RISK AND INSURANCE OF

BUSINESS ENTERPRISES

4  Definition of Risk management

 Types of risks
 The process of Risk management
 Insurance of the Small Business

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 Definition of Risk
 Risk is part of any business, and it's inherent in any job, whether
you're an entrepreneur or a manager. The trick is to learn to manage
that risk and to make sure that all risks are calculated risks.
Is the probability or threat of damage, injury, liability, loss, or any other
negative occurrence that is caused by external or internal vulnerabilities,
and that may be avoided through preemptive action.
Is the possibility of financial loss
A risk is a potential problem – it might happen and it might not

Two characteristics of risk

 Uncertainty – the risk may or may not happen, that is, there are no
100% risks (those, instead, are called constraints)
 Loss – the risk becomes a reality and unwanted consequences or
losses occur

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 Types and source of risk
 Technical risk. Failure in meeting a performance requirement of the service
or product.
 Production risk. Causes can be break down of machinery, no availability of
raw materials causing shortfall in production.
 Political risk. Examples are trade restrictions, nationalization of industries,
political changes.
 Financial risk. Wrong choice of investment, receivables turning into debts,
change in interest rate.
 Marketing risk. Changes in market demand, errors in demand forecasting,
 Social risk. Labor unrest, agitations
 Human risk. No availability of skilled personnel, inter-group politics and
lack of motivation in employees
 Risk of nonpayment by customers is experienced by all business that offer
credit
 Injury and illnesses suffered by employees
 Injury from accidents incurred by customers
 Natural events (storms, floods, fire, earthquakes)
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 Theft of business property and Misbehavior by employees

Business risks fall into two general categories: those are
1.Speculative risk: risk which is inherent to a business, involving the
chance of either profit or loss
Most business decisions, such as marketing a new product,
involves under speculative risk
2.Pure risk: is the threat or a loss to a business without any
possibility of gain, such as robbery or employee theft
 A natural disaster, such as a flood, or an accident involving a
customer or an employee is a pure risk for a business owner.
 There are three categories of pure risk are: Crime, Natural disasters and
Accidents

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Risks on the Road to Success

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 BUSINESS RISKS
Three general types of events that cause business risk:
1. Events related to the property of the business
2. Events related to personnel
3. Events related to customers and others

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 BUSINESS RISKS
1. Property of the business:
 Property involves specific forms of risk
 Inventory can be stolen, machinery can break
 Buildings can be damaged or destroyed
 Land may become contaminated
 Patents may be infringed upon
2. Events related to personnel:
 Theft, violation of government regulations, loss of key
employees
3. Events related to customers and others:
 Risk from customers primarily arises from:
 Injuries suffered while upon business property
 Injury or damage that is caused during the use of the
business’s products
 Product liability: payments for injury or damage that occurs 7
during the use of the business’s products
To minimize business risk, risk management is needed
 Risk Management
Management -The business function used to plan, organize, staff, direct
and control all available resources to reach company goals

Risk Management:
Risk as uncertainty concerning the occurrence of a loss.
Risk Management: is “Formal process by which risk factors are
systematically identified, assessed and provided for.”
Objective: to reduce the impact of potentially adverse event.
Risk management is a scientific approach to dealing with pure risks by
anticipating possible accidental losses and designing and implementing
procedures that minimize the occurrence of loss or the financial impact of
the losses that do occur.
Is the systematic process of managing an organization’s risk exposure to
achieve objectives in a manner consistent with public interest, human
safety, environmental factors, and the law.
The Best strategy is to develop a business environment that minimizes:
•Probability of the risk causing event occurrence 8

•Amount of loss that can be experienced if the event does occur

RISK MANAGEMENT PROCESS INVOLVE;

• Risk Identification and Analysis, (How ?)

• Consider Alternatives Measures (Risk Prevention and
Control, Risk transfer, avoidance and acceptance), (Ways)
• Implement and Monitor

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 Risk Identification
Method I Method II
• Risk Analysis • Interactions with External
Questionnaires environment
• Financial Statement • Interactions with other
Analysis Departments
• Flow Chart Method • Past Losses
• On-Site Inspections

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 Accident Causation

• Human Relations View (behavior, ability…)

• Engineering View (part failure, misalignment…)

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 Ways to Manage Business Risks

Alternatives to handle risk,

There are 4 principle ways to handle risks
1. Risk Prevention and Control (Loss Prevention)
2. Risk Transfer
3. Risk Acceptance
4. Risk Avoidance

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 Ways to Manage Business Risks
1. Risk Prevention and Control
 Screening and Training Employees
 Providing Safe Conditions
 Providing Safety Instruction
 Preventing External Theft
 Deterring Employee Theft
This is often called “Loss Prevention” in the business world
2. Risk Transfer: means buying insurance and paying a
premium to cover any losses, which transfers some of your risk
to an insurer company
The three Common Risk Transfers are:
 Insurance
 Product/service warranties 13

 Transference through business ownership

2. Risk transfer
2.1 Insurance
According to the Ethiopian Commercial Code, a code governing Insurance
policies, an Insurance policy is “a contract whereby a person called the
insurer, undertakes against payment of one or more premium to pay to person,
called the beneficiary, a sum of money where a specified risk materializes.
2.2 Product/Service Warranties
Warranties are simply promises made by the seller or manufacturer with
respect to the performance and quality of a product and protection against loss
2.3 Transference Through Ownership
The total amount of risk the business must handle depends in part on the type
of business ownership
For example, a entrepreneur who owns a sole-proprietorship assumes all
the risk whereas a stockholder in a corporation assumes only his
percentage of the risk.
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3. Risk Acceptance
 When the business assumes the loss responsibility to keep
with in the company
 Most companies pull out a certain percentage of their
revenue for damages, loss to theft, and unsold items.
4. Risk Avoidance, speculative risk
 Risks can be avoided by advance anticipation
 Following market research can assist a business in making
the decision on whether or not to invest in a product.
 To determine whether the product is a low risk you must
weigh the potential benefits against the potential risks

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 Insurance of the Small Business
1. General Liability Insurance: Every business, even if home-based, needs
to have liability insurance. The policy provides both defense and damages if
you, your employees or your products or services cause or are alleged to have
caused Bodily Injury or Property Damage to a third party.
2. Property Insurance: If you own your building or have business personal
property, including office equipment, computers, inventory or tools you
should consider purchasing a policy that will protect you if you have a fire,
vandalism / destruction, theft, smoke damage etc. You may also want to
consider business interruption/loss of earning insurance as part of the policy to
protect your earnings if the business is unable to operate. Including Personal
Automobile Insurance
Commercial Auto Insurance: Commercial auto insurance protects a
company’s vehicles. You can protect vehicles that carry employees, products
or equipment. With commercial auto insurance you can insure your work cars
and trucks from damage and collisions.
Homeowner’s Insurance: is one of the most important kinds of insurance you need.
This type of insurance can protect against damage to the home and against damage to 16
items inside the home. Additionally, this type of insurance may protect you from
accidents that happen at home or may have occurred due to actions of your own.
3. Life Insurance: Life insurance protects an individual against death. If you
have life insurance, the insurer pays a certain amount of money to a beneficiary
upon your death. You pay a premium in exchange for the payment of benefits to
the beneficiary. This type of insurance is very important because it allows for
peace of mind. Having life insurance allows you to know that your loved ones
will not be burdened financially upon your death.

Worker’s Compensation: Worker’s compensation provides insurance to

employees who are injured on the job. This type of insurance provides wage
replacement and medical benefits to those who are injured while working. In
exchange for these benefits, the employee gives up his rights to sue/go to court
his employer for the incident.
As a business owner, it is very important to have worker’s compensation insurance because it protects yourself and
your company from legal complications. State laws will vary, but all require you to have workers compensation.
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Penalties for non-compliance can be very stiff.
Others like;
Professional Liability Insurance: this type of insurance is also known as
Errors and Omissions Insurance. The policy provides defense for damages
due to failure or improperly rendering professional services. Your general
liability policy does not provide this protection, so it is important to
understand the difference. Professional liability insurance is applicable for
any professional firm including lawyers, accountants, consultants, notaries,
real estate agents, insurance agents, hair salons and technology providers to
name a few.
Directors and Officers Insurance: this type of insurance protects the
directors and officers of a company against their actions that affect the
profitability or operations of the company. If a director or officer of your
company, as a direct result of their actions on the job, finds him or herself in
a legal situation, this type of insurance can cover costs or damages lost as a
result of a lawsuit.

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 Commonly Insured Perils or threats

• Fire • Vandalism (destructions or

• Lightning damage)
• Windstorm • Glass Breakage
• Explosion • Sprinkler Leakage
• Crime Perils • Perils of Transportation

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 Difficult to Insure Perils or threats

• Earth Movement
• Floods
• Nuclear Reaction

Why Are Some Perils Uninsurable?

• Against Public Policy
• Under the Control of the Insured
Ex. Suicide
• Probability of Loss is Too High

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Generally Uninsurable Perils

• War, Terrorism, Rebellion, and Revolution

• Fading, Rust, Dry Deterioration or wear

• Production, Marketing, and Political Risks

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 Final Remarks:

Don’t let the trouble

over power you
be proactive, organized, composed
and remain focused

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 International technology transfer &
multinational enterprises, innovation

5  Technology usage and adoption

 Promotion of technological development
 Public regulation of technology transfers
 Diffusion and Mechanisms of Technology Transfer
 Legal issues (Intellectual Property Rights )

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 Technology Transfer

Countries such as South Korea, Taiwan, Singapore,

Malaysian, Chinese, South Africa, Brazil and Mexico have
been industrialized mostly through borrowing and
transferring foreign technology rather than by generating
new products or processes

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What is;
Technology

Phase of technology transfer

How could technology be transferred

Enabling factors and barriers to technology transfer

How could you rate, current Ethiopian TT Efforts

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 Technology
Business literature review classifies technology as;
1. Product technology - Knowledge to produce any product, or
information that specifies the product characteristics and use
(Knowledge and experience) / Hardware
2. Process technology - Knowledge used in production to organize
inputs and operate machineries (methodology and technical
information) / Software
3. Management technology - Knowledge used in operating a
business – the managerial skill that enable a firm to be
competitive by making it efficient and effective (management and
financial information) / Orgware organizational technologies,
refers to the ownership and institutional arrangements
In the industrialization context, Industry is exemplified by different
product varieties, software by production practices or research on
new production varieties, and orgware, by local institutions that 27
support the use of industry technology adaptation.
 Example, rehabilitating degraded land technology
In the early 1980s, farmers developed methods of rehabilitating degraded land
by improving soils in their traditional planting pits, known as zaï, which consist
of hoeing small holes into the soil, into which farmers put small amounts of
manure and plant sorghum and millet.

The pits/practice concentrate water and nutrients precisely to where they are
needed, and retain water for a long time, allowing plants to better survive dry
spells and thus help to rehabilitate degraded land.

The seeds or trees grown in the pits can be considered hardware, the practices
around creating the pits and improving the fertility of their soil are software, and
the farmer-to-farmer field schools used to share the information with thousands
of farmers across the region represent orgware.
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 Technology Transfer
 Technology transfer is the diffusion and adoption of new technical
equipment, practices and know-how between actors in one geographical
area to another
 Technology transfer is the transfer process between the technology
originator and the receiver
 Technology transfer, also called transfer of technology (TOT), is the
process of transferring skills, knowledge, technologies, methods of
manufacturing, samples of manufacturing and facilities among
governments or universities and other institutions to ensure that scientific
and technological developments are accessible to a wider range of users
who can then further develop and exploit the technology into new
products, processes, applications, materials or services.
 Technology transfer is the process by which existing knowledge,
facilities or capabilities are utilized and marketed to fulfil public and
private needs.
 It could be said that the transferring process mentioned above has been
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completed upon understanding the transferred technology well,
absorbing it, adapting it to the local conditions, ensuring its maintenance,
sustainment and effective use, by the recipient of the technology.
 Cont’d
Technology transfer here is the process through which technology is
intentionally transmitted between countries or firms. In other words, we
define “technology transfer” as the direct type of the spillovers that occurs
voluntarily from technology source (such as multinationals or foreign
firms) to recipient (such as local firms, affiliate of multinational or
suppliers in host country) by way of embodied in the equipment supplied
(such as machinery, manual, and equipment) or disembodied in the forms
of software, patents, knowledge, or know-how and skills provided by
training and education activities

Technology can be;

1. Embodied in person (soft) knowledge and expertise 30

2. Embodied in product/service (hard) physical products
 Cont’d
“Knowledge transfer” and “technology transfer” concepts are used
interchangeably in innovation and development literature. Nevertheless,
 “Technology transfer” involves the transfer of capital goods such as machinery
and equipment, while
 Technology Transfer is the knowledge that goes into the creation and provision
of the product or service
 “Knowledge transfer” includes mostly transfer of tacit knowledge such as
know-how, management, and technical skills.

Although, all firms possess all kind of technology an advantage accrues to those
able to obtain and deploy superior technology
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 Cont’d

Technology transfer can be categorized as;

1. Vertical technology transfer the process moves from basic to
applied or development.
2. Horizontal technology transfer from use of technology from one
place to other place.
When adaptation of the technology to local needs is carried out the
transfer is considered as partly vertical

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Phase of technology transfer
Technology Transfer
Technology
acquisition

Skill Development

Phases
- Know How

Technology
adaptation

Dissemination

Increases production efficiency - Long Term

competitiveness
Technology/Business commercialization model

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Factors influencing technology transfer
i. Law and Policy Factors (legal system; particularly in the field of
intellectual property rights, frequent government interventions,
and many restrictions on foreign-funded enterprises. )
ii. Market Factors (market competition and market size)
iii. Infrastructure Status (transportation, canals, ports, bridges,
telecommunications, electricity, water and urban water supply
and drainage, gas, electricity, and other facilities)
iv. Technology Basis (availability of human resources, the
knowledge level, the development of productive forces)
v. Ownership - greater ownership high control to transfer the
technology
vi. Experience – longer the affiliates are in place and greater
experience and cooperation leads to greater technology transfer
vii. Internationality – the more globally extended the firm, the more
previous opportunities to it has faced to transfer technology to
affiliates worldwide, the greater amount of technology it is likely 35
to transfer to the affiliates.
 Mechanism of technology transfer
1. Domestic transfer: It is also known as vertical transfer or
adaptation process, basically, it involves the flow of technology
from one stage of research and development process to another.

2. International transfer: It is also denoted by horizontal transfer

or adoption process, is the movement of technology from one
culture of systems and methods that were developed for
application into a different culture and location.

 Formally market-mediated channels and

 The informal or non market-mediated channels

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 Mechanism of technology transfer
i. Market-mediated channels
The market mediated technology transfer channels involve the formal
arms-length transactions between buyers and sellers, and it includes:
Turn Key: the technology supplier may construct a fully functional
facility where the recipient needs merely turn a key to get a facility
functioning.
Technical Enclave: Multi-National Corporations establish fully
functional modern facility in developing countries, where the local
population is employed as laborer, and the products of the facility
would not find their way into the local economy, but would be
exported abroad.
Licensing: an agreement that allows a technology recipient to
employ the transferred technology as per the conditions that are
spelled out by both parties.
Joint Venture: when two or more business entities set-up a third
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entity that will enable them to produce a good or service jointly, by
sharing the enormous expenses of technical, marketing, production
and managerial skills.
 Mechanism of technology transfer
 Patent Right/franchise: a legal right to possess monopolistic control over an
invention for a stipulated term can be bought and sold. A firm may buy this
right for a technology that will help it to round out an existing product line, or
in order to get into a new line of business or in order to avoid a legal suit.
 Direct Purchase of Naked Technology: the purchase of a product is based on
complex technological device from a firm. This process can save considerable
research and development, and production costs to the recipient.
 Purchase of Embodied/key component Technology: the supplier may prefer to
sell a key technology embodied in a product (for example, a special
semiconductor device may be the key element of an instrument that measures
high temperature) over the sale of the same technology.
 Education Abroad: the education of people overseas is a very important transfer
mechanism, and has a significant impact in the development of scientific and
technological capabilities of a country.
 Site Visits and On-the-Job Training to Abroad: technology can be transferred by
sending people abroad for field visits and a short term on the job training.
 Journals and Seminars: the dissemination of research findings, the principal
norm of science is done through scientific journals, meetings, seminars and 38
symposiums. This is an excellent and relatively cheap source of information for
scientists.
 Mechanism of technology transfer
ii. Non-market channels
Informal channels for foreign technology transfer, is conducted without
mediation of the two parties, and basically the technology transfer take
place without formal agreements and there is no any direct payments done
to the technology owner. The specific technology transfer channels in this
category are:
 Imitation: Among the different important non-market channels of
technology transfer, the most significant one is the process of imitation
in which a rival firm learns the technological or design secrets of
another firm’s formula or products. Imitation may be achieved through
product inspection, reverse engineering, de-compilation of software,
and even in simple trial and error.

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 Mechanism of technology transfer
 Departure of Employees: Another form of non-market channel for
technology transfer is when technical and managerial personnel’s leave
the firm, and join or start a rival firm based on the knowledge they
acquire over the years from the technology owner. Such competition
can be a significant form of information diffusion in industries.
 Data in Patent Applications and Test Data: Registered patent
applications are available in public databases for a legal right on the
subject matter. However rival firms in principle can read such
applications, learn the underlying technologies, develop competing
processes, and products that do not violate the claims of the original
applicants.
 Temporary Migration: Much technology could also be transferred
through temporary migration of students, scientists, managerial and
technical personnel to universities, laboratories, and conferences
located mainly in the developed economies.
The challenge for developing countries in this context is their failure to
encourage expatriate students and professionals to return home and 40
undertake scientific, educational, and business development activities.
 Major Actors in Technology Transfer
Various terms have been used considered as major actors of technology
transfer, such as technology parks, science parks or science based
industrial parks and research parks.

They generally provide a place for technology transfer with high-skill

people, and have strong relationship with the university and research
institute. Moreover, parks offer high quality of working, living and
learning environment, and they are equipped with advanced technological
facilities to support research and development (R&D) activities.

They offer opportunities for synergy between business incubators,

technology enterprises and research institutes particularly in the early
development and stimulation of business.

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 Process of Technology Transfer
Process of Technology Transfer begins with assessing the
need for it. This may be due to the changes in policies
governing social, economic, environmental and political
issues.
There are various stages

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Barriers to Technology Transfer
1. Legal constraint, the rights and responsibilities of suppliers and
recipients have to clearly defined.
2. Infrastructure barrier, the educational capability of the recipient country
3. Cultural barrier;
 Differing value systems may cause misunderstandings due to differing
conceptions of right, wrong, proper, etc.
 The economic system may give rise to different attitudes towards
competition, labor and capital efficiency, and acceptable standards of
living. In many societies job securities may be more important than the
potential for advancement.
 Social and family customs may affect interpersonal relationship, and
the individual attitude towards group activities. 43

 The personal relationship may affect the organizational patterns that

are possible in the recipient firm.
 Barriers to Technology Transfer
5. Attitudinal barriers, The resistance to change may also be as a result of lack of
proper educational background to deal with the technology (intellectual
resistance), the new technology may seem to be too expensive (economic
resistance), the new technology may threaten peoples’ ordered existence
(psychological resistance), and the new technology may cause a change in
organizational structure (sociological resistance).

6. Communication or language barrier

7. Lack of business security/stability, Inaccessibility of finance like loan and

working place, Lack of government focus/ownership, & Inappropriateness of
technology
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Public regulation of technology transfers

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46
 For successful and sustainable TT, Cont’d
Some key lessons that can be drawn upon to enhance successful and sustainable
implementation of technologies, and decrease the risk of maladaptation, in irrigation

• By collaborating with the final users of a technology via flexible and continuous
processes, the suitability, sustainability, and, subsequently, effectiveness of
technologies, can be enhanced. For example, the introduction of manually-operated
water pumps for irrigation in East Africa was initially lacks enthusiasm from the
target farmers. Effective promotion, achieved user engagement and eventual
adoption of the water pumps.

• Continuous assessment and improvement of communication methods should be

undertaken. In addition, ongoing support for the end users should be provided to
ensure informed and progressive problem-solving and, understanding, which may
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contribute to the sustainability of a technology.
 Cont’d
• Knowledge management approaches for technology diffusion and transfer
ensure equal access to information by all stakeholders, including those
beyond the knowledge networks (Identification, selection, acquisition,
exploitation, and legal system)

• A network of farmer groups works closely with NGOs and researchers to

test the use of appropriate technologies for agricultural adaptation in
context. Yet each stakeholder role should be considered as part of a larger,
integral and collaborative process.
(Stakeholder Involvement and Collaboration)

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 Multinational corporations
Theoretically, there is widely shared view that

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Intellectual property rights

 Legal issues (Small business legal smarts – by Deborah l. Jacobs)
1. Planning for new or expanding your setup
• Business formats, physical setup, and contingency planning
2. Protecting innovations and inventions
• Copyrights, Patents, Trademarks, and Trade secrets
3. Finding affordable, quality legal advice
• Hire and managing lawyer &avoiding legal sticker shock
4. Hiring and managing employees – worker compliance
5. Marketing products and services – Harm to user/consumer
6. Getting paid – unpaid credits
7. Resolving disputes - Disputes
8. Record keeping and taxes – Documenting tax… legal issues
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2. Protecting innovations and inventions
For Most companies the most valuable thing is not plant and
equipment but its “Intellectual property” that is legal lingo for the
bundle of rights that go with products, services, information, and even
certain business names.
1000 180565567 gergo
Common type of IPR:-
• Copyrights deals with art and written work
• Patents involves inventions that are new, useful, and unobvious
• Trademarks apply to words, phrases, symbols, or devices that your
goods or services and distinguishes them from those of others
• Trade secrets protects confidential information that could give
your competitors an edge
Registering your rights by getting copyrights, patent or trademark
helps secure potential lucrative business. It also gives you important
protections if others accuse you of infringement. 51
 Intellectual Property Rights and patent, Cont’d
Patent is an exclusive right to make commercial exploitation of a new invention
 To manufacture patented product or
 To use patented process
 What is intellectual property (IP)?
 IP as a term describes the ideas, inventions, artworks, music and
literature that are basically intangible in creation.
 IP is the commercial application of imaginative thought to solving a
technical or artistic challenge.
 What is patentable?
 Software programs
 Modified Electronic product/processes
 New variety of plants, products Trademarks, a logo, distinctive name,
distinctive smell or sound/chemicals, etc.
 What is not patentable?
 Natural discoveries, mathematical formulae, surgical procedures, business
processes, living organisms (exceptions modified!!), etc.
 Contrary to well established natural laws, morality, mere discovery of a 52
known process/machine, process for enhancing efficiency.
More Value Being Self Employ than
Being Employ to someone else
(Decide your direction early!)

Thank you so much, and

Good luck guys!

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