Risk and Uncertainty

Dr Noor Muhammad

What is a Risk?

Risk: is the probability that the future state of the business will be less successful than planned

To focus on the inception of the entrepreneurship

concept, risk-taking has been a central theme of entrepreneurship literature (Busenitz, 1999)

Risk propensity is defined as an individual’s current

tendency to take or avoid risk

What is a Risk?

In the boundaries of entrepreneurship,

entrepreneurs face four types of risk: financial;

career; social; and psychological (McCarthy, 2000),

but financial risk seems to be the most defining

feature of entrepreneurial behaviour. Someone who

takes other types of risks within an existing

organization may be known as an intrapreneur

(Smart and Conant, 1994).

Types of Risk

General environmental (government regulation and technological change)

Variables related to the industry’s characteristics (number of competitors)

Number of suppliers and customers

Mobility barriers

Risk return profitability

Variables related to characteristics of the decision-maker, age, experience,

knowledge

Characteristics of the problem under consideration such as complexity,

ambiguity, controllability

Probability of loss

Three Common Risk Determinants

1. Lack of time

2. Lack of information

3. Lack of control over alternative courses of action

MacCrimmon and Wehrung (1986a)

How to Minimize Risk

Chell et al (1991: 43) propose that entrepreneurs adopt risk minimisation that rests on the following strategies

Seeking and being aware of information.

The ability to plan imaginative solutions and problems.

Supreme confidence in the solution and hence the

decision.

How to Minimize Risk

• Risk control • Preventive approaches

• AVOIDANCE • Eliminate the activity, thus eliminate the risk

• REDUCTION • Change the activity to reduce the probability of loss/risk

• Risk sharing • Insurance • Outsourcing/Independent Contractors/Suppliers

• Risk communication • Educating employees, customers, etc about the

risks

The Wheel of Misfortune

Fire

Property Risks

Natural Disasters

Burglary and Business Swindles

Shoplifting

On-Premise Injury

Competition from Former

Employees

Loss of Key

Executives

Employee Dishonesty

Bad Debts

Product Liability

Personnel Risks

Customer Risks

Bankruptcy

Classifying Risk by Type of Asset

Uncertainty

Entrepreneurial risks also create uncertainty which

entrepreneurs face in the context of business

environment. However, risk and uncertainty have been

discussed in the entrepreneurship literature in several

contexts.

Uncertainty

Cantillon (1775) defines that entrepreneurs are those

who take risks, however, his arguments also added some

points regarding uncertainty, in which he defined the

entrepreneur as “someone who engages in exchanges

for profit; specifically, he or she is someone who

exercises business judgment in the face of uncertainty”

(Hebert and Link, 1988:21).

Uncertainty

Hastie suggests that uncertainty refers to “the decision-

maker’s judgment of the propensity for each of the

conditioning events to occur” (2001:657). Therefore,

judgment is what must be exercised to construct a

decision between different courses of action that take

place in an uncertain environment.

Types of Uncertainty

State Uncertainty

Effect Uncertainty

Response Uncertainty

Types of Uncertainty

State uncertainty: is used to denote when the administration perceive the environment to be unpredictable (1987). what’s happening out there? (State uncertainty)

Effect uncertainty: is defined as “an inability to predict what the nature of the impact of a future state of the environment or environmental change will be to the organization” (1987:137) How will it impact me? (Effect uncertainty)

Response uncertainty: is “a lack of knowledge of response option and an inability to predict the likely consequences of a response choice (Conrath, 1967; Duncan, 1972; Taylor, 1984)” what am I going to do about it? (Response uncertainty)

Assignment # 1

Hugh and Donald Smith

This short case study profiles father and son, Hugh and Donald

Smith, and outlines the origins, growth and eventual demise of

the family business, Albyn Combs. The company, founded in

1973, manufactured handmade, natural horn, hair combs for a

niche consumer market and would later diversify its product

range across the retail pharmaceutical industry. This case can

be used to form the basis of debate around the nature of the

entrepreneur, and entrepreneurial behaviour.

Questions

1. What you have learned from this case study?

2. Apply major definitions of entrepreneurship to this case

study with justification.

3. Three major themes of entrepreneurship: Innovation;

opportunity recognition and risk-taking should be

pointed out from the case study with examples.

4. Compare and contrast the key entrepreneurial

characteristics of Hugh and Donald Smith.

Assignment # 1

Words Limit

Min: 500

Max: 600

Submission deadline: 03/02/2014