Lecture 4 - Risk & Uncertainty

Risk and Uncertainty
Dr Noor Muhammad
What is a Risk?
Risk: is the probability that the future state of the
business will be less successful than planned
To focus on the inception of the entrepreneurship
concept, risk-taking has been a central theme of
entrepreneurship literature (Busenitz, 1999)
Risk propensity is defined as an individuals current
tendency to take or avoid risk
What is a Risk?
In
the
boundaries
of
entrepreneurship,
entrepreneurs face four types of risk: financial;

career; social; and psychological (McCarthy, 2000),
but financial risk seems to be the most defining
feature of entrepreneurial behaviour. Someone who
takes other types of risks within an existing
organization may be known as an intrapreneur

(Smart and Conant, 1994).
Types of Risk
General environmental (government regulation and technological change)
Variables related to the industrys characteristics (number of competitors)

Number of suppliers and customers
Mobility barriers
Risk return profitability
Variables related to characteristics of the decision-maker, age, experience,
knowledge
Characteristics of the problem under consideration such as complexity,
ambiguity, controllability
Probability of loss
Three Common Risk Determinants

1. Lack of time
2.
Lack of information
3.
Lack of control over alternative courses of action
MacCrimmon and Wehrung (1986a)
How to Minimize Risk

Chell et al (1991: 43) propose that entrepreneurs adopt
risk minimisation that rests on the following strategies
Seeking and being aware of information.
The ability to plan imaginative solutions and problems.
Supreme confidence in the solution and hence the
decision.
How to Minimize Risk

Risk control
Preventive approaches
AVOIDANCE
Eliminate the activity, thus eliminate the risk
REDUCTION
Change the activity to reduce the probability of loss/risk
Risk sharing
Insurance
Outsourcing/Independent Contractors/Suppliers
Risk communication
Educating employees, customers, etc about the

risks
The Wheel of Misfortune
On-Premise
Injury
Fire
Product
Liability
Classifying
Risk by Type
of Asset
Customer
Risks
Bad Debts
Property
Risks
Personnel
Risks
Burglary and
Business Swindles
Shoplifting
Employee
Dishonesty
Loss of
Key
Executives
Natural
Disasters
Competition
from
Former
Employees
Bankruptcy
Uncertainty
Entrepreneurial risks also create uncertainty which

entrepreneurs
face
in
the
context
of
business
environment. However, risk and uncertainty have been
discussed in the entrepreneurship literature in several

contexts.
Uncertainty
Cantillon (1775) defines that entrepreneurs are those

who take risks, however, his arguments also added some
points regarding uncertainty, in which he defined the
entrepreneur as someone who engages in exchanges
for profit; specifically, he or she is someone who
exercises business judgment in the face of uncertainty
(Hebert and Link, 1988:21).
Uncertainty
Hastie suggests that uncertainty refers to the decision-
makers judgment of the propensity for each of the

conditioning events to occur (2001:657). Therefore,
judgment is what must be exercised to construct a
decision between different courses of action that take

place in an uncertain environment.
Types of Uncertainty
State Uncertainty
Effect Uncertainty
Response Uncertainty
Types of Uncertainty
State uncertainty: is used to denote when the administration
perceive the environment to be unpredictable (1987). whats
happening out there? (State uncertainty)
Effect uncertainty: is defined as an inability to predict what the
nature of the impact of a future state of the environment or
environmental change will be to the organization (1987:137) How
will it impact me? (Effect uncertainty)
Response uncertainty: is a lack of knowledge of response option
and an inability to predict the likely consequences of a response
choice (Conrath, 1967; Duncan, 1972; Taylor, 1984) what am I
going to do about it? (Response uncertainty)
Assignment # 1
Hugh and Donald Smith
This short case study profiles father and son, Hugh and Donald
Smith, and outlines the origins, growth and eventual demise of
the family business, Albyn Combs. The company, founded in
1973, manufactured handmade, natural horn, hair combs for a

niche consumer market and would later diversify its product
range across the retail pharmaceutical industry. This case can
be used to form the basis of debate around the nature of the
entrepreneur, and entrepreneurial behaviour.
Questions
1. What you have learned from this case study?
2. Apply major definitions of entrepreneurship to this case

study with justification.
3. Three major themes of entrepreneurship: Innovation;
opportunity recognition and risk-taking should be
pointed out from the case study with examples.
4. Compare
and
contrast
the
key
entrepreneurial
characteristics of Hugh and Donald Smith.
Assignment # 1
Words Limit
Min: 500
Max: 600
Submission deadline: 03/02/2014

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Risk and Uncertainty

entrepreneurs face four types of risk: financial;

organization may be known as an intrapreneur

Variables related to the industrys characteristics (number of competitors)

Three Common Risk Determinants

Lack of control over alternative courses of action

MacCrimmon and Wehrung (1986a)

How to Minimize Risk

How to Minimize Risk

Eliminate the activity, thus eliminate the risk

Change the activity to reduce the probability of loss/risk

Educating employees, customers, etc about the

The Wheel of Misfortune

Entrepreneurial risks also create uncertainty which

environment. However, risk and uncertainty have been

discussed in the entrepreneurship literature in several

Cantillon (1775) defines that entrepreneurs are those

makers judgment of the propensity for each of the

decision between different courses of action that take

1973, manufactured handmade, natural horn, hair combs for a

2. Apply major definitions of entrepreneurship to this case

characteristics of Hugh and Donald Smith.

Submission deadline: 03/02/2014

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