BUSINESS RISKWhat is Business Risk

Business is mainly run to earn profit. However, there is always a chance of suffering loss in it. This danger of loss from unforeseenable events in future in business is named as business risk. Business risk is an essential element of business. It goes side by side with it. There is no business in the world which can guarantee,claim or insure for “no business risk” and the fact is that it cannot be avoided, but, it can be minimized by taking timely suitable measures by the businessman.

Causes of Business Risk:

1. Natural Factors2. Competition3. Mismanagement4. Change in demand5. Change in government policy6. Use of modern techniques of production7. Human Causes

1. Natural Factors

There are certain Natural Factors like earthquake,floods,famine,hailstorm etc, which cause damage to business. Since human beings have no control over nature, therefore, the loss caused to business due to natural causes is unavoidable.

Natural disaster is a terrible dream for business, because, when it occurs, it doesn’t effect only one business, but effects on all the business community of the area, and similarly, it’s effect touches the whole economy.

For example, the natural disaster (tsunami) that hit Japan, it effected not only the business community of the place where it hit it, but the whole business structure of Japan was disturbed and great damage was caused by it.

2. Competition

If there is stiff competition for the sale of a product in the market and the manufactures indulge in cut throat competition by cutting down price of the goods or by producing cheaper quality of the product, it will increase business risk.

For example the business risk increased for NIKE few years ago. They were producing high-quality shoes,but they were not stylish as well as the price of the products was high. One of the biggest competitors of NIKE, known as Reebok International found Nike’s problem and they started to give good quality shoes with style and in low price. NIKE had to bear big business loss before they recognized that their competitor has taken advantage of it.

3. Mismanagement

If the management running the business is inefficient and there is no proper planning and control in it, it will increase the cost of production of goods,lower its quality,it may load to decrease in profit and eventually flop the business.

4. Change in demand If there is a sudden change in demand for the

product, it will lead to loss in business. The demand of the customer never remains

the same and it changes with time to time. So one has to be ready to change according to the demands.

Not changing with demands will effect only one’s business,because in the field of business, there are always competitors who are ready to take advantage of any weak point of their competitors and it greatly increases the risk in business.

For example, Blackberry Mobiles, they tested their luck, but many can see that blackberry instead of changing with the demands, they are sticking to their own business techniques, while on the other Hand, Nokia after outrunning it’s competitors attaining the “Worlds number 1 manufacturing handset company” title, they flourished all over the world because of their business technique of “Change in Demand”.

5. Change in Government Policy

If there is a sudden shift in monetary and fiscal policies of the Government, it may lead to loss in business.

The best example of this can be the Petrol Pumps. As everyone knows that the Petrol Pumps store petrols, now when the government announces that petrol prices are increased, then the same petrol which was bought for less price from government, sell on higher prices or the new implemented prices, similarly when the prices are decresed from the government then they had to sell the stored petrol on lower prices which causes loss to the business of petrol owner, so one has to be ready for any upcoming surprise.

6. Use of modern techniques of production

If the manufactures set up heavy machinery and begin to use modern techniques of production, which lower per unit cost of production of goods, the small business units producing similar goods will suffer losses as they will not be able to introduce heavy machinery.

For example, The carpeting industries which produces hundreds of carpets everyday, is greatly disturbing the business of small units which produces carpets on a small scale or by hiring alot of people to make carpets by hands which take months and even years to produce a single carpet. So the modern techniques and equipments also minimizes the risk of loss in business.

7. Human Causes

Business loss may also occur due to corruption,theft, forgery, lavish expenditure, top heavy management etc.

Business risk maximizes when bad elements effects the organization which are present within the organization.

Loss in Business risk is always high when it is caused by humans in it,because it constantly keeps the business of the organization under threat.

For example, Steel Mills Corporation is nearly destroyed because of corruption in it. If somehow the corruption and the other bad things are removed in it, not only it’s risk of loss in business can be recovered but can be made on of the profitable organizations.

Minimizing Business Risk

1. Market Research2. New techniques3. Effective advertisement4. Insuring goods

1. Market Research The businessman before establishing the

business should search the market and must attain knowledge about the market and it’s environment. Then, the business in operation should keep a constant eye on the quality, prices, advertisement and promotion of the goods produced by competitors. This will enable him to adjust his own goods according to the prevailing conditions of the market.

For example, China Mobiles, they came into markets, and adjusted themselves according to the conditions of the market. Within a short span of time, they were able to rule the local markets of many countries including Pakistan and hence they flourished very quickly by researching and understanding the rules and demands of the local markets!

2. New techniques The production of goods according to the new

techiniques will help in minimizing the business risk. New techniques doesn’t only mean the approach to

sell goods but it includes the production and all the other requirements to fulfill as well.

It includes the new machineries, which help a lot in the production facility. With the passage of time new techniques were introduced, resulting in more production and obviously less business risks.

For example, Fed Ex, which was once only used to deliver goods in specefic locations or on local level and taking limited number of delivering orders. But with the passage of time, new techniques were brought in view and similarly they expanded their business in the whole wide world. With the help of new machineries, and new techniques, they are delivering the goods all over the world and are becoming more popular with the introduction of online system. So new techniques does minimize the risk in business.

3. Effective Management

There should be effective management for the sale of goods in order to compete in the market with others, and, it will also help in minimizing the business risk.

4. Insuring goods A business man can also minimize the risk by insuring the

goods. Insuring about the goods means satisfying the customer

in one way about the products quality. Giving insurance of the product, the customer feels satisfy and are more interested in buying the goods which are of their choice and with warranty.

Insuring goods is one of the strategic skill that can help alot in flourishing a new business and upholding the level of business growth.

People always prefer to buy goods with some warranty, rather than buying a high quality product but without insuring it, most of them won’t go for buying that product, because satisfaction is not there for the customer.

So one can say that insuring the goods minimize the loss in business.

For example, people prefer to buy new cars instead of used cars because of the assurance provided by the company with new car.