LAP
Teaching Guide
Leadership, Attitude, Performance ...making learning pay!
Productcc
Performance
Indicator:
Economics
LAP 3 PM:013
Performance Indicator: EC:011
Lose,
Win, or Draw
Business Risk
Take a chance
Can you handle it?
Worth the risk
iStockphoto/Thinkstock
ACKNOWLEDGMENTS
LAP development requires the leadership and active participation
of many individuals—instructors, writers, editors, and others. Special credit is due the following individuals for their contributions to
this LAP:
Original Developer: Kerry Winfrey
Final Editing: April J. Miller
Field Test Coordination: Theresa Vozenilek
Production Manager: Mary Carlisi
Production Assistance: Barbara Boggs, Sarah Fedner
Graphics: Christopher C. Burke
Produced and distributed by MBAResearch, a non-profit research
and development center, 1375 King Ave., P.O. Box 12279, Columbus,
Ohio 43212-0279 Ph: (614) 486-6708. ©2013, by MBA Research and
Curriculum Center, Columbus, Ohio.
Sample logos and trademarks used in this learning activity package are
for instructional purposes only. Many are registered trademarks. Use in
this instructional material does not imply endorsement.
Details: www.MBAResearch.org
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 2
TABLE OF CONTENTS
4
So What?
Rationale for studying business risk
4-18
Discussion Guide
An outline of the content in the student
booklet of LAP-EC-003—Lose, Win, or
Draw (Business Risk). In addition, discussion questions have been included
throughout the content to build classroom discussion/interaction.
4-18
18
18
19
Presentation Slides
Optional visual support for the LAP can
be obtained in graphics presentation software. The slides to be shown are numbered within the discussion guide.
Make It Pay!
Ways students can use their understanding
of business risk—NOW!
The Gray Zone
An ethical dilemma associated with
business risk
Directions for Activities
Directions are provided for four activities
that reinforce the lesson. Two of the activities are designed for completion by an individual student, while the other two provide preparation and process information
for group completion.
20 Individual Activity 1: Risk Match-Up.
Matching exercise with answer guide
22 Individual Activity 2: Responding to
Risk. Case study exercise with answer
guide
24-25 Total Recall Key
Answers to the Total Recall questions
found in the student booklet on pages
5 and 8
26-27 Practice Test
A short-answer test covering main aspects
of LAP; can be used as a guide for note taking, as a formative test, as a summative
test, etc.
28-32 Practice Test Key
Answers to the short-answer questions
found in the Practice Test
33-35 Posttest
Twenty multiple-choice questions that assess student understanding of business risk
36-38 Posttest Key
Descriptive answers to the multiple-choice
questions found in the Posttest
39
Posttest Grader
A listing of correct responses to the
multiple-choice questions
40-41 Glossary
Definitions of words defined in the LAP
and other words with which students may
not be familiar
42-43 Questionnaires
Student and teacher questionnaires that
can be sent to MBAResearch to improve
the LAP
19 Group Activity 1: Online research
exercise
19 Group Activity 2: Group brainstorming
exercise
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 3
Performance Indicator: Determine factors affecting business risk (EC:011)
OBJECTIVES
A – Explain types of business risk.
B – Explain how businesses deal with risk.1-3
DISCUSSION GUIDE
OBJECTIVE A (Slides 1-3)
(Slide 4)
•
So What?
A. You might not think of yourself as a daredevil, but you
face risk every single day!
1. Examples:
a. You could fall and twist your ankle as you hurry downstairs in the morning.
b. Your car could break down on the way to school.
c. At lunch, you could buy a stale sandwich.
d. Before you leave, you could lose your car keys somewhere in your locker.
2. If any of these things happened, you’d be frustrated.
DISCUSSION #1: Ask students to share some risks they’ve faced this week.
B. So you try to keep bad things from happening—or you try to protect yourself against them.
1. Businesses do the same thing.
2. Just like you, they don’t want to lose out!
•
Business risk described
A. Businesses can lose, just as people can.
1. When you go out to a restaurant with your friends, you risk wasting your money
on a disappointing meal.
2. The restaurant, on the other hand, risks losing money if you demand a refund.
3. And, if you write a negative review of the restaurant on a site like Yelp, the restaurant
risks losing additional customers.
4. One meal can be pretty risky!
(Slide 5)
B. Business risk is the possibility of loss (failure) or gain (success) inherent in conducting
business.
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DISCUSSION GUIDE (Obj. A, cont’d)
1. With free enterprise, businesspeople have the right to risk everything.
a. They can lose it all.
b. They can make a fortune.
DISCUSSION #2: Ask students to name some businesspeople they’ve heard about who have lost it all or made a fortune.
(Slide 6)
2. But if a business owner can lose everything by gambling on a risk, why would s/he even
take the chance?
a. Because taking risks, even if those risks can result in loss, is the only way for a business to be successful.
b. Hiring new employees, introducing new products, and buying new equipment are all
risks that businesspeople have to take from time to time.
3. That doesn’t mean taking every risk is a good idea.
4. Effectively managing risk is what separates successful businesses from unsuccessful
ones.
C. It’s important to understand the risks businesses can face—and what factors influence
those risks.
(Slide 7)
•
Classifications of business risk
(Slide 8)
A. Hazard risks
1. Potential events or situations that cause injury or harm to people, property, or
the environment
2. Most can only cause business losses, not gains.
3. Types of hazard risks:
a. Natural disasters
1) Tornadoes, earthquakes, floods, blizzards, hurricanes, and other natural
phenomena are considered hazard risks.
2) These disasters can cause significant damage to a business.
3) They can even wipe out entire buildings—and years of hard work along with
them.
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DISCUSSION GUIDE (Obj. A, cont’d)
4) Even the threat of natural disasters can be a hazard risk.
a) Think of how business owners along the East Coast were forced to board
up their businesses and evacuate before Hurricane Sandy hit.
b) Even if their businesses weren’t physically damaged by the storm, they still lost significant revenue while they were closed.
DISCUSSION #3: Ask students to share stories of businesses that they are familiar
with that have suffered damage from natural disasters.
b. Property damage
1) A significant cause of property damage is fire, which can destroy buildings as well
as important paperwork and equipment.
2) Other property damage can occur as equipment and facilities age and wear
out—for example, an older shop roof might begin to leak, which would cost
money to repair (plus the additional financial burden of replacing any waterdamaged items inside the building).
3) Damage can also result from human activity, such as vandals spray painting
graffiti on the side of a business.
c. Employee issues
1) Inadequate safety equipment or hazardous working conditions can cause injuries
that may cost a business big money.
2) For example:
a) If your company doesn’t provide safety goggles and an employee gets something in his or her eye, s/he may have to take time off work.
b) If an employee isn’t at work, that means the business may have to hire someone new, pay another employee overtime, or train someone else to
cover the absent worker’s duties.
c) Even worse, the employee may sue the company and be entitled to worker’s compensation benefits.
DISCUSSION #4: Ask students to share other examples of employee issues that
could be considered hazard risks.
3) Or what about an employee who’s been harassed or discriminated against?
4) An employee in this situation could sue the company as well.
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DISCUSSION GUIDE (Obj. A, cont’d)
d. Customer issues
1) Employees aren’t the only ones who can get injured at work.
2) Example:
a) A company’s sidewalk is icy because an employee forgot to salt it.
b) If a customer slips and falls, s/he may sue the company.
3) Or, if an employee says something rude or inappropriate to a customer,
that customer may leave and never come back.
e. Crime
1) Robbery
2) Check fraud
3) An employee pocketing money
4) A customer stealing merchandise
(Slide 9)
B. Operational risks
1. Operational risks are the possible events and situations that can result from employee
actions, core processes, and daily business activities.
2. As long as your business deals with people, you’ll always have some degree of operational risk.
3. These are things that can go wrong in the short term.
4. Operational risks include:
a. Human errors
1) If your employees haven’t been properly trained, or if they simply can’t do their jobs correctly or effectively, this is an operational risk.
2) Good employees add financial value to the company, but incompetent employees are just another way for a business to lose money.
3) The same is true of careless employees.
4) If an employee makes a mistake and orders the wrong supplies, s/he could cost a
business serious money.
b. Production problems
1) What if a manufacturing plant can’t obtain needed parts from a supplier?
2) What if one of its machines breaks when it has a big order to fill, and it can’t get the products to its customers on time?
3) These problems with core processes can lose customers and profit.
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DISCUSSION GUIDE (Obj. A, cont’d)
c. Leadership problems
1) Company leaders are just as capable of making mistakes as employees who are
lower on the totem pole.
2) If a leader makes bad decisions or isn’t trusted by employees, it can be hard to maintain a productive and profitable working environment.
d. Labor relations
1) If a union strike occurs, it can upset production for days, weeks, or months.
2) This makes it difficult or impossible to fulfill customer orders.
e. Insufficient information management
1) It’s hard to make good business choices when you can’t find the information you need.
2) Disorganized files and out-of-date data can lead to bad decisions.
(Slide 10)
C. Strategic risks
1. Can have significant impact on the company’s long-term plans
2. Are much broader than the other types of risks we’ve discussed
3. Often concern the overall business environment
4. Some types include:
a. Reputation damage
1) Let’s say you’ve heard that a local restaurant doesn’t follow safe hygiene practices and, as a result, several people have gotten sick after eating its food.
2) Whether this is true or just a rumor, you’re not likely to eat there again, right?
3) This kind of negative publicity can make a business lose money or even go under.
4) Or, consider a business whose owners commit fraud and bilk investors out of
thousands of dollars.
5) Even if new owners attempt to keep the company going, typically the reputation
damage is too great to overcome.
b. Competition
1) If you own a toy company and your competitor introduces a new toy that every
kid wants, you have two options.
a) You can introduce a new, better toy.
b) You can lower your prices.
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DISCUSSION GUIDE (Obj. A, cont’d)
2) Developing, producing, and marketing a new toy can be a significant expense,
and lower prices can result in lower profits.
3) Either way, you run the risk of losing out to your competitor.
c. Obsolescence
1) How many brick-and-mortar stores in your city sell CDs?
2) Probably not as many as did 15 years ago.
3) Advances in technology, including the iPod and downloadable music, have made
CDs a thing of the past for a lot of people.
4) That’s the effect of obsolescence—the fading away that occurs as new products
or processes are introduced.
5) These introductions are often influenced by technology.
6) If a business can’t keep up, its days are numbered.
DISCUSSION #5: Ask students to think of other examples of businesses or products affected by obsolescence.
d. Regulatory and political issues
1) Every business is influenced by the government in some way.
2) Revenues—and profits—are affected by what governments require.
3) Companies often have to invest time and money to comply with tax standards,
environmental regulations, employee protection laws, and many other government guidelines.
4) Example:
a) If the Food and Drug Administration (FDA) bans the sale of a specific medicine, companies that manufacture that medicine would have to quickly
adapt.
b) If they didn’t, they’d run the risk of suffering financially.
e. Changing customer needs
1) What customers want today may not be what customers want tomorrow.
2) Businesses need to keep up with changing needs.
3) Think about the changes in styles of clothing from year to year.
4) If a clothing manufacturer doesn’t pay attention to what’s in fashion, it can be left behind.
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DISCUSSION GUIDE (Obj. A, cont’d)
DISCUSSION #6: Ask students to identify some fashions that are in style right
now. How do these fashions compare to previous fashions?
(Slide 11)
D. Financial risks
1. Financial risks are possible events or situations that directly influence a company’s cash flow.
2. Businesses face both external and internal financial risks.
a. External
1) External risks can’t be controlled.
2) Inflation is an external financial risk.
a) It occurs when the prices of goods and services rise.
b) Inflation can make it hard for businesses to afford the supplies they need.
c) It also results in decreased spending power.
d) Customers can’t afford to buy as much, making a company’s profits go down.
3) Interest rate fluctuations can be a financial risk, as well.
4) If interest rates are high, businesses often can’t afford to borrow money.
5) Some external financial risks can actually help a company.
a) When the value of the U.S. dollar increases, items purchased from overseas
suppliers will cost less.
b) The flipside of this is that when the value of the U.S. dollar decreases, overseas goods become more expensive.
b. Internal
1) Internal risks are controlled by the business.
2) Consider a business’s budgets.
a) If a company is not honest and thorough, the budget won’t be very helpful.
b) If a company is too optimistic about the earnings it expects or underestimates its costs in its budget, it can find itself without enough cash to cover its
expenses.
E. It’s important to note that business classifications overlap, and sometimes a business risk fits into more than one category.
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DISCUSSION GUIDE (Obj. A, cont’d)
F. Example:
1. An incompetent employee is an operational risk.
2. S/He may do a company’s accounting incorrectly (a financial risk).
3. This could result in a violation of a government regulation (a strategic risk).
(Slide 12)
•
Distinguishing between pure risks and speculative risks
A. All business risks—regardless of type—can be put into two categories: pure risks or
speculative risks.
1. With pure risk, there are two possibilities—loss or no loss.
a. Either something bad happens or nothing happens.
b. Hazard risks and operational risks are considered pure risks.
c. Example:
1) A tornado could strike your building and damage it.
2) Or, your building may never be hit by a tornado at all and suffer no damage.
3) In this situation, you’re faced with damage (loss) or no damage at all (no loss).
4) There’s no possibility of a gain in a pure risk situation.
d. Pure risks are considered insurable risks, meaning that businesses are able to take
out insurance policies against them.
1) A business can take out insurance against dishonest employees (referred to as
fidelity insurance)
2) Or, it can get auto insurance to protect company vehicles.
2. Speculative risks bring the possibility of loss, no change, or gain.
a. These risks encompass strategic and financial risks.
b. Think about opening your own restaurant.
1) You might earn money.
2) You might just break even.
3) You might go totally bankrupt.
c. Buying shares on the stock market is also a speculative risk.
1) If you invest $1,000, you may earn a return.
2) You may earn nothing.
3) You could even lose your investment.
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DISCUSSION GUIDE (Obj. A, cont’d)
d. Unlike pure risks, speculative risks are not insurable.
1) In other words, because the risks are unpredictable, companies cannot take out
insurance to protect themselves.
2) For example, a company can’t purchase insurance to protect itself against its product becoming obsolete.
OBJECTIVE B (Slide 13)
•
Businesses go forward with a risky action if it’s worth the risk.
A. Imagine your town’s been hit by a massive snowstorm and the roads are in terrible
condition.
B. Would you drive to the movie theatre?
C. Probably not—you don’t want to get in an accident.
D. But, if you have an emergency, you’d probably attempt the drive to the hospital, even on dangerous roads.
E. In others words, you’re willing to do something risky (in this case, drive on bad roads) because you think it’s worth the risk.
F. Businesses do the same thing.
1. They consider if the actions they want to take are worth more to them than the
possibility of loss or failure.
2. If so, they proceed.
(Slide 14)
•
When businesses proceed with a risky action, they handle the risks involved in one of four
basic ways:
(Slide 15)
A. Avoiding risk
1. Sometimes, the best way to handle a risk is to simply avoid it.
2. This is the first and best way for a business to stay out of trouble.
3. Example:
a. If the owners of a business fly on an airplane that crashes, the business loses its
owners.
b. If the owners do not fly at all, the business avoids the plane-crash risk altogether.
4. A risk not encountered presents no danger.
5. However, if a business were to avoid every risk, it would have a very difficult time
succeeding.
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DISCUSSION GUIDE (Obj. B, cont’d)
DISCUSSION #7: Ask students to share other business risks they think companies
can avoid.
(Slide 16)
B. Preventing/Controlling risk
1. Sometimes, a risk that cannot be avoided can be prevented or controlled.
2. When businesses identify a risk they face, they often take measures to prevent or
reduce that risk.
3. You see this in how businesses deal with things such as:
a. Safety
1) With safety, common sense procedures really help.
2) No business wants its customers or employees to get injured.
3) Safety procedures are an especially important way to reduce that risk.
4) Businesses try to keep their hallways clear so that people don’t trip.
5) They remove known hazards, inspect equipment regularly, and provide safety
training for employees.
6) For fire risks, businesses install fire extinguishers, store flammable materials in
appropriate places, and instruct employees in emergency procedures.
b. Security
1) Businesses install security cameras, deadbolt locks, security bars, and burglar
alarms.
a) To secure their buildings (and products)
b) To prevent or reduce the possibility of break-ins
2) They also hire guards to protect against shoplifters and dishonest employees.
c. Employee incompetence
1) To reduce employee incompetence, it’s best to take action before the employee
is even hired.
2) Businesses carefully screen all applicants to weed out incompetent workers.
3) Then they provide effective employee training to those who make the cut.
d. Product selection
1) To offer the right products in the appropriate quantities, businesses need to
know (ahead of time) what customers want to buy.
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DISCUSSION GUIDE (Obj. B, cont’d)
2) Once they know what to provide, businesses need to assist customers in determining which product will best suit their needs.
3) This can help reduce product returns, an expensive risk that most companies
want to avoid.
4) When a product is returned, not only is the money refunded to the customer,
but the company must also pay to repackage, restock, and resell the item.
e. Credit
1) Businesses carefully screen all credit applications and follow up on past-due
accounts.
2) This helps them control the reckless use of credit accounts and pursue the payments owed to them.
f. Changes
1) To keep informed, businesses pay attention to what is happening in the economy, community, and industry—with population trends, political events, and
competition.
2) Businesses that anticipate changes are better able to reduce the risks involved in
adapting to change.
DISCUSSION #8: Ask students how they think changes can be risky to a business.
g. Weather extremes
1) Many businesses protect themselves (as much as possible) from weather
extremes that can damage company property.
2) Whether it’s a hurricane, flood, or tornado, smart businesses keep their products and information safe and make sure their employees are out of harm’s way.
(Slide 17)
C. Transferring risk
1. Certain risks may be reduced or eliminated by transferring (or shifting) those risks to
another person or business.
2. This option enables businesses to move forward with their decisions without bearing
the risks involved.
3. These businesses use a risk-transfer method, such as:
a. Entering into a contract
1) Contracts are agreements between two or more people or businesses.
2) One party provides the product, and the other pays something in return.
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DISCUSSION GUIDE (Obj. B, cont’d)
3) Examples:
a) A builder is hired to construct a building for a particular price.
b) A web designer is hired to design a new website for an hourly fee.
4) Common contractual agreements for transferring risk are:
a) Guarantees/Warranties
i) The seller or manufacturer sometimes makes a promise concerning the
performance or quality of a product.
ii) With a warranty, the promise is to repair or replace a faulty product.
iii) With a guarantee, the promise is to give customers their money back if
something goes wrong.
iv) You might receive a warranty when buying a car or a computer.
v) Guarantees are relatively common in everyday life—whether you’re buying clothes or fast food, many businesses promise to give your money
back if you aren’t satisfied.
b) Surety bonds
i) Businesses can protect themselves from breaches of contract by requiring the contracted company to purchase a surety bond.
ii) Then, if the contract is broken, the surety bond would be paid to the
company suffering the loss.
iii) Surety bonds are commonly used in the construction industry.
iv) Imagine that a business wants to build a new office.
v) It would probably require its contracted construction company to
purchase a surety bond.
vi) That way, if the construction company doesn’t complete the project in the manner specified in the contract, the business would get money from
the surety bond to cover its loss.
c) Rental/Lease agreements
i) If you don’t want to commit to buying a car, you might decide to lease one.
ii) Many businesses do the same thing when it comes to equipment, buildings, or real estate.
iii) This is an especially good option for a start-up business that hasn’t yet achieved financial stability.
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DISCUSSION GUIDE (Obj. B, cont’d)
b. Selecting a particular form of business ownership
1) How the business is organized can affect the risks that business owners bear.
2) Three basic forms of business ownership are:
a) Sole proprietorship—the owner (or proprietor) bears all business risks alone
b) Partnership—the partners share all the business risks, together
c) Corporation—the owners, as shareholders, limit their losses (risks) to what
they’ve invested in the corporation
c. Purchasing insurance
1) Insurance is probably the most frequently used option for transferring risk.
2) Every year, businesses spend a lot of money on insurance to protect themselves
from the risk of damage or loss.
DISCUSSION #9: Ask students to share reasons why they personally need insurance. How does that relate to what businesses need?
3) Some examples of insurance coverage include:
a) Property
i) Businesses buy property insurance to protect against property
destruction.
ii) Merchandise, business fixtures, and equipment can be lost or damaged
by theft or fire, for example.
b) Transportation
i) A business that transports and stores goods may purchase transportation
insurance.
ii) The risk of loss or damage is covered while goods are in transit or being
stored.
c) Robbery or theft
i) Businesses can buy specific robbery or theft insurance.
ii) For businesses that want to protect against the risk of employees’ stealing from the business, there are fidelity bonds that cover employees who
handle money and other valuables.
d) Personal injury
i) Losses from accidents or injuries (occurring on business property) can be
covered by liability insurance.
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DISCUSSION GUIDE (Obj. B, cont’d)
(Slide 18)
D. Retaining risk
1. In some instances, businesses may keep, or retain, the risk involved in doing business.
2. A business may do nothing to reduce or eliminate a risk because the business:
a. Is unaware of the risk
1) Sometimes, risks are not obvious.
2) A business that does not know that an employee is stealing is not going to
address the issue.
3) Keeping the dishonest employee on the payroll is risky, but the business doesn’t know it.
b. Underestimates the risk
1) Other times, a business knows about a risk but doesn’t evaluate it correctly.
2) If a company thinks a large risk is actually small, this can lead to problems!
3) Example:
a) A company expects the parts of a machine to last for 10 years, but the parts
actually wear out after five.
b) The company must pay for parts earlier than planned.
c. Feels that the risk is small
1) If a risk is financially small, businesses will often choose to absorb it.
2) You can see this when a bookstore puts its shelves of clearance books outside on
the sidewalk.
3) It could rain, or someone could steal a book, but those risks bring minimal losses
when inexpensive items are involved.
DISCUSSION #10: Ask students to share other situations in which they think a
business would choose to absorb risk—e.g., when a customer is displeased.
d. Believes there’s a chance of return
1) A business is sometimes willing to retain a risk for the potential of making a
profit—such as through a business investment.
2) Businesses often invest company money in real estate or stocks with the hope of
making a significant return.
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DISCUSSION GUIDE (cont’d)
(Slide 19)
•
Make It Pay
A. Your last visit to a theme park may have been exciting, but did you think about the
risks the park faces every day?
1. Employees could make mistakes.
2. Visitors could break safety rules.
3. Machinery could break down.
4. Rides could cause serious injuries.
B. Identify three risks you think the theme park could face.
C. Recommend (for each) whether the park should avoid, prevent/control, transfer,
or retain the risk.
(Slide 20)
•
The Gray Zone
A. The responsibility for business risk is not always a clear issue.
B. Example of a construction company:
1. Sets up a safe working environment at a building site
2. Trains its workers in taking appropriate safety precautions
C. When Bob (a construction worker) still falls from the scaffolding, whose fault is it?
1. You might say, “The construction company’s.”
2. The dangers of working on a building project are business risks.
D. If you knew, however, that the construction worker had ducked under a barrier to jump
from one scaffolding platform to another, would your answer change?
1. Would you still lay the blame on the company?
2. Or, would you say that the company should not be held responsible for this worker’s actions?
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DIRECTIONS TO THE INSTRUCTOR
Individual Activities
These activities are designed to reinforce individual student understanding of the factors affecting
business risk. Read the two exercises, and select the one that better meets the individual’s needs.
1. Duplicate the handout entitled Risk Match-Up found on page 20. When the student has
completed the activity, give him/her a copy of the answer guide found on page 21.
2. Duplicate the handout entitled Responding to Risk found on page 22. When the student has
completed the activity, give him/her a copy of the answer guide found on page 23.
Group Activities
These activities are designed to provide group reinforcement and understanding of the factors
affecting business risk. Read the two activities, and select the one better suited to the group’s needs.
1. Preparation: Obtain Internet access for the students.
Process: Divide the class into groups of three or four students each. Ask each group to conduct online research at the U.S. Department of Labor’s website for the Occupational Safety
and Health Administration (http://www.osha.gov). Specifically, ask the groups to read three
of the real stories of teenage workers who were injured on the job
(http://www.osha.gov/youngworkers/stories.html). Have the students discuss these stories
within their groups and recommend how the businesses should handle similar risks in the
future. Ask one person from each group to share its selections and suggestions.
2. Preparation: No advance preparation is needed for this activity.
Process: Divide the students into small groups of three or four students each. Ask the
groups to brainstorm a number of risks (at least 10) they think their school might face—and
write them down. Then, have the groups determine which risks they think would also apply
to other schools in their area. (If their school is a public school, compare its risks to those of
a private school. If a high school, compare to a middle school, etc.) Next, have the groups
determine how their school should handle the risks it faces—by avoiding, preventing/
controlling, transferring, and/or retaining. At the end of the discussion period, ask one person from each group to briefly summarize the group’s ideas. Discuss with the class the similarities and differences of the answers given.
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Lose, Win, or Draw 19
RISK MATCH-UP
Directions: Match the term with the associated phrase. Write the letter of your response in the
space provided. When finished, ask your instructor for a copy of the answer guide.
A. Operational risk
G. Financial risk
B. Pure risk
H. Strategic risk
C. Avoiding (risk)
I. Retaining (risk)
D. Obsolescence
J. Competition
E. Transferring (risk)
K. Hazard risk
F. Speculative risk
L. Preventing/controlling (risk)
____ 1. Tornadoes, earthquakes, and blizzards
____ 2. Possibility of loss, no change, or gain
____ 3. Shifting to another person/business
____ 4. Inflation and interest rate fluctuations
____ 5. Keeping away from
____ 6. Keeping for oneself
____ 7. Possibility of loss or no loss
____ 8. Human errors
____ 9. Taking action to reduce
____ 10. Reputation damage
____ 11. Fading away over time
____ 12. Rivalry for the sale of goods or services
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 20
RISK MATCH-UP—ANSWER GUIDE
A. Operational risk
G. Financial risk
B. Pure risk
H. Strategic risk
C. Avoiding (risk)
I. Retaining (risk)
D. Obsolescence
J. Competition
E. Transferring (risk)
K. Hazard risk
F. Speculative risk
L. Preventing/controlling (risk)
__ K__
1. Tornadoes, earthquakes, and blizzards
__ F__
2. Possibility of loss, no change, or gain
__ E__
3. Shifting to another person/business
__ G__
4. Inflation and interest rate fluctuation
__ C__
5. Keeping away from
__ I__
6. Keeping for oneself
__ B__
7. Possibility of loss or no loss
__ A__
8. Human errors
__ L__
9. Taking action to reduce
__ H__ 10. Reputation damage
__ D_
11. Fading away over time
__ J__ 12. Rivalry for the sale of goods or services
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 21
RESPONDING TO RISK
Directions: Read the scenario, and answer the questions on a separate sheet of paper.
When finished, ask your instructor for a copy of the answer guide.
Scenario
Boxes-and-Stuff, a box-packing and mailing company in a small town along the Gulf Coast,
lost a key employee last month when its accounting manager was fired for embezzling company money.
Now, the owners of Boxes-and-Stuff, Jerome and Natalia, need to find another accounting
manager—fast. But as they hurry to fill the position, they don’t want to select a dishonest or incompetent employee. They need to be cautious.
Fortunately, the police chief found the embezzled funds in a bank account set up by the
former employee, and authorized the return of the money. This means that Boxes-and-Stuff
will not lose the embezzled amount, after all.
However, Jerome and Natalia are already thinking of ways to protect their company from
other risks. They want to be prepared for risky situations in the future.
Questions
1. Which risks do you think Boxes-and-Stuff might face?
2. Are these risks pure (insurable) or speculative (not insurable)?
3. How do you think the company should handle the risks you’ve identified?
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 22
RESPONDING TO RISK—ANSWER GUIDE
1. Which risks do you think Boxes-and-Stuff might face?
Answers will vary. Students may feel that the hazard risk of theft could be an issue as employees continue to handle company money. Another hazard risk could include a hurricane or
earthquake that causes damage. But, the most likely hazard risk is flooding, due to the company’s coastal location. Students may also feel that the operational risk of incompetence could present itself, too. Strategic risks include the influence of competitors’ actions and the
possible obsolescence of the “box-packing and mailing” industry.
2. Are these risks pure (insurable) or speculative (not insurable)?
Answers will vary according to students’ answers for question one. Theft can be insured because it’s a pure risk. The competence level of employees, however, is a speculative risk. It
may or may not bring the company value—and cannot be insured. Hazard risks, such as
earthquakes, wind, or flood, are pure and can be insured. Strategic risks are speculative and
may or may not bring the company value. As such, they cannot be insured.
3. How do you think the company should handle the risks you’ve identified? Answers will vary according to students’ answers for questions one and two. Students should
mention that avoiding risk is the first and best option, whenever possible. Appropriate procedures will help the company prevent/control certain risks—such as turning off space heaters
to prevent the risk of a fire and storing important documents in another location to control
the damage resulting from a fire, hurricane or flood. All insurable risks should be covered by
insurance, a method of transferring risk. For speculative risks, the company may want to retain certain risks, if there is a possibility of making a profit.
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 23
TOTAL RECALL KEY
OBJECTIVE A (Page 5 of student LAP)
1. Business risk is the possibility of loss (failure) or gain (success) inherent in conducting business. With free enterprise, businesspeople have the right to risk everything. They may lose it
all, or they just may make a fortune. Taking risks, even if those risks can result in loss, is the
only way for a business to be successful. Hiring new employees, introducing new products,
and buying new equipment are all risks that businesspeople have to take from time to time.
However, that doesn’t mean taking every risk is a good idea. Ultimately, effectively managing
risk is what separates successful businesses from unsuccessful ones.
2. Classifications of business risk:
a. Hazard risks are potential events or situations that can cause injury or harm to people,
property, or the environment. Most hazard risks can only cause business losses, not
gains. Hazard risks include natural disasters, property damage, employee issues, customer issues, and crime.
b. Operational risks are the possible events and situations that can result from employee
actions, core processes, and daily business activities. As long as your business deals with
people, you’ll always have some degree of operational risk. Operational risks are often
things that can go wrong in the short term. They include human errors, production problems, leadership problems, labor relations, and insufficient information management.
c. Strategic risks can have significant impact on the company’s long-term plans. Strategic
risks are much broader than the other types of risks, and they often concern the overall
business environment. Some types include reputation damage, competition, obsolescence, regulatory and political issues, and changing customer needs.
d. Financial risks are possible events or situations that directly influence a company’s cash flow. Businesses face both external and internal financial risks. External risks are those
that can’t be controlled by the business, such as inflation and interest rate fluctuations.
Internal risks are those that can be controlled by the business, such as dishonest budgeting, inaccurate financial data, and inadequate accounting processes.
3. Pure risks bring the possibility of loss or no loss—such as a tornado that may or may not strike
your building. Speculative risks bring the possibility of loss, no change, or gain—such as opening a business that may earn money, break even, or go bankrupt. Businesses can buy insurance for pure risks, but insurance companies do not insure speculative risks.
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
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TOTAL RECALL KEY (cont’d)
OBJECTIVE B (Page 8 of student LAP)
1. Businesses avoid risk by not doing the risky activity. This is the first and best way for businesses to stay out of trouble. Not flying, for example, brings zero plane-crash risk.
2. Businesses prevent/control risk by taking measures to prevent or reduce risk. They secure
their buildings, screen credit applicants, and instruct employees in emergency procedures, for
example.
3. Businesses transfer risk by shifting risk to another person or business. This helps businesses
move forward with an activity without bearing the risk involved. These businesses use a risktransfer method, such as entering into a contract, selecting a particular form of business
ownership, or purchasing insurance.
4. In some instances, businesses keep, or retain, the risk involved in doing business. These businesses do nothing to reduce or eliminate a specific risk because they:
a.
b.
c.
d.
Are unaware of the risk
Underestimate the risk
Feel that the risk is small (in monetary terms)
Believe there is a chance of return
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PRACTICE TEST
Directions: Answer each of the following questions. Use a separate sheet of paper to record your
responses.
OBJECTIVE A
1. Describe business risk.
2. Discuss each of the following classifications of business risk:
a.
b.
c.
d.
(10 points; 2 points each)
Human errors
Production problems
Leadership problems
Labor relations
Insufficient information management
5. Explain each of the following types of strategic risks:
a.
b.
c.
d.
e.
(10 points; 2 points each)
Natural disasters
Property damage
Employee issues
Customer issues
Crime
4. Explain the following most common types of operational risks:
a.
b.
c.
d.
e.
(8 points; 2 points each)
Hazard risks
Operational risks
Strategic risks
Financial risks
3. Explain each of the following types of hazard risk:
a.
b.
c.
d.
e.
(2 points)
(10 points; 2 points each)
Reputation damage
Competition
Obsolescence
Regulatory and political issues
Changing customer needs
6. Explain each of the following types of financial risks:
(4 points; 2 points each)
a. External
b. Internal
7. Distinguish between pure and speculative risks.
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
(2 points)
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PRACTICE TEST (cont’d)
OBJECTIVE B
8. Explain the four methods of handling business risk:
a.
b.
c.
d.
(12 points; 3 points each)
Avoiding
Preventing/Controlling
Transferring
Retaining
9. Describe preventing/controlling risk in relation to how businesses deal with each of the
following:
(21 points; 3 points each)
a.
b.
c.
d.
e.
f.
g.
Safety
Security
Employee incompetence
Product selection
Credit
Changes
Weather extremes
10. Explain transferring risk with these methods:
(9 points; 3 points each)
a. Contractual agreements
b. Business organization
c. Insurance
11. Discuss retaining business risk in relation to these situations:
a.
b.
c.
d.
(12 points; 3 points each)
A business is unaware of the risk.
A business underestimates the risk.
A business feels that the risk is small.
A business believes there is a chance of return.
Suggested Criterion Level: 80 points
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 27
PRACTICE TEST KEY
OBJECTIVE A
1. Business risk is the possibility of loss (failure) or gain (success) inherent in conducting business. Businesspeople have the right to risk everything. They may lose it all, or they just may
make a fortune. Taking risks, even if those risks can result in loss, is the only way for a business to be successful.
(2 points)
2. The classifications of business risk are hazard risks, operational risks, strategic risks, and
financial risks.
(8 points; 2 points each)
a. Hazard risks are potential events or situations that can cause injury or harm to people,
property, or the environment. Most hazard risks can only cause business losses, not
gains.
b. Operational risks are the possible events and situations that can result from employee
actions, core processes, and daily business activities. Operational risks are often things
that can go wrong in the short term.
c. Strategic risks are broad and often concern the overall business environment. They can
have significant impact on the company’s long-term plans.
d. Financial risks are possible events or situations that directly influence a company’s cash flow.
3. The types of hazard risk are explained as follows:
(10 points; 2 points each)
a. Natural disasters. Tornadoes, earthquakes, floods, blizzards, hurricanes, and other natural phenomena are considered hazard risks. These disasters can cause significant damage
to a business. They can even wipe out entire buildings—and years of hard work along
with them.
b. Property damage. A significant form of property damage is fire, which can destroy buildings as well as important paperwork and equipment. Other types of property damage
occur naturally—for example, an old roof may begin to leak, which will cost money to
repair (plus the additional financial burden of replacing any water-damaged items inside
the building). Damage can also occur from human activity, such as vandals spray painting
graffiti on the side of a business.
c. Employee issues. Inadequate safety equipment or hazardous working conditions can
cause injuries that may be costly for businesses. Injuries can result in time off, lost money, or possibly even lawsuits. An employee who’s been harassed or discriminated against
may sue the company as well.
d. Customer issues. If a company forgets to salt its sidewalk and a customer slips and falls,
that customer may sue the company. Or, if an employee says something rude or
inappropriate to a customer, that customer may leave and never come back.
e. Crime. Whether it’s robbery, check fraud, an employee pocketing money, or a customer stealing merchandise, crime is a hazard risk for every company.
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PRACTICE TEST KEY (cont’d)
4. Operational risks can be costly to a business. The most common types of operational risks
are:
(10 points; 2 points each)
a. Human errors. If employees haven’t been properly trained, or if they simply can’t do their jobs correctly or effectively, they are operational risks. Mistakes caused by incompetent or careless employees can cost a business serious money.
b. Production problems. Problems with core processes can lose customers and profit. For
example, if a manufacturing plant can’t obtain needed parts from a supplier or if one of
its machines breaks, it might not be able to get products to its customers on time.
c. Leadership problems. Company leaders are just as capable of making mistakes as
employees who are lower on the totem pole. If a leader makes bad decisions or isn’t trusted by employees, it can be hard to maintain a productive and profitable working
environment.
d. Labor relations. If a union strike occurs, it can upset production for days, weeks, or
months, making it difficult or impossible to fulfill customer orders.
e. Insufficient information management. It’s hard to make good business choices when you can’t find the information you need. Disorganized files and out-of-date data can lead to
bad decisions.
5. The following are common types of strategic risks:
(10 points; 2 points each)
a. Reputation damage. Negative publicity (such as rumors or bad press) can make a business lose money or even go under. Reputation damage can also occur when business
owners commit fraud. Even if new owners attempt to keep the company going, typically
the reputation damage is too great to overcome.
b. Competition. When a competitor introduces a new product, a business has two choices.
Either it can introduce a new, better product or lower its prices. Developing, producing,
and marketing a new product can be a significant expense, and lower prices can result in
lower profits. Either way, a business runs the risk of losing out to its competitor.
c. Obsolescence. Some products fade away as new products or processes are introduced.
These introductions are often influenced by technology. If a business can’t keep up, its days are numbered.
d. Regulatory and political issues. Every business is influenced by the government in some
way. Revenues—and profits—are affected by what governments require. Companies
often have to invest time and money to comply with tax standards, environmental regulations, employee protection laws, and many other government guidelines.
e. Changing customer needs. What customers want today may not be what customers want
tomorrow, and businesses need to keep up with changing needs. Think about the changes in styles of clothing from year to year. If a clothing manufacturer doesn’t pay attention
to what’s in fashion, it can be left behind.
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PRACTICE TEST KEY (cont’d)
6. The types of financial risk can be explained as follows:
(4 points; 2 points each)
a. External. Businesses can’t control many financial risks, including inflation and interest rate fluctuations. Inflation, which occurs when the prices of goods and services rise, can
make it hard for businesses to afford the supplies they need. Inflation also results in
decreased spending power; in other words, customers can’t afford to buy as much, making a company’s profits go down. Interest rate fluctuations can be a financial risk, as
well—if interest rates are high, businesses often can’t afford to borrow money. Some external risks can actually help a business. For example, when the value of the U.S. dollar
increases, overseas goods become less expensive.
b. Internal. Internal financial risks are those risks that are controlled by the business.
Consider a business’s budget—if a company is not honest and thorough, the budget
won’t be very helpful. For example, if a company is too optimistic about the earnings it
expects or underestimates its costs in its budget, it can find itself without enough cash to
cover its expenses. Other internal financial risks include inaccurate financial data and
inadequate accounting processes.
7. All business risks are either pure risks or speculative risks. Pure risks bring the possibility of
loss or no loss, and they can be insured. Speculative risks, which bring the possibility of loss,
no change, or gain, cannot be insured.
(2 points)
OBJECTIVE B
8. The four methods of handling business risk are explained as follows:
(12 points; 3 points each)
a. Avoiding. Sometimes, the best way to handle a risk is to simply avoid it. This is the first
and best way for a business to stay out of trouble. If the business owners do not participate in the risky activity, the risk will not be an issue for the company. A risk not encountered presents no danger.
b. Preventing/Controlling. Risks that cannot be avoided can sometimes be prevented or
controlled. First, a business identifies the risk. Then, it takes measures to prevent or
reduce that risk.
c. Transferring. Certain risks may be reduced or eliminated by transferring (or shifting)
those risks to another person or business. This option enables businesses to move
forward with their decisions without bearing the risks involved.
d. Retaining. Businesses may keep, or retain, the risk involved in doing business. In these
cases, businesses do nothing to reduce or eliminate a risk.
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PRACTICE TEST KEY (cont’d)
9. Preventing/Controlling risk is described in relation to how businesses deal with the following:
(21 points; 3 points each)
a. Safety. To ensure a safe environment, businesses keep their hallways clear, remove
known hazards, inspect equipment regularly, and provide safety training for employees.
b. Security. Businesses install security cameras, deadbolt locks, security bars, and burglar
alarms to prevent or reduce the possibility of break-ins. They also hire guards to protect
against shoplifters and dishonest employees.
c. Employee incompetence. Businesses carefully screen all applicants to weed out incompetent workers and then provide effective employee training to those who make the cut.
d. Product selection. Businesses need to know (ahead of time) what customers want to buy.
Once they know what to provide, businesses can assist customers in determining which
product will best suit their needs. This can help reduce product returns, an expensive risk
that most companies want to avoid. When a product is returned, not only is the money
refunded to the customer, but the company must also pay to repackage, restock, and
resell the item.
e. Credit. Businesses carefully screen all credit applications and follow up on past-due
accounts. This helps them control the reckless use of credit accounts and pursue the
payments owed to them.
f. Changes. Businesses pay attention to what is happening in the economy, community,
and industry—with population trends, political events, and competition. Businesses that
anticipate changes are better able to reduce the risks involved in adapting to change.
g. Weather extremes. Many businesses protect themselves (as much as possible) from
weather extremes that can damage company property. Whether it’s a hurricane, flood, or tornado, smart businesses keep their products and information safe and make sure
their employees are out of harm’s way.
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PRACTICE TEST KEY (cont’d)
10. Transferring risk is explained in relation to these methods:
(9 points; 3 points each)
a. Contractual agreements. Contracts are agreements between two or more people or
businesses. One party provides the product, and the other pays something in return.
Common contractual agreements for transferring risk are guarantees/warranties, surety
bonds, and rental/lease agreements.
b. Business organization. How the business is organized can affect the risks that business
owners bear. Three basic forms of business ownership are sole proprietorship (in which
the owner bears all business risks alone), partnership (in which the partners share all
business risks, together), and corporation (in which the owners are shareholders and can
limit their losses to what they’ve invested in the business).
c. Insurance. Insurance is probably the most frequently used option for transferring risk.
Examples of insurance coverage include property insurance (to protect against property
destruction), transportation insurance (to protect goods while in transit), robbery or
theft insurance (to protect against losing goods to thieves), and personal injury insurance
(to protect the business from losses due to accidents or injuries occurring on business
property).
11. Retaining risk is discussed in relation to these situations:
(12 points; 3 points each)
a. A business is unaware of the risk. If a business does not know about a risk, it will retain
(or keep) that risk. An example is keeping an employee on the payroll, although the
employee is secretly stealing from the company.
b. A business underestimates the risk. Sometimes, a business knows about a risk but does
not evaluate it correctly. An example is thinking that the parts of a machine will wear out
in 10 years, but the actual wear-out time is five years.
c. A business feels that the risk is small. If a risk is financially small, businesses will often
choose to absorb the risk. An example is a bookstore’s setting shelves of books out on the sidewalk for a clearance sale. It could rain, or someone could steal a book, but those
risks bring minimal losses.
d. A business believes there is a chance of return. A business is sometimes willing to retain
a risk for the potential of making a profit, such as through a business investment.
Suggested Criterion Level: 80 points
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 32
POSTTEST
Directions: Identify the correct answer to each of the following questions. Use a separate sheet of
paper to record your responses.
OBJECTIVE A
1. People who go into business know that the business may not succeed. This possibility is
referred to as business
(5 points)
a. risk.
b. retention.
c. downsizing.
d. economizing.
2. The general classifications of business risks are
a.
b.
c.
d.
(5 points)
competitive, strategic, financial, and operational.
production, hazard, operational, and strategic.
hazard, operational, strategic, and financial.
strategic, production, competitive, and hazard.
3. A hurricane that destroys a business is an example of a(n) __________ risk.
a. operational
b. financial
(5 points)
c. strategic
d. hazard
4. A garden store customer tripped over a plant, fell, and sued the store for damages. This is an
example of a(n) __________ risk.
(5 points)
a. strategic
b. operational
c. hazard
d. financial
5. A union strike that stops production at a manufacturing plant is a(n) __________ risk.
(5 points)
a. financial
b. operational
c. strategic
d. hazard
6. What category of business risk includes production problems and incompetent employees?
(5 points)
a. Operational
c. Strategic
b. Hazard
d. Financial
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
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POSTTEST (cont’d)
7. When a rival’s product on the market reduces sales of your company’s product, your company is experiencing strategic risk caused by
(5 points)
a. regulatory and political issues.
b. changing customer needs.
c. obsolescence.
d. competition.
8. Financial loss from investing time and money to comply with accounting standards is an example of which strategic risk:
(5 points)
a. Reputation damage
b. Regulatory and political issues
c. Changing customer needs
d. Obsolescence
9. Which of the following is a pure business risk:
a. Robbery
b. Obsolescence
(5 points)
c. Competition
d. Inflation
10. Which of the following is an example of a business risk that cannot be covered by insurance:
(5 points)
a. Goods lost in transit
c. Increase in interest rates
b. Destruction of building by fire
d. Injury of employee on the job
OBJECTIVE B
11. Management decides to hold its annual meeting in one U.S. city rather than another because of
crime in that city. This is an example of __________ the risk.
(5 points)
a. retaining
b. preventing or controlling
c. avoiding
d. transferring
12. Having well-planned buildings and providing effective employee training are ways that a business can __________ business risks.
(5 points)
a. transfer
b. insure against
c. retain
d. prevent or control
13. Carefully selecting goods or services to sell is an example of handling business risks by
__________ the risk.
(5 points)
a. avoiding
b. transferring
c. retaining
d. preventing or controlling
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
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POSTTEST (cont’d)
14. Careful screening of credit customers is an example of handling business risks through
(5 points)
a. prevention.
c. training.
b. management.
d. retention.
15. The act of reducing or removing risks by shifting the risk factor to another person or business is
referred to as __________ risk.
(5 points)
a. retaining
b. transferring
c. avoiding
d. controlling
16. Contractual agreements such as guarantees, surety bonds, and leases are examples of business
risks being handled through
(5 points)
a. management.
b. transfer.
c. avoidance.
d. prevention or control.
17. Requiring a contractor to purchase a surety bond is an example of handling business risk by
__________ the risk.
(5 points)
a. transferring
b. retaining
c. reducing
d. preventing
18. Businesses can protect themselves from the risk associated with lost shipments by
a. inspecting shipments of goods.
b. purchasing transportation insurance.
(5 points)
c. training receiving personnel.
d. selecting resale items carefully.
19. When a business keeps a risk because management is unaware of it, the business is _________
the risk.
(5 points)
a. avoiding
b. preventing or controlling
c. retaining
d. transferring
20. If a risk is small in terms of money, a business may decide to __________ the risk.
a. transfer
b. avoid
(5 points)
c. control
d. retain
Suggested Criterion Level: 80 points
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 35
POSTTEST KEY
OBJECTIVE A
1. a Risk. Business risk is the possibility of loss (failure) or gain (success) inherent in conducting
business. People who go into business know they are taking a chance. They may make a
fortune or lose everything. Downsizing reduces the size of a business. Economizing is
deciding how scarce resources will be used. Retention is the act of keeping or hanging on
to something.
(5 points)
2. c
Hazard, operational, strategic, and financial. All business risks could most likely be listed
under one of these general classifications. Competition is a strategic risk. Problems with
production are considered operational risks.
(5 points)
3. d Hazard. A hurricane is a natural disaster, which is one kind of hazard risk. Other natural
disasters include tornadoes, floods, and blizzards. Financial risks are possible events
or situations that directly influence a company’s cash flow, strategic risks often concern the overall business environment, and operational risks are the possible events and
situations that can result from employee actions, core processes, and daily business
activities.
(5 points)
4. c
Hazard. Hazard risks are potential events or situations that can cause injury or harm to
people, property, or the environment. In this case, the plant caused a customer to trip,
which led to an injury and a lawsuit. Strategic risks often concern the overall business
environment, operational risks are the possible events and situations that can result from
employee actions, core processes, and daily business activities, and financial risks are possible events or situations that directly influence a company’s cash flow.
(5 points)
5. b Operational. Labor relations are an operational risk. If a union strike occurs, it can upset
production for days, weeks, or months, making it difficult or impossible to fulfill customer
orders. Financial risks are possible events or situations that directly influence a company’s cash flow, strategic risks often concern the overall business environment, and hazard risks
are potential events or situations that can cause injury or harm to people, property, or the
environment.
(5 points)
6. a Operational. Production problems and incompetent employees are considered operational risks. Operational risks are the possible events and situations that can result from
employee actions, core processes, and daily business activities. Strategic risks often concern the overall business environment, financial risks are possible events or situations that
directly influence a company’s cash flow, and hazard risks are potential events or situations that can cause injury or harm to people, property, or the environment.
(5 points)
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POSTTEST KEY (cont’d)
7. d Competition. Competition can be a strategic risk to a business. The company in this situation may be forced to lower its prices or to change its product. Regulatory and political
issues include tax standards, environmental regulations, employee protection laws, and
many other government guidelines. Customer needs change quickly, and if businesses
don’t pay attention to this, they may be left behind. Obsolescence is the fading away that
occurs as new products or processes are introduced.
(5 points)
8. b Regulatory and political issues. Revenues and profits are affected by what governments
require. Companies often have to invest time and money to comply with tax standards,
environmental regulations, employee protection laws, and many other government guidelines. Financial loss from complying with accounting standards does not result from reputation damage, changing customer needs, or obsolescence.
(5 points)
9. a Robbery. A pure risk is one that carries the possibility of loss or no loss. Robbery is a pure
business risk that can be covered by insurance. Obsolescence, competition, and inflation
are speculative risks because they could bring gain.
(5 points)
10. c
Increase in interest rates. The increase/decrease of interest rates is an unpredictable
speculative risk that is not insurable. Destruction of buildings by fire, the loss of goods in
transit, and injury of employees on the job are all examples of pure, insurable risks.
(5 points)
OBJECTIVE B
11. c
Avoiding. The business is avoiding the dangers of criminal activity by eliminating the risk.
To retain risk is to keep it. Preventing or controlling risk is taking measures to prevent or
reduce the risk, which would not be possible in this case. Transferring risk is passing the
risk to someone else.
(5 points)
12. d Prevent or control. Both of the examples (having well-planned buildings and providing
effective employee training) involve planning that can help to prevent or control risk. Transferring risk involves passing the risk to someone else, often by purchasing insurance.
Retaining risk involves keeping it.
(5 points)
13. d Preventing or controlling. Making careful, wise choices of goods or services to sell is one
way management can prevent or control risks. Avoiding risk means not being exposed to
risk at all. Transferring risk is passing the risk to someone else. Retaining risk is keeping it.
(5 points)
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POSTTEST KEY (cont’d)
14. a Prevention. By carefully screening applications for credit, management can prevent nonpayment issues. Screening credit customers is not an example of training, which involves
teaching or developing a specific skill. Retention is the act of keeping or hanging on to
something. Management is the process of coordinating resources to accomplish an organization’s goals.
(5 points)
15. b Transferring. Three ways of transferring risk are through contractual agreements, business
organization, and insurance. Retaining risk is keeping it. Avoiding risk is taking measures to
eliminate the risk completely. Controlling risk is taking measures to reduce the risk.
(5 points)
16. b Transfer. Contractual agreements that pass part or all of a risk to someone else are examples of transferring the risk. Management transfers risk by signing a contract. Avoidance
involves completely eliminating the risk. Prevention or control involves attempting to
reduce the risk.
(5 points)
17. a Transferring. Requiring a contractor to purchase a surety bond is an example of transferring risk—shifting the risk to someone else. If the contract is not fulfilled as expected, the
surety bond is paid to the business that stands to lose. Retaining risk is keeping it. Reducing risk is preventing or controlling it. Preventing risk is taking measures to reduce the risk.
(5 points)
18. b Purchasing transportation insurance. A business can buy transportation insurance to cover the risk of loss or damage while goods are in transit or being stored. Selecting resale
items carefully helps to protect the business from economic risks such as changes in customer demand. Training receiving personnel and inspecting shipments of goods can help
prevent losses after shipments have been delivered.
(5 points)
19. c
Retaining. Sometimes management is unaware of a risk and keeps the risk—doing nothing
about it. Since management is unaware of the risk, it is not avoiding, preventing/
controlling, or transferring the risk. Avoiding risk means not being exposed to the risk at
all. Preventing/Controlling risk means taking measures to reduce the risk. Transferring risk
means passing the risk to someone else.
(5 points)
20. d Retain. If a risk is small in terms of money, a business may find that it’s less costly to retain
or keep the risk than to avoid, prevent/control, or transfer it. Avoiding risk means not
being exposed to risk at all. Preventing/Controlling risk is taking measures to reduce the
risk. Transferring risk is passing the risk to someone else.
(5 points)
Suggested Criterion Level: 80 points
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POSTTEST GRADER
Page 33
Page 34
7. d
1. a
Page 35
14. a
8. b
15. b
9. a
16. b
2. c
10. c
17. a
3. d
4. c
18. b
11. c
19. c
5. b
12. d
20. d
6. a
13. d
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GLOSSARY
1. BILK: Cheat, swindle, defraud
2. BUSINESS RISK: The possibility of loss (failure) or gain (success) inherent in conducting business
3. COMPETITION: The rivalry between two or more businesses to attract scarce customer dollars
4. CONTRACT: Agreement between two or more businesses or individuals stating that one party
is to do something in return for something provided by the other party
5. CORPORATION: A form of business ownership that is owned by stockholders who have
purchased units or shares of the company
6. DEMAND: The quantity of a good or service that buyers are ready to buy at a given price at a
particular time
7. EXTERNAL RISKS: Financial risks that a business cannot control, such as inflation and interest
rate fluctuations
8. FIDELITY BOND: Insurance coverage to protect a business from losses due to employee theft
9. FINANCIAL RISK: Possible events and situations that directly impact a company’s cash flow
10. FREE ENTERPRISE: An economic system in which individuals and groups, rather than the government, own or control the means of production—the human and natural resources and
capital goods used to produce goods and services; also known as private enterprise
11. GUARANTEE: A promise made to the consumer that a product’s purchase price will be refunded if the product is not satisfactory; often called a money-back guarantee
12. HAZARD RISKS: Potential events or situations that can cause injury or harm to people,
property, or the environment
13. INSURANCE: A contractual agreement in which one company (insurer) will pay for specified
losses incurred by the other company (insured) in return for installment payments (premium)
14. INTERNAL RISKS: Financial risks that are controlled by the business, such as poor budgeting,
inaccurate financial data, and inadequate accounting processes
15. INVESTMENT: The use of money to generate a profit or gain
16. LEASE: A contract to use property that belongs to someone else for a specific period of time
and for a specific amount of money
17. LIABILITY INSURANCE: A contractual agreement that provides compensation for losses that a
person or business is responsible for
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GLOSSARY (cont’d)
18. MARKETS: Arrangements for the buying and selling of goods and services
19. OBSOLESCENCE: The state of being outmoded or unfashionable
20. OPERATIONAL RISKS: Possible events and situations resulting from employee actions, core
processes, and daily business activities
21. PARTNERSHIP: A form of business ownership in which the business is owned by two or more
persons
22. PROFIT: Monetary reward a business owner receives for taking the risk involved in investing
in a business
23. PURE RISKS: Chances of loss that carry with them the possibility of loss or no loss
24. RETURN: Income received from an investment
25. REVENUE: Income
26. SHAREHOLDER: Anyone who owns stock in a corporation; also known as a stockholder
27. SOLE PROPRIETORSHIP: A business owned by one person who receives all the profits from the
business and takes all the risks
28. SPECULATIVE RISKS: Chances of loss that may result in loss, no change, or gain
29. STRATEGIC RISKS: Possible events and situations that can affect the execution of an organization’s long-term plans
30. SURETY BOND: A guarantee that protects a business when another person or business fails to
fulfill the terms of a contract between them
31. WARRANTY: A promise made by the seller to the consumer that the seller will repair or
replace a product that does not perform as expected
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
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LOSE, WIN, OR DRAW STUDENT QUESTIONNAIRE
Directions: After completing Lose, Win, or Draw (Business Risk), please rate the following statements to help MBAResearch improve the LAP. Marking a five indicates that you
“strongly agree” with the statement, while selecting a one indicates that you “strongly disagree.” When you have finished, please fax your responses to 614-486-1819 or mail
them to MBAResearch at P.O. Box 12279, Columbus, OH 43212.
1. The information in So What? encouraged me to want to know more
about business risk.
1 2 3 4 5
2. The examples used in the LAP helped to increase my understanding or
interest in business risk.
1 2 3 4 5
3. The LAP content is clear and easy to understand.
1 2 3 4 5
4. I liked the application exercise/activity.
1 2 3 4 5
5. I understood the directions for the application exercise/activity.
1 2 3 4 5
6. I better understood business risk after completing an activity/
application exercise.
1 2 3 4 5
7. I easily understood what the test questions were asking.
1 2 3 4 5
8. I guessed and got the right answer to test questions most of the time.
1 2 3 4 5
9. The Gray Zone presents an ethical dilemma that does not have a blackand-white answer.
1 2 3 4 5
10. The Gray Zone really made me think about ethical dilemmas involving
business risk.
1 2 3 4 5
11. Make It Pay! offers useful tips that will help me to implement information about business risk.
1 2 3 4 5
12. What did/didn’t you like about this LAP?
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 42
LOSE, WIN, OR DRAW TEACHER QUESTIONNAIRE
Directions: After completing Lose, Win, or Draw (Business Risk), please respond to the following
questions to help MBAResearch improve the LAP. When you have finished, please fax
your responses to 614-486-1819 or mail them to MBAResearch at P.O. Box 12279,
Columbus, OH 43212.
1. What information could be presented in So What? that would compel students to want to know
more about business risk?
2. What information in the student or teacher booklets needs to be changed to make it more
accurate, easier to understand, and/or more up-to-date?
3. What anecdotes, examples, etc., could be added to the LAP to increase student understanding
or interest in business risk?
4. How would you improve the application exercises and their directions?
5. What specific changes need to be made to test questions so that they will be clearer?
6. How would you change The Gray Zone to make it relate more to business risk and present an
ethical dilemma that does not have a black-and-white answer?
7. What useful tips could be added to Make It Pay! that would help students implement information about business risk?
LAP-EC-003-CS ©2013, MBA Research and Curriculum Center®
Lose, Win, or Draw 43