The Concepts Of Risk And Uncertainty Economics Essay

Risks and uncertainty are notions that talk about expectations in future. Risk on the other hand is a probable factor, any business begins with risk and there is no business endeavor that does not involve a certain amount of risk in it. There are however many definitions of risks and though each of the talks state different things, it is noted that all agree on a common point of future problems and mishaps that can be avoided or reduced when take on a certain activity. This quotes risk as a quantitative concept, i.e. noting risk as a measurable factor.

Conversely in many common manners of speaking, risk and uncertainty are referred to as being one and the same thing. Uncertainty nonetheless is a word that connotes measures or events that may occur in future and over which one has no control. It is usually known with an X-factor implicated to it due to its concept being immeasurable and non-quantifiable. Hence when an outcome of any business activity is not measurable or consequences are not alerted of, the concept is consequently known as uncertainty.

Nevertheless the document presented below will be an elaboration on the concepts of risks and uncertainty that a fast food firm, “MarryBrown” is likely to face when entering a South African Market and about how these unknowns (risk and uncertainty) are managed.

Below is a presented mind map on the approach of risk and uncertainty, faced by a fast food firm entering a South African market.

Difference between the concepts of Risk and Uncertainty

As initially mentioned above, the concepts of risk and uncertainty under many circumstances are usually misunderstood to be the same. A business risk is an incident or a factor that states negative possible and probable negative impacts on the operation or profitability of any given company. Noting the probable, it denotes that risk is a measurable factor. A factor that can be identified and measures can be taken to avoid or reduce it. Uncertainty conversely denotes a circumstance when probabilities are too miniscule to be identified or measured hence quoting is as an unavoidable and non quantifiable concept.

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Talking about different businesses with its different opportunities, risk and uncertainty can however be turned into positive impacts as opportunistic levels. Research and plans with data involved from existing markets and/or products can minimize the level of risk and may offer a business an opportunity with objective judgments. Similarly, when uncertainty are assumed as risks, subjective judgment are likely to be taken and entrepreneurs are to be owned with skills of forging new directions and involving into new markets and/or products.

Foreign Market Analysis on Fast Food

Likewise as stated initially, any firm entering any market is to be faced with different levels of risk and uncertainty and so would be the case for a fast food firm, “Marrybrown” entering a South African fast food market. A basic view is given to the fast food market in South Africa that would help spotting out the levels of possible risks and assumed uncertainties.

It is noted that the fast food industry in being challenged by rising food prices, a tough competitive environment and falling disposable incomes. Thereby firms with the best innovation in the name of brand loyalty game are the only one to survive through the market.

The South African consumer foodservice sees a strong value growth in 2009 despite the poor economic climate with consumers experiencing lower disposable income levels. Consumers are likely to spend less on luxuries such as eating out. Due to this the consumer foodservice has altered down its growth in comparison to the previous year (2009), where the consumer food service displayed a strong value growth.

Leading brands in the fast food industry nevertheless fought for consumer loyalty during the economic downturn although the South African consumer foodservice had attained its strong value growth in 2009. On the other hand, leading brands in the fast food industry came up with the introduction of smaller snack sized menu pieces in order to survive the economic downturn in the South African, hence minimizing unit prices and encouraging consumer spending. The brands also increased the number of their menu items with varieties (innovation) to slot in more eating occasions therefore encouraging consumers to continue to buy food between meal times.

The leading positions in the consumer foodservice market with international and local brands are also to be considered within the fast food industry. With the domination of local players with full-service restaurants, 100% home delivery/takeaway services, restaurants and small street stalls, a huge share of fast food ensures a strong international existence in the general consumer foodservice market. However with the basic consideration noted on competitors, the fast food industry in South Africa is led by the international brand KFC, with Steers being ranked as the second local brand. Hence it states that with the reputation and strength of the fast food industry in South Africa, it is the international fast food brands that have made a large impact on the consumer foodservice market as a whole.

Nevertheless, there is a steady growth forecast for South African consumer food service market despite the economic pressures and the effects of the National Credit Act altering down the growth of franchises in South Africa. The overall value growth is however forecasted to remain intact during the period of economy recovery although it will be lower than it has been during the review period as unit prices are likely to change in stabilization.

With an overview of the consumer food service market in South Africa, the risk analysis and uncertainty levels likely to be faced by “MarryBrown” are thereafter taken into account of. Below follows the few types of risk most likely to be faced.

Types of Risks likely to be Faced

There is however different types of risk that faces a firm in international business based on the country’s macro economic health, political influence as well the market/industry size itself. Below are the types of risks that MarryBrown is most probable to face in the South African consumer food service market.

Political Risk:

With brief elaboration, political risk is the likelihood that political events, decisions and condition will influence commercial investments.

The World Bank ranks the economy of South Africa as the upper middle income economy making it one of the only four (4) countries (Botswana, Gabon and Mauritius) in Africa representing the category. Hence this implies that South Africa holds a strong policy that might affect the MarryBrown as a new entrant.

• Systematic Risk: This is likely to be faced due to the changes in policy that would affect all companies. However, having an overview over the South African economy, it is noted that South Africa holds a strong policy in regards to those affecting different firms. According to a South African review-based research, there is usually not much frequent changes in the policies affecting the fast food firms (small enterprises) in South Africa hence the systemic political risk is rated to be low. However according to the Gauteng Provincial Government in South Africa, a policy frame work is developed for the Small, Medium and Micro enterprises (SMME), i.e. MarryBrown being a small fast food enterprise, will have to follow the developed strategies and being a new firm in the market.

The Small medium enterprise (Fast food Firm) in South Africa initially depends on the self financing by entrepreneurs due to its boosting economy. The small medium enterprises would thereby move on to debt finance as they set up business records and expand operations. The different kinds of funding requirements may lead to systemic risks to be faced by MarryBrown with a ratio of low skill to high capital requirement.

• Procedural Risk: Political interventions in business procedures are however a common issue in almost all business procedures. The follow up in the procedure for opening up a firm is however a long process in South Africa, with obtaining the rights and responsibilities for the firm. For the fast food industry, it is however challenging in terms of government and social agencies raising issues over health and hygiene and compliance with nutritional labeling laws of the country as well as union and trade group over labor relations and laws.

• Distributive Risk: Without the tax revenue, the government is usually bounded to do its job. Any state’s majority income relays on the income tax, hence the “MarryBrown” is likely to face distributive risk in terms of the appropriation of profits earned. The state requires tax rands to fund programs, both social and economic and to provide public goods and services. This hence turns to be one of the type of political risks likely to be faced by a fast food firm in the South African Market (and/or any other firm in any other market). Also noting the distributive risk on the appropriation of profits with different promotion tools including adverting, price promotions and any other method of attaining customer attention to influence consumers purchase.

• Catastrophic Risk: Revolutionary changes in the government are however noted to be a political risk faced by any firm in any foreign market. Nevertheless, with the boosting South African economy, catastrophic risk is however seen to be low for a fast food industry.

Hence the above are the political risks that are likely to be faced by MarryBrown as a fast food industry in South Africa.

Conversely, political risk is only one type of risk expected to be faced by almost any firm, there are other noted risks as elaborated below:

Economic Risk:

The economy of South Africa being robust is likely to let MarryBrown face not so many economic risks in its development as a successful enterprise. Nonetheless, until after the global economic crisis struck South Africa in late 2008, economic growth had been steady and unmatched. Since from the first quarter of 1993 to the second quarter of 2008, the country had a well steady and an uninterrupted economic growth, but as the crisis struck the economy, it was felt to recession. The Growth of Domestic Credit constricted in the third and fourth quarter of 2008 officially dropping the economy to recession. The constriction went on into the first and second quarters of 2009, with the GDP growth at -6.4% and -3% respectively.

Nevertheless South Africa’s economy has now been totally refurbished since the advent of democracy in 1994. Intrepid macroeconomic reforms have enhanced competitiveness, economic growth, increased employment factors and opening South Africa to world markets. This quotes MarryBrown to face more of Market/Industrial risks in terms of strong completion and rivalry. Economic risk is however low for MarryBrown in South Africa.

With an even better view over the South African economy, the International Monetary Fund (IMF), in the 2007 presented report on annual country assessment, quoted South Africa’s economy as “undergoing its longest expansion on record, and in recent years has experienced elevated growth in an environment of rapid credit expansion, booming asset prices, strengthening public finances, and rising international reserves financed by large capital inflows.”

The Inflation rate in South Africa was last reported at 4.1% in March 2011. Inflation rate however refers to a universal rise in prices calculated against a standard level of purchasing power. The most common and well known measures of inflation include the Growth of domestic product (GDP) as mentioned above and Consumer Price Index (CPI).

With consideration put on the Consumer Price Index (CPI) in South Africa the chart below represents the CPI/ GDP Inflation rate in South Africa:

Hence with the above analysis of the macroeconomic health of South Africa, it can be stated that MarryBrown as a fast food firm will not face much of the economic risk due to the well stabled economy of South Africa.

The largest percentage share (47%) of the entire income in the food and beverage industry was brought about by Restaurants and Coffee shops and Fast Food outlets with 29% of contribution and Caterers and other Catering services contributing the other 25% in the industry. With research it is noted that with around 181,373 people employed in food and beverage industry in South Africa, Restaurants and Coffee shops owned the largest portion of 51% while the Caterers and other Catering services owned 30% of the entire fast food industry. Therefore with the presented research it is noted that the fast food industry indicates a relatively high level of concentration and consolidation in South Africa.

Industrial/Market Risk:

In South Africa, the fast food firms are using a combination of different strategies in order to gain competitive advantages. These strategies range from global and domestic franchises, employee empowerment, co-branding to positioning communication and information technologies (ICT) as competitive tools and for reducing information asymmetrical problems. The FASA; i.e. the Franchising Association of South Africa is the mother body of franchises in the country that administers competition and wellbeing matter for small medium enterprises in the Fast food industry. It can hence be noted that the fast food industry in South Africa is an emerging industry. Joint Investments are made between gas stations and fast food firms in order to allow them to work under one roof and increase consumer awareness of their food services thereby increasing sales.

With the above presented short review on the fast food industry in South Africa, it can be stated that MarryBrown is likely to face major industrial risks within the market, main due cause being tough competition and rivalry.

The analysis of Michael Porter’s five competitive forces however helps in examining the industrial risk with a better overview.

Above is a presentation of Michael Portal’s five competitive forces in a pictured form. MarryBrown will however face these competitive threats in the market, being the Threat of New Entrants, Bargaining Power of Buyers, Bargaining power of Suppliers, Threat of Substitute Product or Services and Rivalry among the existing competitors.

Analyzing each of these threats, below is a short elaboration on the 5 forces to be faced by MarryBrown – Fast Food firm in South Africa.

Threat of New Entrants: MarryBrown is likely to face a threat as a new entrant in the fast food market as there will be a relatively high need of initial capital outlay. It will also need to face the consolidation of the growing industry as well as keeping up with the economies of scale will also be a challenge that MarryBrown is to face. With all the listed threats as faced by new entrants, MarryBrown will also need to understand the logistics of the learning curve in the Fast Food Industry in South Africa.

Bargaining Power of Customers: Facing a fragmented customer base review on the services offered as well as having a relatively low average purchase denotes the bargaining power of Customers to be high. This would also include the rising segment of discriminating customers with the consumer council of South Africa.

Bargaining Power of Suppliers: This is noted to high as well with the regional franchises exhibiting the market power. The numbers of substitute suppliers are relatively high in the fast food industry in South Africa and there are also other low operators with the brand loyalty. Switching costs in the industry are also noted to be low, such as distribution channels.

Threat of Substitutes: The threat of Substitutes is relatively in the fast food industry with high product differentiation such as different meal solutions. There are also many other independent caterers being local industry players as well as few other Global industry players such as KFC, McDonalds, etc. The switching costs for customers may also be low hence threat of losing customers.

Rivalry among existing firms: Industry rivalry is however stated high as well in South Africa with high concentration ratio of around 36%. Competitiveness would also be match in regards to low pricing power, market consolidation as well as low margins.

Hence the above is a short analysis of the market risk likely to be faced by MarryBrown in the South African Market.

Levels of Uncertainty

Nevertheless, the entire presented document is an examination of both the risks and uncertainties faced by a firm in a specific market. The risks likely to be faced are however elaborated above, but in addition to that there are also few other levels of uncertainties likely to be noted. Below are the levels of uncertainties to be taken into account.

Uncertainty as initially defined is a circumstance of future occurrence that is unpredictable and immeasurable. The circumstances that connotes measures or events that may occur in future usually known with an X-factor implicated to it due concept being immeasurable and non-quantifiable. Nevertheless, there are four levels of Uncertainties these include:

Level 1: Uncertainties noted from the past predictive and trend analysis, e.g. predicting the demand for burgers and vegetable wraps tomorrow. This may denote that if the demand for burger drops, so will the profitability of MarryBrown

Level 2: Uncertainties noted from discrete (binary) futures. These would include uncertainties like the changes in policies that may affect fast food industry in relation to health benefits.

Level 3: Uncertainties with multiple futures are also to be noted. These would include predicting the fall of the fast food industry with negative economic changes.

Level 4: This includes true ambiguity, such as predicting change of consumer based view, with losing image for fast food.

Hence that above are the types of uncertainties likely to be faced by MarryBrown in the South African market.

Conclusion

With the above presentation of the analysis of the risks and uncertainties faced by a fast food firm in the South African market, I have concluded the distinction between the two concepts with probable possibilities.