RISK TYPES & ENTERPRISE RISK MANAGEMENT
Name the five main types of business risk studied in this lesson.
Financial risk
Market risk
Operational risk
Legal risk
Reputational risk
Which two factors are multiplied to calculate a risk score?
Probability and impact.
Risk Score = Probability × Impact
Name the four risk management strategies studied in this lesson.
Acceptance
Mitigation
Transfer
Prevention
What is the main difference between a business risk and a business crisis?
A risk is a potential event or condition that may affect business objectives.
A crisis is a serious disruptive situation requiring urgent management attention and decisions.
What is escalation of commitment?
Continuing to invest in a failing approach despite warning signs and evidence that reassessment is needed.
What does Enterprise Risk Management (ERM) mean, and what three main activities does the OpenStax process include?
Enterprise Risk Management is an integrated, cross-disciplinary approach to monitoring business risks.
The three activities are:
Risk identification
Risk assessment
Risk abatement
In the presentation's five-point scales, what do probability score 4 and impact score 5 mean?
Probability score 4 = Likely
Impact score 5 = Severe
These are illustrative ordinal categories, not measured probabilities or monetary amounts.
What is the difference between risk acceptance and risk mitigation?
Risk acceptance means deliberately retaining and monitoring a risk after considering its consequences.
Risk mitigation means introducing measures intended to reduce the probability and/or impact of a risk.
Acceptance retains the exposure, while mitigation seeks to reduce it.
Name three important priorities during a business crisis.
Any three of the following:
Protect people.
Understand the facts.
Stabilize operations.
Communicate relevant information.
Plan recovery.
What are the four stages of the lean startup learning cycle presented in the lecture?
Build → Measure → Learn → Revise
A café faces declining customer demand, an equipment breakdown, and an unclear supplier contract. Identify the main risk category in each situation.
Declining demand — Market risk
Equipment breakdown — Operational risk
Unclear supplier contract — Legal risk
A supplier delivery delay has a probability score of 4 and an impact score of 3. Calculate the risk score and classify it using the presentation's priority bands.
Risk Score = 4 × 3 = 12
Priority = High
A café depends on one supplier. The owner identifies an alternative supplier to reduce the likelihood of business interruption. Which strategy is being used and why?
Risk mitigation.
An alternative supplier may reduce dependence on one source and limit the consequences of a delivery disruption.
The risk is reduced but not necessarily eliminated.
A café's main supplier unexpectedly fails to deliver essential ingredients. The café cannot prepare several products. What should the manager do before promising customers that the problem will be resolved immediately?
The manager should verify the available information, determine which operations are affected, investigate feasible alternatives, and establish realistic next steps.
Communication should be accurate and should not contain unsupported promises.
A café introduces premium breakfast packages, but customer feedback and sales remain disappointing. The owner decides to revise the offering based on evidence. What entrepreneurial concept may describe a significant change of approach?
Pivoting.
A pivot is a significant change in approach when evidence shows that the current approach is not working.
A café's refrigeration equipment breaks down, causing product shortages and financial losses. Customers become dissatisfied and begin reporting service problems publicly. Explain how one event can generate several types of business risk.
The equipment failure begins as an operational risk.
It may produce financial risk through lost products, expenses, or interrupted sales.
The service disruption may create customer dissatisfaction.
If customers lose confidence in the business, reputational risk emerges.
This demonstrates how one operational event can create several interconnected consequences.
A café identifies three risks:
Risk A: P = 4, I = 3
Risk B: P = 3, I = 4
Risk C: P = 2, I = 5
Calculate the scores, rank the risks, and explain why the scores alone may not determine which risk management should address first.
Risk A = 4 × 3 = 12
Risk B = 3 × 4 = 12
Risk C = 2 × 5 = 10
Risk A and Risk B have the same numerical score.
Risk C has a lower score but a severe impact rating.
Management should also consider the nature of each consequence, available resources, and whether the risk requires particular protective attention.
A café purchases property insurance. Explain why this represents risk transfer and identify two important limitations.
Insurance can shift specified financial losses to an insurer under the policy's conditions.
Limitations:
Insurance does not prevent the original incident from occurring.
Insurance may not cover every loss or remove all responsibilities from the business.
Therefore, risk transfer should not replace responsible operational management.
Identify the seven stages of the practical crisis response framework presented in the lecture.
Recognize the problem.
Protect people and essential resources.
Verify the available facts.
Identify feasible response options.
Assign responsibilities and act.
Communicate relevant information.
Monitor outcomes and adjust.
A business resumes normal operations after a crisis. What six activities should it consider during its post-crisis learning process?
Document → Investigate → Identify Lessons → Revise Plan → Assign Actions → Monitor Results
The business should examine what happened, evaluate its response, identify weaknesses, and implement improvements.
A small café faces five problems: falling revenue, a new competitor, repeated employee mistakes, a supplier contract dispute, and declining customer trust. Classify each risk and explain why management should evaluate their connections.
Falling revenue — Financial risk
New competitor — Market risk
Employee mistakes — Operational risk
Contract dispute — Legal risk
Declining customer trust — Reputational risk
A café's hypothetical risk register contains the following information:
Cash shortage: P = 3, I = 5
Supplier delay: P = 4, I = 3
Customer data incident: P = 2, I = 5
Negative customer review: P = 3, I = 2
Calculate all four scores, rank them, and identify one limitation of using only the numerical ranking.
Cash shortage: 3 × 5 = 15 — High
Supplier delay: 4 × 3 = 12 — High
Customer data incident: 2 × 5 = 10 — High
Negative customer review: 3 × 2 = 6 — Moderate
Score-based ranking:
Cash Shortage → Supplier Delay → Customer Data Incident → Negative Review
Limitation:
A risk with a severe impact may warrant particular attention even if its numerical score is lower.
Risk scores are illustrative prioritization values, not measured probabilities or predicted financial losses.
A café discovers that its refrigeration equipment may be unsafe. It also depends on one supplier and owns expensive equipment. Design a risk management approach combining prevention, mitigation, transfer, and acceptance.
Prevention: Suspend use of potentially unsafe equipment until the problem has been resolved.
Mitigation: Improve equipment maintenance and identify alternative suppliers to reduce future operational exposure.
Transfer: Consider suitable property insurance for specified covered losses.
Acceptance: Identify any remaining limited and tolerable risks that management can deliberately retain and monitor.
The business should not treat serious safety concerns as risks that can simply be ignored or accepted.
The strategies may be combined because each addresses a different aspect of business exposure.
A café experiences a serious equipment failure during peak service. Employees are confused, customers are waiting, and management does not know when normal operations can resume. Prepare an immediate crisis decision-making plan.
Recognize the disruption and determine whether there are safety concerns.
Protect employees, customers, and essential resources.
Verify which equipment is affected and what activities can continue.
Identify feasible options, including suspending affected operations.
Assign clear responsibilities to employees.
Communicate verified information to affected customers and other stakeholders.
Monitor the situation and revise the response as further information becomes available.
Management should avoid guessing about recovery times or making commitments without sufficient information.
An entrepreneur continues producing a poorly selling product because substantial money has already been invested. Customer feedback remains negative. Explain the decision-making problem and propose a more evidence-based approach.
The problem may involve escalation of commitment, excessive optimism, or ignoring new evidence.
A better approach would be to:
Review the original business assumptions.
Examine customer feedback and sales performance.
Identify warning signs.
Evaluate possible product or business model changes.
Decide whether to continue, revise, or significantly change the current approach.
Monitor the results of the decision.
The entrepreneur should remain committed to business objectives without insisting on an ineffective method.