Risks and Uncertainties in Innovation and Competition Essay Example Pdf

Most business decisions are made with incomplete information and an uncertainty future. Managers have to deal with risks every day. More specific a company may have a great new technology but consumer acceptance of this innovation is mysterious. A competitor may be tempted to engage in direct competition with a firm or may decide that the profits of a divided market are too slim and go on to look for other opportunities.

Uncertainty includes both identifiable trends whose depth and timing can only be guessed at and unexpected events whose effect is immediate. What is risk? (Doherty Neil A. integrated risk management, mc graw hill professional 2000) Risk is present when the outcome of some defined activity is not known. Risk refers to the variation in the range of possible outcomes, the greater the potential variation, the greater the risk. In the economic sense risk does not refer to the adverse quality of some outcomes likes losses instead of profits but rather to the lack of knowledge about which of several outcomes may prevail. A risk is implied by our inability to predict the future. What is certainty? Certainty is a procedure that always show you the way for a specific outcome. Uncertainty Uncertainty refers on a situation of not having more information about the future. It is necessary in an environment of decision making. Managers should handle the uncertainty in a way that the probability of making mistakes will be in logical stage. For example costumers’ acceptance of a new product can be beyond the most hopeful prediction. Threats Threats are risks from the behavior of others. For example when goody’s enter to the Greek market where McDonalds was making profits then there is a threat for mc Donald’s because this might reduce their profits.

The lower profits can be expected but the moves of the other competitors business can’t be expected with sureness. A risk condition is a position where the results are unfamiliar to the decision maker. For example a manager is not confident about the outcome and uncertainty may lead to bad choices. Market risk is something that businesses concern because if their hopes about the future market situation are wrong then they have losses. It is a natural part of investing and market involvement. It can be control but not reducing it. If managers use future contracts then they are not worried about any loss may have because they will take some profits. Prepayment risk refers to the possibility that the resources may be prepaid earlier than their designated day.( financial markets and institutions j, Madura cengage learning 2008) Credit risk refers to the risk that a loss will occur because of the defaults on the contract.

Business worried about the stability of their stock. The economic future of a business can’t be predicted with confidence. A company might fail about their credit value. In order to identify risks that a company might have managers should ask their selves: what can go wrong?’ for example if Starbucks company wants to make a coffee with a specific ingredient and the supplier don’t bring it on time then they faced an unexpected risk. Managers should introduce a research and development for reaching high performances. On every circumstances risks can estimated in two categories noticeable and moderate. A less than noticeable is when a senior manager leaves from the company but the other manages have a good succession plan for sales and profits that will not affect them. Noticeable events are things such as the market entry of a small competitor. This entry has been predicted and as long as the competitor stays in its narrow market there is a small loss in sales that requires no particular response. The failure of the supplier with little alternatives moves or an entry of a competitor with the same technology are facts that have moderate collision. New business faced with the challenge of having new capabilities.

The strategic choices that should consider are which competencies should enter? How they will enter them? When they will enter them? These are difficult to answer because of the uncertainty that the market environment have. Entering into a new marketplace can be risky but it worth it in order to achieve new business opportunities. Because of the high level of uncertainty managers are not confident that the new industry that they are going to extend will be profitable. A company has a lot of choices to enter. They can wait until the uncertainty and risk have increased or they can take a strong position early. A company can be tempted to favor flexibility over commitment and to postpone the investments required until much of the market uncertainty is resolved. But in strong environments characterized limited chances of opportunities a business may haven’t the correct capability at the right time. Risk return Some claimed that when we take large risks we expect large returns. Risk relates with return in some way.

Everything is about to maximizing the return and the profit so a company has to take all the risks. If you know all the necessary facts then you do not take any risk, but if you do not know all about the future, which you do not!, then you take a risk. Risk and uncertainty are thus correlated. Risk/Return Return low risk- low return High risk- high potential return Risk A risk could be control if managers have the necessary information and knowledge about this dilemma. They should focus on other options might have, gather more information, try to find different features of the problem and study the problem to decrease the risk and finally hold up the decision. country When a country change their political regime it might lead to increase taxes, leaving out the repatriation of business profits to the home country, force them the exchange rate controls and deny to allow them new technology practices. All these issues managers should concern and decide if this country is worth it to expand. ” , a country’s economic risk points to economic forces that may result in drastic changes in the business environment that are detrimental to business interests.

Economic mismanagement and corruption are chief among the causes of increased economic risk, often resulting in high inflation, capital flight, and debt defaulting.” Culture Among the country and the international country there are difference in culture, norm and values. This leads to an uncertainty and cost of conducting business in international market. Culture dissimilarities influence international business judgments like market entries, entry mode choice, effectiveness of global strategies, and local responsiveness. Managers prefer to make foreign expansion in countries with the same culture, norms and values in order to decrease the risk of possible failures of the products and services in these countries. Also managers are away from markets with different cultures that they don’t understand the business background and norms. The more cultural differences existed among the home country and the international country the more possibilities of not doing business in that country and it can significantly influence the internationalization process. Managers should recognize two types of risk assessment. The internal risk which are specific market and type of investment, and external which are climate and political changes, changes in laws and policies. Conclusion Many managers have the mistaken opinion that investing in abroad country is riskier than investing in their home countries. Research shows that invest in abroad have the same risk as invest in your home country. Mc donalds Mc Donald faced the challenge of making stores in India.

The risk was that India has different habits and culture. They are not eating beef or pork. As a result there was risky to open stores there and have high profits because mc menus have meat. McDonalds thought to make food and pricing strategies that can suit to India’s market. So they make a menu that don’t have beef or pork but a vegetarian menu.

Vegetarian products are separate throughout the sourcing cooking and servicing processes. Instead of having Big mac in India the buy Mc AlloTikki or Mc Veggie burger. Euro Disney Walt Disney Corporation decided to expand the theme park in Europe. Walt Disney method of entry in Japan had been licensing. But Disney chose to invest in other European countries that theme park has owning 49% and 51% public.

The problem was the site so the company evaluates the criteria for choosing a location. Other problem was the euro Disney project illustrate that even if a company has been successful in the past, future success was not sure when it moves to a different country and culture. The alterations for national differences should always be measured in order to avoid risk. Disney thought to have the same recipe of fantasy and magic in Europe in order to have big profits. But in some countries wasn’t acceptable because they believe that this was a threat to their culture. euro Disney should focus on the details inside the park, better food and the price structure for the international market in order to succeed to entry in new market without having high risks of failures and fight for a long survive in other countries. Framework Market place performance Product characteristics Host market characteristics Home market characteristics Firm size Entry mode strategy Political risk The possibility that political decisions, events or conditions will affect a countrys business environment in ways that will cost investors some or all of the value of their investment or force them to accept lower than projected rates of return. Huge risks take a company when they expand in another country because a country may change political leaders, opinions and policies. It may be costly to companies because of the loss or damage to their property and the need to adjust to changes in the rules hovering business. For example Bolivia is a risky environment for foreign investors because of the demonstration and violence and coca cola has police protection of its trucks and telephone connections in Angola. As a result managers should predict the possibility of having a political risk but it’s difficult because past political incidences situations change for better to worse and situation changes within countries and companies. Also managers should take some opinions from political leaders to determine their opinion about foreign business relations and their thinking about foreign countries.

They should inform from the global newspapers or internet or television about the political events that could affect their business. Managers should visit the countries that they are interested and focus on business people, journalists and labor leaders that may change and affect the business sector and usually affect political conditions. Monetary risk A company influenced from exchange rates. More specific if the value of a foreign currency is change then the value will be less competitive because it will cost more the product or services. Also it influenced from the funds that moved out of a country. If a company wants to invest in a foreign country then the capability to get funds from the country is an issue. Companies should accept the factor that if they want to move their financial resources there is a possibility to have lower return. Competitive risk A company success depends on competitors moves.

Managers should consider that when they operate in a foreign country with less familiar environments it might be high risky because foreign countries are not survive than the local companies that know their local market. However if foreign companies succeed to learn more about their new market and manage correctly all the issues that might face then they can gain their new market. As a company learns more about customers, competitors and governments plans they decrease uncertainty. So managers prefer to invest in countries that located close to them with similar language, culture, legal system and market conditions in order to decrease uncertainty and have a competitive advantage that fits to their rules. Also a company thinks about the local resources if there are available in association with their needs. More specific a company may want to find local personnel that know the business. Companies follow competitors into foreign markets and match their investments with the competitors. They took advantage from that because they know that this location is acceptable for this product or service they want. There are clusters of competitors that use them in order to have better competitive position and learn news and information from them. However SOME COMPANIES PREFER TO invest into a market first in order to gain competitive advantage and build a strong brand and have strong customer relationship. So it has the chance to be a market leader with better product or services and distributions. As a result it decreases the competitive risk. For example, Amazon.com may not have been the first seller of books online, but Amazon.com was the first significant company to make an entrance into the online book market. There are four types to choose how to enter a foreign market.

The first type is exporting that a product produces in one country into another. The second is licensing a company use the property of the licensor in the country that they are interested.

They should pay a fee in order to use this property. The third is joint venture that two or more have a plan for a business and approve to share the profits of the business enterprise. Finally is the foreign direct market that the country businesses have an ownership. It has a high control of the resources (technology, personnel and capital.) as a result you have the opportunity to know your customer and competitors. Features of cultural distance Different languages and religions different social norms Features of organizational distance Political unfriendliness government rules Geographic distance Size of country different climates Economic distance Different income different human and natural resources

Cite this page