii. Financial Risk


Direct financial risks have to do with how your business handles
money. That is,
which customers do you extend credit to and for how long?

What is your debt load?


Does most of your income come from one or two clients who
might not be able to pay?

Financial risks also take into account interest rates and if you do
international business, foreign exchange rates.

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EN6502 - Introduction to Entrepreneurship

1.

T pes of Busi ess Risks Co t

iv. Operational Risk


Operational risks result from internal failures. That is, your
usi esss i ter al pro esses, people or s ste s fail u e pe tedl .
Therefore, unlike a strategic risk or a financial risk, there is no
return on operational risks.
Operational risks can also result from unforeseen external events
such as transportation systems breaking down, or a supplier failing
to deliver goods.

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EN6502 - Introduction to Entrepreneurship

1.

T pes of Busi ess Risks Co t

v. Reputational Risk
Loss of a o pa s reputation or community standing might result
from product failures, lawsuits or negative publicity.
Reputations take time to build but can be lost in a day. In this era of
social networking, a negative Twitter posting by a customer can
reduce earnings overnight.
According to Matt McGee, a search engine optimization consultant,
O e negative blog post or product review can spread online in a
flash and change the direction of a company.

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EN6502 - Introduction to Entrepreneurship

1.

T pes of Busi ess Risks Co t

vi. Other Risks


Other risks include:
environmental risks, including natural disasters
employee risk management, such as maintaining sufficient staff
numbers and cover, employee safety and up-to-date skills
political and economic instability in any foreign markets you
export goods to
health and safety risks
commercial risks, including the failure of key suppliers or
customers

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EN6502 - Introduction to Entrepreneurship

2. Types of Risk Attitudes of an Entrepreneur


A person can have any of these four types of risk attitude:
i.

Risk averse
Averse means opposing.
A risk averse person or organization is not comfortable with digesting
risks. They are not very creative or supportive towards risks.
They usually try to avoid risks unless the reward to take on the risks is
high enough to outweigh the aversion of the risk

ii.

Risk taker/seeker
Seeker means loving.
A risk seeking or risk taking person or organization likes to seek risks if
they see any opportunity.
They enjoy and find it challenging to deal with risks; however,
sometimes this excessive optimism can cause losses.
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EN6502 - Introduction to Entrepreneurship

2. Types of Risk Attitudes of an Entrepreneur


Co t
A perso a ha e a
iii. Risk neutral

of these four t pes of risk attitude o t

Neutral means neutral.


As the name suggests, these people or organizations are
neutral to risks. These people deal with risks objectively.
They analyse risks with various techniques such as Expected
Monetary Value (EVM), the Decision Tree Method, or any
other tool, and then make an informed decision.

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EN6502 - Introduction to Entrepreneurship

2. Types of Risk Attitudes of an Entrepreneur


Co t
A perso a ha e a
iv. Risk tolerant

of these four t pes of risk attitude o t

Tolerant means forbearing.


These people or organizations are very comfortable with
ignoring risks.
The do t are a d e er pa a atte tio to a risk u til it
becomes an issue.
It is the job of a project manager to find the risk attitude of
individual stakeholders and any group formed by these
stakeholders.

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EN6502 - Introduction to Entrepreneurship

3.
i.

Basic Concepts of Risk Management


What is risk management process

Risk management is the identification, assessment, and


prioritization of risks (defined in ISO 31000 as the effect of
uncertainty on objectives) followed by coordinated and economical
application of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events or to maximize the
realization of opportunities.
Risk a age e ts objective is to assure uncertainty does not
deflect the endeavour from the business goals.

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3. Basi Co epts of Risk Ma age e t Co t


ii.

Steps of risk management process

The following diagram illustrates the six steps of the risk


management process: identify, analyze and prioritize, plan and
schedule, track and report, control, and learn.

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3. Basi Co epts of Risk Ma age e t Co t


ii.

teps of risk

a age e t pro ess Co t.

The following is a brief introduction to the six steps of the risk


management process.
I. Identify - Risk identification allows individuals to identify risks so that the
operations staff becomes aware of potential problems. Not only should risk
identification be undertaken as early as possible, but it also should be
repeated frequently.

II. Analyse and prioritize - Risk analysis transforms the estimates or data about
specific risks that developed during risk identification into a consistent form
that can be used to make decisions around prioritization. Risk prioritization
enables operations to commit resources to manage the most important risks.

III. Plan and schedule - Risk planning takes the information obtained from risk
analysis and uses it to formulate strategies, plans, change requests, and
actions. Risk scheduling ensures that these plans are approved and then
incorporated into the standard day-to-day processes and infrastructure.

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3. Basi Co epts of Risk Ma age e t Co t


ii.

teps of risk

a age e t pro ess Co t.

IV. Track and report - Risk tracking monitors the status of specific risks and
the progress in their respective action plans. Risk tracking also includes
monitoring the probability, impact, exposure, and other measures of risk
for changes that could alter priority or risk plans and ultimately the
availability of the service. Risk reporting ensures that the operations staff,
service manager, and other stakeholders are aware of the status of top
risks and the plans to manage them.
V. Control - Risk control is the process of executing risk action plans and
their associated status reporting. Risk control also includes initiating
change control requests when changes in risk status or risk plans could
affect the availability of the service or service level agreement (SLA).
VI. Learn - Risk learning formalizes the lessons learned and uses tools to
capture, categorize, and index that knowledge in a reusable form that can
be shared with others.
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3. Basi Co epts of Risk Ma age e t Co t


Risk treatment options are described below:
Accepting the risk.
Ex: most people would consider minor injuries in participating in
the sporting activity as being an inherent risk.

Avoiding the risk.


Ex: this is about your club deciding either not to proceed with
an activity, or choosing an alternate activity with acceptable risk
which meets the objects of your club.

Reducing the risk.


Ex: likelihood or consequences or both is commonly practiced
treatment of a risk within sport, for example use of mouth guards for
players in some sports.

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Risk treatment options are described below cont
Transferring the risk in full or in part.
Ex: your insurance contract is perhaps the most commonly used
risk transfer form used.
Other examples include lease
agreements, waivers, disclaimers, tickets, and warning signs.

Retaining the risk


It is knowing that the risk treatment is not about risk
elimination, rather it is about acknowledging the risk is an
important part of the sport activity and some must be retained
because of the inherent nature of the sport activity. It is
important to consider the level of risk which is inherent and
acceptable.

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3. Basi Co epts of Risk Ma age e t Co t


iii. Strategies in minimizing risk
Consider building alliances. There is often more strength from
combination with other companies. It may also be more profitable
for potential enemies to join together than fight.
When taking a high-risk strategic approach, seek ways to minimize
the downside exposure of the company and avoid jeopardizing all
the o pa s activities. If the opportunity does not work out, then
it is clearly preferable to have attempted to reduce such risks so
that the company is able to continue trading elsewhere.
Build shareholder protection where possible. This may be
undertaken by careful structuring of risky strategic deals such that
shareholders are not unnecessarily exposed to failure.

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3. Basi Co epts of Risk Ma age e t Co t


iii. trategies i

i i izi g risk o t

Seek ways of moving out of weak strategic areas before being


pushed. If a market sector is likely to prove exceptionally
vulnerable, it may be wiser to withdraw while it is still profitable.
Consider a staged development of a risky strategy. Many companies
take a number of years to build their share in markets: the time
perspective allows for development to be undertaken in stages. This
reduces the risk but does not eliminate it.

Appoint good professional advisers: accountants, bankers, lawyers


and consultants. Both the specialist expertise and more general
advice reduce the risk and build protection.

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End of the section 08

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