Theme 12. Analysis and assessment of business risks. Termination of business

Questions:

1. Essence of business risks

2. Analysis and assessment of business risks

1. Essence of business risks

Business risks are an inevitable part of any company’s life, regardless of its scale or industry. They represent the probability of unfavorable events or circumstances that can have a negative impact on financial results, reputation, operational activities, or overall business development. Understanding the essence and causes of business risks is a key aspect of successful enterprise management and the minimization of potential adverse consequences.

The essence of business risks lies in their uncertainty and uncontrollability. Despite all attempts to predict and control possible negative scenarios, some factors may remain elusive or beyond the company’s control. These could be changes in the economic situation, external influences (such as changes in legislation), technological changes, or even natural disasters. Business risks can also be related to internal issues within the company, such as poor management practices, inefficient processes, or insufficient funding.

However, despite the inevitability of business risks, their essence does not imply that entrepreneurs should worry and avoid any risky actions. In the realm of entrepreneurship, risks and opportunities are always interconnected. It is essential to learn how to effectively manage risks rather than avoid them entirely. In some cases, risky decisions can bring enormous benefits and lead to the success of a company.

The main causes of business risks can be diverse. Here are some of them:

External factors: External economic, political, and socio-cultural conditions can exert a strong influence on the business. For example, changes in legislation, economic crises, or shifts in consumer demand can affect a company’s profitability and competitiveness.

Technological changes: Technological advancements can lead to product or service obsolescence and result in the company losing its market position.

Financial risks: Lack of funding, indebtedness, fluctuations in currency exchange rates, and interest rates can all have a negative impact on a company’s financial position.

Supply chain risks: Disruptions in the supply chain, supplier instability, or logistic failures can cause problems with production and product deliveries.

Reputational risks: A company’s reputation is a valuable asset, and negative reviews or accusations can lead to a loss of trust from customers and partners.

Management risks: Incorrect decisions, ineffective management practices, or insufficient control over the business can become sources of risk for the company.

Natural disasters and calamities: Floods, earthquakes, fires, and other natural disasters can damage a company’s property and lead to production downtime.

To cope with business risks, entrepreneurs need to develop risk management strategies, analyze potential risks, and take appropriate measures to mitigate them. However, it is essential not to completely avoid risky decisions, as in some cases, they can lead to significant success and transform the company into an industry leader. The ability to strike a balance between risks and opportunities is a crucial quality of a successful entrepreneur.

2. Analysis and assessment of business risks

Analysis and risk assessment are key tools for effective business management. Entrepreneurs and managers must understand the potential risks that may arise and how they can impact the company. Only with a clear understanding of risks can adequate risk management strategies be developed, and informed decisions made.

Risk analysis helps identify potential threats and assess their probability and impact on the company. Risk assessment helps determine the criticality of different risks and what measures need to be taken to mitigate them.

SWOT Analysis One of the most common methods of risk analysis is the SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. During the SWOT analysis process, a company evaluates its internal strengths and weaknesses, as well as external opportunities and threats. This analysis helps identify key risks and opportunities for development.

Forecasting and Scenario Analysis

Forecasting involves predicting future events and trends based on available data and statistics. However, in uncertain conditions, forecasting may not be accurate enough. Therefore, entrepreneurs also use scenario analysis, which involves developing different scenarios of events and assessing their impact on the company. This approach allows for more flexible planning and adaptation to different conditions.

Historical Data Analysis Historical data is valuable for risk analysis. By analyzing past events and the company’s responses to them, patterns and lessons can be identified, helping entrepreneurs make more informed decisions in the future.

Probabilistic Models

Probabilistic models are used for quantitative assessment of the probability of various risks occurring and their impact on the company. This allows risks to be expressed in numerical values and compared with each other. Probabilistic models can be based on statistical data, expert assessments, or a combination of approaches.

Interaction of Risks

One of the complex aspects of risk assessment is the interaction between different risks. For example, a change in exchange rates can affect the company’s financial position and also impact raw material prices, which, in turn, will affect production costs. Taking such interrelationships into account helps more accurately assess the overall impact of risks on the company.

Risk Management Strategies

Risk management involves the development and implementation of strategies to minimize and manage risks. There are several main risk management strategies:

• Avoidance of risks: The company may decide to avoid certain risks by refraining from certain activities or collaboration with specific partners.
• Transfer of risks: The company may transfer some risks to other parties, for example, through insurance or contractual arrangements with guarantees.
• Mitigation of risks: The company can develop strategies to mitigate the impact of risks, for example, by creating crisis plans or diversifying its assets.
• Acceptance of risks: Some risks may be deemed inevitable and even desirable to achieve certain goals. In such cases, the company accepts risks but develops plans to manage them.

Role of Corporate Culture

Successful risk management depends on the corporate culture of the company. If risk management is ingrained in the organization’s culture, employees will be more vigilant and responsible regarding risks. A culture of openness and a proper approach to mistakes also helps identify and resolve issues promptly.

Task: Risk Quest: Business Risk Management

Task Description: Welcome to an exciting adventure in business risk management! You are a team of entrepreneurs who will embark on a journey of facing challenges and resolving risky situations to succeed in your virtual business expedition.

Objective: Throughout this captivating quest, participants must demonstrate their skills in assessing, analyzing, and managing risks in the context of business. You will encounter various scenarios and make informed decisions to minimize adverse consequences and maximize opportunities for the success of your virtual enterprise.

Game Rules:

Teams: Participants will be divided into equal teams (2-4 individuals in each team).

Scenarios: Several scenarios with risky situations that may arise in business will be presented, such as changes in legislation, financial crises, loss of key clients, and more.

Tasks: Each team will receive a set of tasks related to each scenario. You must assess the risks, conduct analysis, and propose measures for risk management.

Time: A limited time will be assigned for each scenario and task to simulate real-time decision-making.

Presentations: After completing each scenario, teams must present their solutions and justify their choices.

Sample Scenarios and Tasks:

Scenario: Financial Crisis Tasks: Evaluate the potential impact of an economic downturn on your company. Propose strategies to reduce operational costs and enhance liquidity.

Scenario: Competitive Threats Tasks: Analyze the actions of competitors that may threaten your market position. Develop a plan to strengthen competitiveness and diversify products.

Scenario: Legislative Changes Tasks: Assess the legislative changes that might affect your industry. Propose measures for compliance with new requirements and minimizing legal risks.

Scenario: Technological Changes Tasks: Investigate technological trends that could alter demand for your products. Develop a strategy for innovation and new product development.

Scenario: Reputational Risks Tasks: Identify potential situations that may damage your company’s reputation. Propose measures for managing public perception and crisis communications.

Rewards: The winning team will be the one that demonstrates the best understanding of risks and offers the most effective risk management strategies. Participants will have the opportunity to gain insights into the complexities of business risk management and enhance their decision-making skills in uncertain environments.

Discussion Questions for the Classroom:

1. Which external factors can exert the most significant impact on businesses, and how are they assessed in the context of risks?

2. How does corporate culture and employees’ attitude towards risks influence the effectiveness of risk management in a company?