CHAPTER 14, SECTION 3
UNINSURABLE RISKS
IDENTIFYING AND REDUCING RISKS
• Businesses cannot insure many of the risks they face.
Some are too expensive to insure.
• If the chance that a risk will occur cannot be
reasonably predicted or the possible financial loss to
the business cannot be calculated, it is not likely that
an insurance company will provide coverage.
• The cost of some risks, such as medical malpractice or
product liability, are so high that a business cannot
afford the cost of insurance protection. In that case,
the business must determine other ways to deal with
those risks.
TYPES OF UNINSURABLE RISKS
• Several circumstances can lead to business risks that can be very
costly to a company.
• Those circumstances are:
• Economic Conditions
• Consumer Demand
• Competitors’ Actions
• Technology Changes
• Local Factors
• Business Operations
• Economic Conditions—If a company does not cut production
and expenses, during the company downtime, it can experience
serious problems.
• Consumer Demand—If a company produces products that they
think will sell and meet consumer demands and then consumer taste
changes, the company may end up with products in inventory that
they are unable to sell at a profit.
• Competitors’ Actions—Businesses function in a competitive
environment. The actions of competitors can affect the success of a
business. If a competitor starts a major advertising campaign or
decides to reduce prices, a business will have to decide whether it
needs to respond or not. The wrong decision can result in lost sales
and profits or additional unneeded expenses.
• Technology Changes—If a business does not keep up with
the changing technology they could lose a large amount of
customers. If a company is not prepared to accept debit cards as a
form of payment, customers could take their business elsewhere.
• Local Factors—The laws, regulations, taxes, and infrastructure
of a local community can have an influence on the operations of a
business. Some businesses decide to move from one community
to another to get conditions that are more favorable.
• Business Operations—The day-to-day operations of a
business can have a major impact on its success or failure. A poorly
run business will have higher costs, low morale, increased
turnover, and a poor customer image.
RISK MANAGEMENT
• Each of the situations just described poses a risk to
businesses. Alone, any of the risks can cause serious
financial problems.
• If several occur at the same time, it is not likely the
business will survive.
• Uninsurable risks present important challenges to
managers and employees.
RISKS IN INTERNATIONAL BUSINESS
• As an international business manager, would you be
willing to ship automobiles to a company in another
country before receiving the payment?
• Would you agree to take a country’s currency for
payment instead of U.S. dollars?
• These are just a couple of the risks faced by every
organization involved in international business.
STRATEGIES FOR REDUCING RISKS
To reduce international business risk, management experts advise the use of four strategies.
1. Carry out business in many countries. This approach reduces the risk faced when
doing business in only one country or a single region. If turmoil occurs in one nation,
causing lost sales and profits, the global company is covered with profits from other
markets.
2. Offer a range of products. When an organization broadens it’s product line, reduced
sales of one item will not mean complete failure for the company.
3. Involving local business partners may reduce risk. Joint ventures with local companies
help to reduce political and social risks. An agreement between a global company and
a local business can help both organizations.
4. Employ local management in order to lower global business risk. Executives and other
managers who are native to a country or region better understand cultural norms and
political actions. This knowledge can help the international company adapt its product
and business activities to the needs of the foreign market being served.
INTERNATIONAL PROPERTY RIGHTS
• In some South American countries, local companies not
connected to the National Basketball Association make
shirts celebrating the championship of an NBA team. In
China, street vendors illegally duplicate and sell copies of
popular movies, music videos, and books. These are both
examples of violations of property rights.
• Property rights are the exclusive rights to possess and use
property and its profits. This excludes everyone else from
interfering with the use of the item.
• Intellectual Property refers to technical knowledge or creative
work. It includes software, clothing designs, music, books, and
movies. For many companies, their intellectual properties are
valuable assets that generate sales and profits.
• A patent is the exclusive right of an inventor to make, sell, and use
a product or process.
• A trademark is a distinctive name, symbol, word, picture, or
combination of these that a company uses to identify products or
services.
• Some common trademarks known around the world include, the McDonald’s golden
arches and Kellogg’s Tony the Tiger.
• A copyright protects the original works of authors, composers,
playwrights, artists, and publishers.
COUNTERFEITING
• Counterfeiting refers to illegal uses of intellectual property, patents, trademarks, and copyrights.
• For example, a company may make slight changes in a well-known product
and sell it in other countries. They are using the product illegally so they
don’t have to pay for the development costs of their own products or pay the
original company for the product.
• By using the actual product name of trademark illegally, they are trying to
profit from the reputation of the famous company.
• When property rights laws are not enforced, companies can lose profits. This
discourages them from participating in international trade.