2C11. Business economics and entrepreneurship

Transcription

1 2C11 Busess economics and entrepreneurship Claudiu Albulescu (12/05/2014) European Erasmus Mundus Master Course Sustaable Constructions under Natural CZ-ERA MUNDUS-EMMC

2 Sustaable Constructions under Natural LIST OF LECTURES s L1 Trends and challenges for the dustry L2 Busess strategies and busess development companies L3 Fancial management companies L4 Project management generalities L5 Project management support activities L6 Project management systems applied s L7 Entrepreneurship issues L8 Standard contracts civil engeerg L9 Summary and discussion of the exam questions Applications A1 General presentation of the case study (WTP Hunedoara) A2 Fancial analysis and management (WTP Hunedoara) A3 Cash flow analysis (WTP Hunedoara) A4 Visit WTP Hunedoara A5 Project s presentation

3 Sustaable Constructions under Natural L9 RISK MANAGEMENT IN CONSTRUCTION COMPANY OBJECTIVES - The student understands how to analyze and evaluate risks (identify risks for its activity) - The student understands and adopts a feasible behavior when he/she is confrontg with risks (risk adversity, risks avoidance etc.). - The student identifies formation sources for own busess risk assessment and prioritization - The student knows how to apply a good risk management plan or strategy

4 Sustaable Constructions under Natural L9 RISK MANAGEMENT IN CONSTRUCTION COMPANY TOPICS I. RISK AWARENESS What does risk represent? II. IDENTIFICATION OF RISK ELEMENTS Risk typology Behavior front of risks III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION Risks related to one s own busess Risk prioritization IV. MANAGEMENT OF THE RISKS Methods of dealg with risk Specific examples for risk mitigation V. RISKS IN CONSTRUCTION INDUSTRY Busess risks faced by most companies International contractg Insurance

5 Sustaable Constructions under Natural I. RISK AWARENESS TOPICS What does risk represent?

6 Sustaable Constructions under Natural I. RISK AWARENESS What does risk represent? - The risk, is associated with people s capacity to know the future, with the vulnerability of the enterprise or with the variability of the result attaed under the pressure of the environment. - The risks characterize the economic activity general, but they are maly associated with the start-up of a new busess - Risk is associated to failure

8 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS TOPICS Risk typology Behavior front of risks

9 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS Risk typology Subjective risks -In the literature, there are different ways to classify risks -The risks affectg the entrepreneur s activity can be grouped subjective risks and objective risks - Subjective risks related to the entrepreneur s character and are associated to personal failure - Subjective risks can be grouped : professional risks emotional risks

10 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS Risk typology Objective risks - Objective risks can be split busess related risks (microeconomic risks) and risks dependg on the busess conjuncture or climate (macroeconomic risks). 1. Busess related risks A. Knowg the activity and its operation mechanisms: an novation risk, operational risk, risk associated to the technological tensity of the busess, IT risk, etc. B. Change of market conditions: terest rate risk, currency risk, competition risk C. Fancial risks: default risk, busess fancg risk 2. General economic risks A. Macroeconomic risks at national level: legal risk, pure macroeconomic risks, political risk. B. Risks associated to the global economy: the risk of the change of the busess climate, the onset of a fancial crisis at ternational level.

11 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS Risk typology Risks for entrepreneurs (1/2) Risks the entrepreneurial activity Subjective risks Objective risks A. Professional risk B. Emotional risk Busess related risk General economic risks A. Risks related to the knowledge of the busess and to the operation method - risk for the novation - operational risk - risk associated to the technological tensity of the activity - IT risk B. Risks related to the change of the market conditions - terest rate risk - exchange rate risk - competition risk C. Fancial risks - default risk (credit) - fancg risk. A. Macroeconomic risks at national level - judicial risk - pure macroeconomic risk - political risk B. Risks related to the global economy - risk related to the onset of an ternational fancial crisis - risk related to the degradation of the ternational busess climate.

12 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS Risk typology Risks for entrepreneurs (1/2)

13 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS TOPICS Risk typology Behavior front of risks

14 Sustaable Constructions under Natural II. IDENTIFICATION OF RISK ELEMENTS Behavior front of risks - The willgness to accept risk and the consequences of venture failure depends on numerous factors and conditions, cludg the risk management culture. - Not all the managers/entrepreneurs take the same decisions when confrontg with risks. - Risk adversity is fluenced by different factors related to managers/entrepreneurs personal features, novation process or factors characterizg the economic context Risk adversity behaviour and categories of entrepreneurs - Opportunity entrepreneurs and necessity entrepreneurs - Entrepreneurs with short-range risk behaviour and entrepreneurs with longrange risk behaviour

16 Sustaable Constructions under Natural III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION TOPICS Risks related to one s own busess Risk prioritization

17 Sustaable Constructions under Natural III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION Risks related to one s own busess - it is necessary that potential entrepreneurs consider both subjective and objective risks affectg the entrepreneurial activity - case of the subjective risks*, it is necessary to put balance the advantages and the convenient for the entrepreneur person, related to the busess set-up - relation with the objective risks, it is necessary to understand the particular features of a busess and to evaluate the economic climate * Subjective risks impact upon the activity of most of the entrepreneurs, while objective risks depend on the particular features of a busess. For example, when assessg the professional risk of startg a busess and failg, potential entrepreneurs can balance between two or three years the position of manager of an unsuccessful start-up and the same two or three years as simple employee with his/her former employer or with a different.

18 Sustaable Constructions under Natural III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION TOPICS Risks related to one s own busess Risk prioritization

19 Sustaable Constructions under Natural III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION Risk prioritization - There are several possibilities to establish a hierarchy of risks to which an entrepreneur or potential entrepreneur is confronted: short-range risks, respectively medium and long-range risks; impact and probability of occurrence, etc. - Dependg on their impact and probability of occurrence, risks can be grouped as 1st degree risks, requirg an immediate treatment, 2nd degree risks, requirg treatment an termediary phase and 3rd degree risks, volvg a subsequent treatment.

21 Sustaable Constructions under Natural IV. MANAGEMENT OF THE RISKS TOPICS Methods of dealg with risk Specific examples for risk mitigation

22 Sustaable Constructions under Natural IV. MANAGEMENT OF THE RISKS Methods of dealg with risk -Reduction of risks by: avoidg harmful events, foreg or research to remove the uncertaty, combation of risks, accumulation of reserves, compensation or offsettg of risks - Acceptance of risks by: owner-managers, vestors and speculators, laborers -Transfer of risks to others: to laborers, through the wage system; to capitalists, through the terest system -Contractg-out risks: surance, hedgg, guaranty, underwritg

23 Sustaable Constructions under Natural IV. MANAGEMENT OF THE RISKS TOPICS Methods of dealg with risk Specific examples for risk mitigation

24 Sustaable Constructions under Natural IV. MANAGEMENT OF THE RISKS Specific examples for risk mitigation Example 1: IT risk - The IT risk manifests itself by the capacity of the IT system to function, as well as by the loss of the formation related the portfolio of clients, suppliers, contracts, correspondence, etc. - Solutions: Out-sourcg to a with experience IT services Regularly save the formation by implementg a back-up procedure with external storage support Example 2: General economic risks management - It is important to analyze the macroeconomic situation because it can provide useful formation: on vestment opportunities or on the decisions to be made by authorities order to correct imbalances. - In order to manage macroeconomic risks, it is necessary to analyze the macroeconomic dicators trend at national and ternational level

25 Sustaable Constructions under Natural IV. MANAGEMENT OF THE RISKS Specific examples for risk mitigation Example 3: Operational risk - Defg work procedures applicable with the organization: selection and trag respect of human resources, contractg procedure, documents flow, payments, estimation of the cash flow, procurement procedures, risk management procedures - Each procedure has to provide: the purpose for which it is developed, the field of application, the reference documents, the defition of volved terms and concepts, the responsibilities and the work method.

27 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY TOPICS Busess risks faced by most companies International contractg Insurance

28 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY Busess risks faced by most companies (1/2) - Construction is a risky busess, and risk management is an essential responsibility managg a. This cludes the risks: encountered by beg a busess enterprise as well as the risks associated with constructg projects. - Busess risks clude liability for the activities of employees and potential loss of or damage to property. - When a firm executes a contract with a project owner, it assumes the risks associated with constructg the project, as defed the project plans and specifications risk of obtag the needed materials, labor, and equipment with an agreed price and completg the project by the contractual completion date.

29 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY Busess risks faced by most companies (2/2) - Some of this risk may be transferred contractually to subcontractors, but much of the risk remas with the general contractor. In addition, the curs the risk of subcontractor bankruptcy and poor workmanship Common risks health and safety of its employees while workg on the job or at another location, jury or property loss to third parties as a result of activities, damage or loss to work place but not yet accepted by the owner, and loss of or damage to its vehicles and equipment.!!! These risks and liabilities are so great that most firms must purchase surance policies to protect, or partially protect, themselves agast fancial loss that may result from these risks.

31 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY International contractg (1/2) - International contractg is the type of busess activities based on supplyg ternational projects and/or when the contractor is engaged a permanent busess activity of its subsidiary abroad - Why Contractg? - the ma potential asset of busess is the contract awarded to the contractor as a result of a biddg process - Problems of the dustry: the not predetermed form and scope of the products (projects), overall riskess of the bid assessment and pricg, problems of performance given site, existg high competition the market. - There exists a real opportunity to reach the better results towards creasg the total volume of works abroad and so to raise the share of exports of the total output, connected with realizg the appropriate government measures and corporate level steps.

32 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY International contractg (2/2) - Constructors must fd answer to a series of questions What are the obstacles and factors preventg the quicker crease of the export? What is the fluence of a well-prepared firm strategy on the s export success cludg the risk management procedures? What are the criteria measurg the degree of success ternational contractg of the firms? What could be the possible improvements of the risk mitigation procedures?!!! Company s willgness to go abroad has been clearly connected with the ternational contractg risk. The assessment and comparison of home market and foreign market risk is the key issue. That is why the utilization of elaborate risk systems enables to some large and medium firms do ternational works so prosperously and sustaably for many years.

34 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY Insurance Insurance Contracts - The primary parties to an surance policy (contract) are the purchaser of the contract (the sured) and an surance that provides the required surance coverage (the surer or carrier). - Insurance policies are two party contracts under which the surer promises, for a fee or premium, to assume fancial responsibility for specified losses or liabilities of the sured for a specified period of time. The amount of risk transferred is limited to the amounts stipulated the dividual surance policies. - Some policies are written with deductible amounts that are the responsibility of the sured. If the policy cludes a deductible amount of $100,000, the surance is liable only for the crement of the loss that exceeds $100,000.

35 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY Insurance Subjects of Insurance Contracts - Key Person Insurance. Is a life surance obtaed by the on prcipals. These policies provide protection to the agast fancial losses that may result from the untimely death of a prcipal. They simply are large life surance policies that are owned by the. The benefits from such policies are used to fance buy/sell agreements as a part of its succession plan. - Subcontractor Insurance. General (ma) contractors typically require each subcontractor to provide and mata certa levels of surance coverage. Usually, the coverage limits required of subcontractors are the same as those required of the general contractor by the project owner. Many general contractors also require subcontractors to list the general contractors as additional sured. - Insurance Certificate. Under the terms and conditions of most contracts, the contractor is required to submit a certificate of surance. These certificates are issued by surance companies to certify that the named surers have force the coverage listed.

36 Sustaable Constructions under Natural V. RISKS IN CONSTRUCTION INDUSTRY Insurance Insurance policies - Property surance for the project as e.g. Builder's Risk Insurance, is a first party surance that provides coverage for the cost of damages to the project durg, which clude temporary structures and any materials stored on the project site, but not the contractor's equipment. It protects both the owner and the contractor agast direct losses. - Property surance for the 's property, consider the consequences of fancial loss due to loss of or damage to owned property. Dependg on the type of property owned, a may need to purchase multiple surance policies to transfer this risk for Equipment, Transportation, etc. - Liability surance is needed when the course of conductg busess, a happens to cur any of the followg types of legal liability: (i) Liability for personal jury to third parties; (ii) Liability for acts of parties for whom it is responsible, such as subcontractors; (iii) Liability for latent defects completed projects; (iv) Liability that results from design or professional services provided;(v) Liability to employees jured on the job; (vi) Liability for actions taken by employees.

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