Exam code:8132
Key business risks
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Business uncertainty is when a business cannot predict what is going to happen or directly influence it
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All businesses face uncertainty
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Uncertainty cannot be prepared for because it is unknown and cannot be measured
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Factors that typically cause uncertainty include:
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Environmental factors such as the Japanese Tsunami in March 2011
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Economic changes such as Covid lockdowns, Brexit or collapses in the banking system
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The entry of new competitors
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Changes in local and national legislation (laws)
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Changes in the political party governing the country
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Risk can be measured, allowing business owners to make informed decisions before taking action
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E.g. Awareness of increased demand for music on vinyl, extensive market research and a strong business plan convinced entrepreneurs Joel Magill and Will Greenham to set up Smugglers Records in the small seaside town of Deal
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Risk versus uncertainty
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Business risks can be classified as internal risks or external risks
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Internal risks arise from inside of a business, over which the business often has a significant level of control
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External risks are those outside of the business over which the business is likely to have less control
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Examples of internal and external business risks
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Business owners have varying levels of risk they are willing to accept
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Risk-averse entrepreneurs may prefer to start small and achieve slow growth
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Some entrepreneurs may prefer to share risks with others in a partnership or protect their personal assets by forming a private limited company
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Successful entrepreneurs can manage risk and quickly respond to uncertainty in the business environment
Case Study
In 2020, the COVID-19 pandemic caused many people to cancel their travel plans and stay home to avoid exposure to the virus
This had a major impact on Airbnb’s business
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Rather than wait for the pandemic to pass, CEO Brian Chesky quickly pivoted their business strategy to meet the changing needs of their customers
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The business launched a new service called “Online Experiences,” which allowed people to participate in virtual tours, cooking classes and other experiences from the comfort of their own homes
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It also took steps to address the health and safety concerns of its customers by implementing enhanced cleaning procedures and providing hosts with a guide on how to prepare their homes for guests during the pandemic
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By quickly changing business strategy and addressing the concerns of his customers, Chesky was able to drive his business forward and position Airbnb for continued success in the future
Minimising risks
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Although some level of risk is to be expected, businesses can reduce the level of risk they face by taking a range of actions
Ways to reduce risk
Invest in training
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Providing employees with the necessary skills, techniques and information can have a significant impact on risk reduction, as they will know how to respond when facing risks
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E.g. Public relations training can improve communication with the media, whilst IT training can help workers understand how to protect the security of systems with which they work
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Diversification
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Developing new products and targeting different markets helps a business diversify into different markets and reduces the risk of overall failure
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If a key market is affected by an unexpected event, resources can be focused on a different market, allowing business objectives to be met
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Carry out research
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Market research helps businesses find out what customers want, reducing the risk of developing products that fail to meet their needs
Business planning
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Business planning involves detailed forecasting of what is likely to happen in the future
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It can help businesses make appropriate decisions and prepare resources in anticipation of external events that could affect business success
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Use experts
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Taking on board the advice of business consultants and experts can aid business planning with a deeper understanding of risks
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E.g. Finance consultants can improve understanding of economic factors that could impact a business, and help managers make appropriate decisions to avoid the worst impacts
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Take out insurance
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Businesses can purchase insurance policies that provide some protection against the most common risks, such as fire, floods and theft
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Financial compensation can fund business recovery from these kinds of risks
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Examiner Tips and Tricks
It is important to remember that risks cannot be eliminated, and uncertainty cannot be measured. Look for evidence in the case study that might indicate how well-prepared a business is to deal with the unexpected. A well-prepared business is more likely to recover quickly from setbacks, whilst a poorly-prepared business may struggle to survive.
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