Marketing Dynamics Unit 1, Lesson 4 Risk Management Marketing Dynamics Unit 1, Lesson 4 Copyright © Texas Education Agency, 2012. All rights reserved.

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Copyright © Texas Education Agency, 2012. All rights reserved. Goals Students will be able to categorize types of business risk. Students will be able to interpret how various types of risk impact business activities. Students will be able to evaluate security precautions. Students will be able to demonstrate knowledge of safety precautions and skills related to health and safety in the work place. Copyright © Texas Education Agency, 2012. All rights reserved. 3

Copyright © Texas Education Agency, 2012. All rights reserved. Terms to Know Risk Risk Management Business Risks Economic Risks Natural Risks Human Risks Copyright © Texas Education Agency, 2012. All rights reserved. 4

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Risk is the possibility of financial loss. A businesses’ goal is to be profitable but that may be difficult. Businesses may not make as much money as they expected or there may be an unexpected financial loss. This is the risk that business people take when they open their businesses. Copyright © Texas Education Agency, 2012. All rights reserved. 5

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Risk Management is the systematic process of managing an organization’s risk exposure to achieve objectives in a manner consistent with public interest, human safety, environmental factors, and the law. Businesses cannot eliminate risks altogether, however they can reduce risk and manage it by using the latest and best marketing information, making wise choices, and analyzing opportunities. Copyright © Texas Education Agency, 2012. All rights reserved. 6

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Business Risks are the possibility of business loss or failure. There are three types of business risks Economic Natural Human Business risks can be categorized into three different categories. Economic, natural, and human. It is important for business people to understand what these risks are so they can put plans in place to minimize these risks. Knowing what your greatest strengths and weaknesses are will enable the business to have a greater chance of success. Copyright © Texas Education Agency, 2012. All rights reserved. 7

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Economic Risks occur from changes in the overall business conditions. These risks include the following. Type or amount of competition Businesses must keep up with the products that their competitors are offering. Foreign competitors might be able to offer the product at lower price. Economic risk encompasses many aspects of business that business owners have no control over. Competition can come from new companies or existing companies who modify their product or drop prices to be more competitive. Examples of companies that were not paying close enough attention to their competitors can be found in the video rental business when a major video rental business did not keep up with competitors offering movies online. Or book sellers who ignored the e-reader trends. In many cases it can be less expensive for foreign producers who can manufacture goods at lower costs due to natural resource advantages or lower labor costs. Copyright © Texas Education Agency, 2012. All rights reserved. 8

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Changing customer lifestyle Single parent households Dual-income households Aging populations Postponing marriage As consumers lifestyles change, they look for products that will fit into their new lifestyles. For instance the rise of dual income families facilitated the popularity of fast and convenient food. Women working outside of the home no longer had time for home cooked meals and looked to products that tasted home cooked but were easy and quick to prepare. The aging baby boomer population has caused an increase in products for older people. There has been an increase in everything from medicines to treat joint pain to housing developments built specifically for an older, empty nest population. Copyright © Texas Education Agency, 2012. All rights reserved. 9

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Product obsolescence Fashion trends Technology Fads Government regulation New laws or regulations passed Recalls Depending upon the business, products may become obsolete very quickly. For instance stores that sell cell phones see their products become obsolete every six to nine months. Clothing stores also see fashions change at least twice a year. If these stores have a large amount of inventory when products become obsolete they are forced to sell the existing inventory at reduced prices which affects their profit. Our government can add additional regulations or change the laws at any time which can affect business. They may require a business to pay higher taxes or provide a higher level of environmental restrictions. All of these changes make it more difficult for business to make a profit. Recalls also have a negative affect on potential customers of the product. If a company has to issue a recall it can be very expensive. They will have to notify all of the owners and then replace or repair the defective part. Copyright © Texas Education Agency, 2012. All rights reserved. 10

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Inflation Recession Inflation causes dollars to be worth less than they were. Businesses are not able to purchase as much for the same dollars and they must raise prices to make a profit. Customers also feel the affects of inflation and will start to curb their spending. This will cause sales to decline in many businesses which can affect profit. Recession can cause many businesses to close their doors. In times of recession the unemployment rate rises. With many people out of work or in fear of being laid off, consumer spending will drastically decline. This in turn causes sales and profits to plummet which forces many businesses to fail. Copyright © Texas Education Agency, 2012. All rights reserved. 11

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Natural Risks are risk that are caused by natural disasters such as floods, tornadoes, hurricanes, fires, lightning, droughts, earthquakes, and unexpected changes in normal weather patterns. Insurance can help with some natural risks, but not all. Some businesses depend upon predictable weather. Ski resorts depend upon snow during the winter months. If there is an unusually warm winter without snow, people will not go skiing and the resorts will lose money. Same is true for beach resorts that depend on warm sunny weather to draw tourists. Other types of natural disasters can wreak havoc on a business but most can be insured, which we will discuss later. Copyright © Texas Education Agency, 2012. All rights reserved. 12

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Human risks are caused by human mistakes and by the unpredictability of customers, employees, and the work environment. Theft Nonpayment of accounts Bad checks Employee negligence Employee incompetence Employees abuse discounts There are lots of ways that people can be a risk to business, both as consumers and employees. Customers may shoplift or not pay their bills. They can also write bad checks that cannot be collected. Employees can be risky if they are not careful about their job and do something to damage the products. If a chef does not cook the meal properly they can unwittingly serve a customer a tainted meal which causes them to get sick. This could cause a law suit at worse or a call to the health department and bad publicity at the minimum. Employee’s can also be incompetent and give out wrong change that causes the register to be short or not follow proper procedures for proper cash handling. Employees could also steal from the business or abuse their discount privileges by giving it to friends or taking more than they are entitled to. Copyright © Texas Education Agency, 2012. All rights reserved. 13

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management SWOT Analysis Strengths – What do you do well? What advantages do you have over your competitors. Weaknesses – What are your weaknesses? Lack of resources? Inexperience? Etc… Opportunities – These are external to your business. What opportunities exist in your market, or in the environment, from which you hope to benefit? Threats – These are beyond your control. Government changes, economic downturns, bad publicity, etc… Businesses can use a SWOT analysis to determine where their weaknesses lie and how they can capitalize on their strengths. In order to conduct the analysis, companies have to look at their competitors, the economy, internal threats, and government regulations to see what they need to be wary of in the future. Strengths and weaknesses are within your organization. Opportunities and threats are external to your organization. Copyright © Texas Education Agency, 2012. All rights reserved. 14

Copyright © Texas Education Agency, 2012. All rights reserved. Risk Management Each element of the SWOT analysis is put in a separate box on the paper. By research and brainstorming each element is filled in so the company can plainly see where it stand and what areas it need to focus on to avoid risks. Copyright © Texas Education Agency, 2012. All rights reserved. 15

Copyright © Texas Education Agency, 2012. All rights reserved. Picture Sources http://www.freedigitalphotos.net/images/view_phot og.php?photogid http://www.freedigitalphotos.net/images/view_phot og.php?photogid=3116 http://www.freedigitalphotos.net/images/view_phot og.php?photogid=2365 http://www.freedigitalphotos.net/images/view_phot og.php?photogid=2268 http://www.freedigitalphotos.net/images/view_phot og.php?photogid=2898 Copyright © Texas Education Agency, 2012. All rights reserved. 16