Lecture 2: Urban & Regional Planning (Risk Mitigation Concept)
Lecture RISK 2
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Transcript of Lecture RISK 2
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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.
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Risk quadrant
High
impact
low probability high
Disasters
Fire, storm
Institutional
Low moraleretention
Decision
making
No staples
Daily risks
Occupationalhazard
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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.
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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
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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
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Riskanalysis
Breakevenanalysis
Guesstimates
Optimistic Pessimistic
Most likely
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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
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Peter Drucker
Successful entrepreneursare not risk takers
Instead they take steps to minimize risks by
carefully understanding them Theyavoidfocusing on riskand remainfocus
on opportunity
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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
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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
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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
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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
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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
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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
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Luke Johnson chairman of one of the UKs main
terrestrial television channels, Channel 4
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
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Luke Johnson chairman of one of the UKs main
terrestrial television channels, Channel 4
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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Types ofevents
Three types ofevents that cause business risk
Events related to the property ofthe business
Events related to personnel
Events related to customers
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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Employee violation
Equal employment opportunity
Osha
Discrimination EAP
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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
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Types ofinsurance
Liabilityfor damage
Illnessandinjurydue to employment
Unemployment insurance
Vehicle andinjurydue to accidents
Workers compensation
Product liability
Propertyinsurance
Insurance heidi klum,beckham,jlo,
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Thankyou
SME