RISK TAKING

Engineering Entrepreneurship
Second Semester of A.Y. 2014/2015
International Program
Civil Engineering Department
Faculty of Engineering
Universitas Atma Jaya Yogyakarta

CONCEPT of RISK
DEFINITION: negative consequence of
uncertainty in the future which brings
disadvantage/loss to businessmen OR
possibility of damage, injury, or loss
High risk, high return
Motivation of risk taking:
wish to obtain rate of return/profit
proportional to sacrifice determination of
profit target
no choice

SOURCE of RISK
Market: competition, price changes,
style changes, competition from new
products, and changes from
fluctuating economic conditions.
Accidents: a merchandise shipment
of tennis shoes may be destroyed in
transit, a warehouse may burn down
and large amounts of expensive
inventory may be lost.

TYPES of RISK
PURE RISK: impact of situation or
decision whose consequence is loss, e.g.
asset loss/damage due to fire, theft,
embezzlement
work accident in production process
indictment, e.g. poisoned food
operational
force majeure: flood, earthquake, tornado,
etc

TYPES of RISK
SPECULATIVE RISK: impact of
situation or decision who consequence
can be profit or loss, e.g.
price change

Increase input price decrease profit margin

Decrease input price increase profit margin
Increase output price increase profit margin
Decrease output price decrease profit margin

debt: fail to pay

TYPES of LOSS
DIRECT LOSS: nominal amount, e.g.
fire due to short circuit goods &
building
INDIRECT LOSS: fail of selling or
profit due to risk, additional
operational cost, lost of investment
opportunity

PROBABILITY of RISK
CALCULATION
How frequent risk occurs
Impact of risk
Loss estimation = frequency x
impact

RISK MANAGEMENT
Effective management particularly to
speculative risks: careful control of
financing, product development activities,
production, marketing, distribution
Contingency plan
Pareto principle: put potential risks in
descending order based on estimated loss
resulted & manage the risks with highest
estimated losses

RISK MANAGEMENT
Strategy choice:
Risk control: reduce risk probability to reduce impact, e.g.
provide & implement good SOP, serious control upon quality of
product & process, equip production area with work safety tools,
introduce risk awareness culture to all employee
Risk transfer: fire insurance company, fixed labor cost
outsourcing, high work capital customers early payment, high
supply cost supplier
Risk retention: payment of risk with/without special allowance
With special allowance increase work capital
Without special allowance new risk: interruption of business process

Risk avoidance: restaurant does not sell cold drink when it is

forecasted to rain heavily during coming week. Frequent risk
avoidance might lead to slow business development due to many
missed opportunities

RISK REDUCTION
through careful planning and
decision-making with activities such
as:
analyzing current and future economic
and market conditions.
considering the consequences of
alternative actions
making reasonable decisions in
response to conditions as they develop
and change.

CASE STUDY
Jill Kearns was in her first year of college, and was running low on
money. She needed to make at least $500 to cover her expenses. She
considered getting a full-time job, but realized that she did not have
enough time to do her studies and keep the job. Her solution was to
start a small business venture with the members of a jazz band to
which she belonged. They would hold jazz concerts and sell tickets to
Jill's performances. Jill's idea for this venture came from her own and
a friend's interest in jazz. As the popularity of jazz has grown, she
would have seen the potential for a business venture expanding. The
idea of using her interest in music to earn the money was very
appealing. Currently, the group members have $500 in the bank. In
order to give a concert, Jill anticipated that they would have the
following start-up expenses: an advertising cost of printing posters,
rent on a concert hall, cost of printing tickets, and incidental
expenses for transportation, telephone calls, etc.

CASE STUDY
By deferring as many payments as possible
and obtaining credit, she found that they
needed$465to hold their first concert. Jill
figured their total expenses would be about
$2000. By giving two shows and multiplying
the ticket price by the legal capacity of the
hall, she calculated that the maximum gross
receipts would be $2900. The business
venture would earn a profit of $900!

CASE STUDY
What risks are involved in this business
venture?
How could these risks be reduced or eliminated?

Source: PACE, Program for Acquiring Competence in Entrepreneurship, CETE/OSU, Columbus,

OH

POTENTIAL RISKS
1. People do not like/are not satisfied with the first
performance and the next (second) performance
will have less audience/bigger failure
2. Number of sold tickets does not reach target to
earn profit
3. Team dispute
4. Musical instruments condition
5. Concert hall condition (electricity, lighting)
6. Team management (money keeper)
7. Force majeure
8. Falsified tickets

RISKS REDUCTION
1. Survey of jazz fans interest to fit the songs to it
2. Promotion: early bird ticket purchase for first
show reduce profit
3. Contract management
4. Regular check
5. Early check and transaction agreement (term
and condition)
6. Multi holder bank account
7. Terms & conditions
8. Security for tickets (hologram, etc)