RISK AND

FORECASTING
TABLE OF
CONTENTS

Anticipating Risk
Forecasting Risk
Methods of Forecasting
Specific Risks in Industrial
Operations
Insurance
 4-1
ANTICIPATING RISK
ANTICIPATING RISK

Risks arise generally from uncertainties

in nature, in the economic system, and
in human nature. They are often created
by improper organization, faulty
product development, unsound
financing and bad management. Many
risks in industry may be likened to leak
in a water system: unless minimized or
eliminated, the leaks will drain off the
profits to the point where the enterprise
ceases to be solvent operation.
 ANTICIPATING RISK

The product is the all-important center of an

industrial enterprise. It is for the sake of the
product that the whole organization of
management, plant, equipment, materials and
workers exists. The product gives meaning to
production. It is the source of profits, one of
the chief incentives for which people labor.
More product and better quality of product are
the chief ends for all we do in the name of
efficiency, whether that product is a
manufactured good or service
ANTICIPATING RISK

The general problem of business risk thus begins with a

study of the product, its physical nature and its commercial
possibilities. We shall deal in later chapters with specific
problems of product development and engineering; here we
are concerned with avoiding risks of product failure. What
must management do to know the product, to be sure that
there is satisfactory demand for it, to prepare the company
for the undertaking, to find the basis for cost, price and
production schedules and to guard the enterprise against
adverse business conditions? The object of inquiries on
these lines is to make reasonably certain that risks to the
company from the possibility of product failure are
minimized or eliminated.
 Is The Product Well
Conceived and Useful?
4-1.1
Is the Product Well Conceived and
Useful?
The utility of s product are
revealed by a thorough
study. In other words, what Note:
do you have to sell? This • This necessarily means close
coordination among several
involves a careful departments: research, engineering,
consideration of such production, sales and finance.
factors as physical
appearance, structure,
functional style and design,
component materials and
detailed uses for which the
product or service is
intended.
Is There a Demand for
the Product?
4-1.2
Is There a Demand for the Product?

After it is certain that the A market study avoid this risk is the best
made in two stages:
product is well conceived
and that no obstacles 1. Preliminary survey
stemming from the product - to determine potential demand
itself will hamper its 2. Intensive market survey
production and sale, the - used as the basis for production
next step is to find out plans and sales campaigns.
whether there is
satisfactory demand for it.
Just because a product is
the firm’s “baby” , there is
no automatic assurance that
the public will cuddle it.
MARKET STUDY

1.Preliminary survey 2. Intensive market study

- show that probable nature, - begins where the preliminary
extent and depth of the market. survey leaves off and it enlarges the range
and degree of coverage
- it may point up defects in the
product and indicate desirable changes - aims to discover how much of
which would be costly to make after the potential demand can be turned into
production is in full swing. actual sales.
How Does the Product
Relate to the
Enterprise?
4-1.3
How Does the Product Relate to the
Enterprise?
From a study of the product and from market studies, it
will be wise to reexamine the relation of the product to the
enterprise if risks are to be avoided or minimized.
Important decisions will hinge upon whether the product is
to be launched along with a new enterprise, or whether it
is a new product of an established company. Of like
importance is the question whether the company is to be
based upon the single product, a line of related products,
or several diversified products. In other words, the place
that the product is to occupy in the company and the
purpose for which the company conceives the product are
of considerable importance in forecast- ing and calculating
the risks.
 4-2
FORECASTING RISK
FORECASTING RISK

Business success and survival in modern times demand that

management pay increasing attention to general economic
conditions. This is true whether a new enterprise is to be
established, a new product is to be launched, or whether an
established firm wishes to improve its relative position in a
competitive market. The uncertainties of economic life create
many risks for industrial enterprise; while some are beyond the
control of the individual firm, many others may be avoided or
cushioned by working with business barometers and forecasts,
even when these aids fall short of absolute reliability.
 Relationship of the
Enterprise to General
Economic Conditions
4-2.1
Relationship of the Enterprise to
General Economic Conditions
The economic present and future are conditioned by
three sets of forces or influences, each of which is made
up of many different elements.

1.Seasonal 2. Long-time trends 3. Business cycles

influence - indicate structural - covers a time period
changes in the economy longer than seasonal
- stem from the yearly fluctuations and much
cycle of weather and from occurring in a slow, cumulative
shorter than long-term
the social seasons set up by way. They come about through
trends. Stated differently,
custom and traditions. changes in productive ability, many seasonal fluctuations
Businessmen have already social institutions, and take place within a business
learned much in the way of individual habits and usually cycle, and many business
adapting their operations to manifest themselves in cycles occur in the progress
these predictable changes. industrial growth or of a long-term trend.
decadence.
Business Barometers
4-2.2
Business Barometers

Since business cycles affect every phase of economic life,

forecasters have made minute studies of economic operations and
conditions in an effort to find either the causes or the indicators of
cyclic behavior. They have studied stock-market activity, industrial
production, employment, prices, construction contracts, electric-
power output, bank debits, income inventories, trade, and similar
features of economic activity. They have divided many of these
larger activities into subclassifications for more intensive study as,
for example, stock prices, world prices, commodity prices, retail
prices, agricultural prices, industrial prices, and such aggregate
price behavior as the general price level.
Thank you
By: MARK JOSEPH B. LINCUNA