Understanding Economic and Market Risks

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Questions and Answers

Which of the following best describes economic risk for an entrepreneur?

  • The potential for theft, injuries, or absenteeism among employees.
  • The fluctuations in market demand and competition within an industry.
  • The impact of geopolitical events, economic cycles, and governmental regulations. (correct)
  • The challenges associated with bringing a new product to the market.

What is a key feature of a market characterized by perfect competition?

  • A limited number of buyers and sellers.
  • A market with no reasonable substitutes for a good or service.
  • Many different buyers and sellers. (correct)
  • A single producer controlling the entire market.

Which type of market system is defined by having only one producer of a particular good or service?

  • Monopolistic competition
  • Oligopoly
  • Perfect competition
  • Monopoly (correct)

What is a potential product risk during the investigation stage of new product development?

<p>The product not being feasible or unique. (D)</p> Signup and view all the answers

Which of the following activities is considered a 'people risk'?

<p>Theft of office supplies. (A)</p> Signup and view all the answers

What is a potential market risk during the feasible stage of new product development?

<p>Unrealistic market studies leading to misallocation of resources. (B)</p> Signup and view all the answers

Which market structure is characterized by numerous competitors and elements of both monopoly and perfect competition?

<p>Monopolistic competition (C)</p> Signup and view all the answers

What is a key business risk during the feasible stage of developing a new product?

<p>Lack of experience in commercializing a business. (C)</p> Signup and view all the answers

What is a primary benefit of having partners, as suggested in the text?

<p>They help in securing larger contracts. (A)</p> Signup and view all the answers

Why should a business consider walking away from a client?

<p>Because of late payments and changing requirements. (D)</p> Signup and view all the answers

What are the three components for dealing with risk and uncertainty?

<p>Entrepreneurial plan, entrepreneurial management, and financing (B)</p> Signup and view all the answers

In the context of a business plan, what is the primary function, according to the content?

<p>Guiding the business during challenging periods. (C)</p> Signup and view all the answers

What is the primary goal of writing a business plan for an entrepreneur with bad credit?

<p>To showcase the new business's potential and creditworthiness. (D)</p> Signup and view all the answers

What does 'owner's equity' refer to?

<p>The owner's money invested in the business (D)</p> Signup and view all the answers

Why might an entrepreneur seek 'seed capital' from family and friends?

<p>As an alternative to traditional financing. (C)</p> Signup and view all the answers

What is a key characteristic of angel investors as described in the text?

<p>They often provide guidance and connections in combination with investment. (B)</p> Signup and view all the answers

During which stage of development is a company most likely to experience a cash-flow problem due to a lack of revenue and difficulty attracting proof-of-concept funding?

<p>Development Stage (C)</p> Signup and view all the answers

What is a key product risk associated with advancing a product from prototype to manufacturing?

<p>Requirement for new skill sets (A)</p> Signup and view all the answers

Which of these indicates a market risk during the introduction stage of product development?

<p>Limited market driven functionality after scaling product production (D)</p> Signup and view all the answers

During which stage is a company at risk of losing focus due to the transition from an emerging environment to true business operations?

<p>Introduction Stage (C)</p> Signup and view all the answers

What financial risk is most likely to occur in the growth stage of a company?

<p>Management focusing on sales rather than profits (D)</p> Signup and view all the answers

When a company's growth rate begins to decline and its product line matures, what type of risk is it experiencing?

<p>Market Risk (D)</p> Signup and view all the answers

When a company shifts its focus towards monthly, quarterly, and annual results, what is a potential business risk it might face?

<p>Difficulty in focusing on innovation (A)</p> Signup and view all the answers

What does William J. Bernstein suggest regarding the information in a given financial asset?

<p>It encompasses all information known to the market about its value (A)</p> Signup and view all the answers

What does the term 'leverage' refer to when discussing financial products?

<p>The asset to debt ratio in an investment decision (B)</p> Signup and view all the answers

What does a holistic approach to risk management involve according to Christopher Portier?

<p>Looking at all the factors involved to make better decisions (C)</p> Signup and view all the answers

What is the primary emphasis of the 'precautionary principle' in risk management?

<p>Taking preventative actions even without concrete evidence of risk (B)</p> Signup and view all the answers

What does the risk management strategy of 'monitoring potential risk' involve?

<p>Observing risks over time before acting (B)</p> Signup and view all the answers

When managing business risk, what is a potential problem with relying too heavily on contractors?

<p>Contractors may leave for better opportunities (A)</p> Signup and view all the answers

How does diversification help reduce business liability?

<p>By mitigating risk of a single product (A)</p> Signup and view all the answers

What role do mentors play when a business is applying for venture capital

<p>They assure the lenders that the company is in stable hands (D)</p> Signup and view all the answers

Flashcards

Economic Risk

Risks related to the economy, including factors like geopolitical events, economic cycles, interest rates, and government regulations.

People Risk

Refers to risks associated with the behavior and performance of individuals within an organization.

Perfect Competition

A market structure with numerous buyers and sellers, where each has a negligible impact on the market price.

Monopoly

A market structure where a single firm controls the entire supply of a specific product or service.

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Oligopoly

A market structure characterized by a few large firms dominating the market.

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Monopolistic Competition

A market structure combining elements of monopoly and perfect competition, with many firms offering differentiated products.

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Technical Risk

Risks associated with the development and launch of new products.

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Product Risk (Investigation Stage)

Risks related to the feasibility and uniqueness of a new product.

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Walking away

When a business owner is willing to walk away from a client who is causing trouble (e.g., late payments, changing requirements).

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Angel Investors

Individuals who invest in early-stage businesses (e.g., startups) with the hope of a high return on investment.

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Business Plan

A plan that outlines the core aspects of a business, including its goals, strategies, and financial projections.

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Entrepreneurial Plan

This refers to the potential risks or challenges a business might face during its development and growth.

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Entrepreneurial Management

This is the set of skills and strategies used to manage and steer the business away from potential risks.

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Owner's Equity

Funding obtained from the business owner's personal savings.

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Seed Capital

A source of funding obtained from family or close friends who believe in the business idea.

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How To Finance with Bad Credit

When business owners face financial difficulties, they can use this strategy to help them secure funds. This strategy shifts the focus to the business's potential and creditworthiness, rather than the owner's personal credit.

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Development Stage (in Business)

A stage where a product is developed and tested, but no revenue is generated yet. It's characterized by significant expenses, difficulty attracting funding, and relying heavily on proof-of-concept validation.

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Introduction Stage (in Business)

A stage where a product is launched in the market, and the focus shifts from R&D to generating revenue. It's marked by challenges like market response, managing expenses, and ensuring product-market fit.

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Growth Stage (in Business)

A stage where a company experiences rapid growth. It's characterized by expanding market share, attracting customers, and managing resources effectively. It also involves adapting to competition and market changes.

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Maturity Stage (in Business)

A stage where the product has reached its peak and its rate of growth starts declining. Companies at this stage focus on efficient management, innovation, and maintaining market share.

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Business Risk

The likelihood of an event or situation happening that can negatively impact a company's goals. Examples include market risks, financial risks, technical risks, and business risks.

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Financial Risk

A type of business risk focusing on a company's ability to generate sufficient revenue to cover expenses and be profitable. It's influenced by factors like market demand, pricing, and cost control.

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Market Risk

A type of business risk associated with a company's market position and its ability to compete effectively. It includes factors like market size, customer perception, and competition.

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Operational Risk

A type of business risk focused on the company's overall operational efficiency and ability to manage its resources effectively. It includes challenges related to logistics, supply chain, and human resources.

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Strategic Risk

A type of business risk that assesses a company's ability to maintain a competitive edge over time. It includes evaluating factors such as innovation, strategy, and the development of unique value propositions.

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Quantitative Financial Risk Assessment

A quantitative assessment of financial risk that involves studying financial markets, analyzing trends, and using data like stock rates and interest rates.

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Qualitative Financial Risk Assessment

A qualitative assessment of financial risk that focuses on understanding market behaviors, trends, and factors that influence market sentiment. It involves analyzing information beyond just numerical data.

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Leverage (Financial)

The ratio of an asset's value to the amount of debt used to finance it. It's a measure of financial leverage and risk in investment decisions.

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Personal Risk (in Finance)

A type of risk related to personal sacrifices, including family, friends, and other priorities, in pursuit of financial goals. It highlights the importance of managing these risks proactively and minimizing negative impacts on personal life.

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Risk Management Strategies

A proactive approach to identifying, analyzing, and managing various risks to prevent potential harm. It involves planning, implementing, and monitoring strategies to minimize negative impacts.

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Study Notes

Economic Risk

  • Includes geopolitical threats, economic cycles, interest rates, and governmental regulations
  • Economics involves the allocation of scarce resources, including investment resources

People Risk

  • Difficult to quantify and manage in any organization
  • Examples include employee theft (pens, notepads), workplace injuries, absenteeism, and aging

Market Risk

  • Various market systems exist, differing by industry and company
    • Perfect competition: many buyers and sellers
    • Monopoly: single producer, no reasonable substitutes
    • Oligopoly: similar to monopoly, few producers
    • Monopolistic competition: combines elements of monopoly and perfect competition, many competitors
    • Monopsony: differentiated by the number of suppliers

Technical Risk (Product Development)

  • Four types of risk apply in different stages of product development. Product, market, business, and financial risk are all important.

A. Investigation Stage

  • Product Risk: Product feasibility and uniqueness are questioned.
  • Market Risk: Limited market understanding leads to inaccurate growth/size assessment.
  • Business Risk: Does a great product/technology equate to a great business?
  • Financial Risk: Proof-of-concept funding for products/prototypes is hard to obtain.

B. Feasible Stage

  • Product Risk: Company focuses excessively on the product, not the business model, and IP is a concern.
  • Market Risk: Inaccurate market studies waste resources. Product design relies on the market study success.
  • Business Risk: Business formation and planning lack expertise/skills in commercialization.
  • Financial Risk: Lack of revenue, difficulty attracting proof-of-concept funding hinders cash flow.

C. Development Stage

  • Product Risk: Transitioning from prototype to production requires new skills; product revenue features no longer under development.
  • Market Risk: Field tests results are negative, competitors react faster than anticipated.
  • Business Risk: If choosing a business over licensing, an experienced professional management team is needed. Business pivots toward revenue generation away from R&D.
  • Financial Risk: Significant expenses without realized revenue.

D. Introduction Stage.

  • Product Risk: Limited market function after scaling product production.
  • Market Risk: Market/competitor response differs from expectations. Uncertainty due to limited repeat business.
  • Business Risk: Lack of focus as the company shifts from emerging to established.
  • Financial Risk: Managing sales prioritized over profit; burn rate exceeds capital.

E. Growth Stage

  • Product Risk: Increased competitor pressure demands new product features, draining capital.
  • Market Risk: Product distribution, customer satisfaction, and features are challenges. Competitors react to the product launch.
  • Financial Risk: A poor financial strategy limits the ability to grow teams.
  • Business Risk: The need to establish formal procedures/operations with increased demands.

G. Maturity Stage

  • Product Risk: Minor product changes have little to no impact; existing structure hinders changes to established products.
  • Market Risk: Declining growth as the product line matures.
  • Business Risk: Innovation becomes difficult as focus shifts to monthly, quarterly, and annual results.
  • Financial Risk: Poor financial strategy limits the ability to grow teams.

Strategic Risk

  • Includes questions of sustainable competitive advantage, and risk sharing through strategic alliances
  • Sharing the risk with strategic alliances is also a key factor for strategic risk.

Financial Risk

  • Assessing financial risk does not have an absolute method
  • Study financial markets, qualitative (trends, behaviors) and quantitative (rates) assessment of markets.
  • Review asset prices reflect market perceptions of value. Stock decline means the market values it less and vice versa.
  • Calculate financial leverage (asset-to-debt ratio in investment decisions).

Personal Risk

  • Personal sacrifices (family, friends, leisure); unmanaged, this becomes overwhelming; risks compounded by a survival instinct.

Risk Management Strategies on Environmental Decision Making

  • Holistic approach to risk management involves understanding all factors to prevent disasters
    • Precautionary Principle: Act early to prevent potential harm; even without concrete evidence
    • Monitoring Potential Risk: Observe risks before acting if action is not necessary. Accept risk at a certain threshold.
    • Revisiting Previous Decisions: Review past decisions to ensure they apply to current needs; adjust if outdated.

8 Steps to Reduce Business Risk and Liability

  • Operational Risk Management: Includes natural disasters, quality problems, supply chain, financial issues.
  • Debt Reduction: Reduce reliance on short and long-term debt.
  • Diversification: Diversify products to mitigate customer preference/new product launches impacts.
  • Quality Control: Prevent customer lawsuits, recalls, or regulatory actions by maintaining quality.
  • Human Resource Planning: Hire full-time personnel to avoid contractor departures and issues.
  • Mentors: Use mentors in venture capital pursuits.
  • Partners: Partners to aid large contracts.
  • Walking Away from Clients: Abandon clients with late payment and changing requirements.

Strategy for Dealing with Risk and Uncertainty

  • Business Plan: Provides guidance
  • Entrepreneurial Plan: Identifies risks
  • Entrepreneurial Management: Mitigating those risks

Financing Businesses with Bad Credit

  • Business Plan: Highlight business viability, creditworthiness, rather than personal credit issues.
  • Owner's Equity: Invest own money, demonstrating confidence
  • Family/Friends: Alternative financing option.
  • Angel Investors: Seek angel investor capital and mentorship.

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