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 RISKSTo 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, trade-

marks, 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.