So you have successfully grown your business from a germinated seed to a fledgling tree. You are starting to feel the warm glow of the sun as you burst above your ‘competition.’
Enjoy this moment, but be careful. Just as everything is looking great, this is the time when you are most vulnerable. A strong gust may just blow you away. You may be starting to feel invincible—and that everything you touch turns to gold. You may even think you know more than everyone else within your industry. So, is this a bad thing?
This is called hubris. You become less attuned to your environment and the subtle signals that previously helped guide you. You stop listening to professional advice and surround yourself with sycophants. You also start making very risky business decisions.
When it comes to risk, small businesses are just as vulnerable as large corporations. It’s a lack of risk management that causes most businesses, big and small, to fail.
Let’s remember why most people are in business in the first place. They want to grow the business so that they can eventually sell it at a profit. So financially speaking, they want to increase their shareholder value because that’s a large part of what they are finally selling. Poorly managed risks—risks that turn into calamity—are the destroyers of shareholder value. Everything you have worked for over the years can quickly disappear. It’s a hard fact for many entrepreneurs to get their heads around, but you need to learn to be Prudent.
Please don’t think I am against taking risks. Entrepreneurship is all about taking risks. But what you need to focus on are Smart Risks. These give your business an opportunity to leap forward.
What types of risk does your business face, and which one is the key culprit in causing your business to fail? There are four broad categories we will look at:
1. Strategic risk
2. Operational risk
3. Failures in regulatory and financial compliance
4. External catastrophic events
And the Winner is:
By a long stretch, strategic risk mismanagement is the one that can result in utter failure. A global study by management consultants Booz and Allen found that 80% of the large business failures they studied were caused by mismanagement of strategic risk. In my experience, I have found the exact same thing.
So now we know that strategic risks are predominantly what make or break your business.
Let’s discuss this more in-depth.
1. Strategic Risks
These are risks typically made by the owner or the top executive team.
● What business you are really in. In other words, what is your core, and have you strayed from it? How well thought out is your business model?
● What products and services to offer. These are risks leading to major product failures or new market failures. They can also result in a failure to react to new initiatives such as digitization of content or online shopping.
● What operating margin you need to function. These are risks caused by insufficient working capital.
● Outsourcing or in-house operations. Potentially giving away strategic value-adding capabilities.
● New business acquisitions or initiatives. Overreaching in terms of cash flow and core capabilities.
● Faster and faster adoption of new products and services. Inadequate processes to meet demands.
● Increasing vulnerability to information theft and loss.
● Social network connectivity. Broadcasting your errors instantly and leaving them there permanently.
● Natural, political or regulatory shocks. For example, not preparing for new taxation and social security operating costs. New tax compliance hits around 30% of your current sales value.
2. Operational Risks
This category includes major operational problems. Check what your major operational risks are and assess how long it would take you to recover if one of them caught up to you; and at what cost.
● Dysfunctional managers. How well are your managers’ and supervisors’ salaries (and bonuses) aligned with the risk to the business?
● Staff capabilities replacement. Do you have back-up capabilities for key functions and knowledge sets, or are you relying too much on indispensible people?
● Data loss. Is your computer data backed up? Is it secure from internal or external theft? Do you have your key business documents secure in a fire-proof safe, with an additional back-up copy at home?
● Customer service breakdowns. Do you have a plan to effectively manage a viral campaign against your company?
● Supply chain disruptions. Have you identified alternative suppliers? Have you validated the operating practices of your suppliers? (Remember the European horse meat scandal and its effect on related brands)
● Are your manufacturing blue prints or clothing patterns duplicated and secure?
● Operational accidents. How will you handle a major injury or death on your premises?
● How quickly, from where and at what cost can you replace that critical piece of manufacturing equipment?
3. Regulatory Risks
These risks result from either ignorance or arrogance (like being above governing laws, standards, or ethics). Fraud, fines and even jail or expulsion are risks faced here. Take advice from your professional support team and do things by the book.
4. External Catastrophic Events
Booz and Allen describe these as natural, political, or regulatory risks where the external event could not be controlled or easily anticipated. An example is the Japanese Tsunami and resulting nuclear fallout. But note that there are opportunities that can come from these events.
Following that explosion, there were many Japanese families bringing their young children to Bali away from the contamination risk. They needed good, affordable education for their children. Unfortunately, many returned to Japan because they couldn’t find enough business to meet that need. But if their business needs had been met, it’s very likely that many more would have followed and boosted Bali’s economy.
Do You Have a Risk Management Plan?
Don’t isolate yourself from your business environment. You need to regularly talk with your customers, suppliers, supporting professionals and workers. Getting feedback and sensing the environment, buzz and feel is so important. If you aren’t spending time in each of these areas on a weekly basis, you will lose touch and be vulnerable. A fancy name for this is market intelligence. The Secret Boss series on television shows the advantages of occasionally being on the front line. From there, you can see what really happens on an operational level, but also gain insight into which way the real world is heading.
Once you are in touch, you can properly contribute to a realistic SWOT Analysis. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Strengths and weaknesses are assessed in relation to your competitors. There is no strength involved if you and any of your competitors have the same capability. Opportunities and Threats relate to potential events in your external business environment.
In risk analysis, we look at how we can reduce the possible impact of weaknesses and threats. If possible, find a way to turn any problem into an opportunity. The analysis is a waste of time if you don’t act on it, so follow up regularly.
Smart Risk Taking
Please don’t think I am against taking risks – entrepreneurship is all about taking risks. But what you need to focus on are Smart Risks. And strategic risks are usually what make or break your business.
Smart risk taking involves sustainable innovation, which means a policy for constant—not occasional—improvements and breakthroughs in products and services. As the owner, you are the driver of sustainable innovation because—more than any other factor—it’s your approach, behaviours, prudence and culture that encourage your team to innovate. They are often more aware about what needs fixing, what can be improved and what the customers are saying than what you are. Do you encourage and harness this knowledge, or do you insist on it all coming from you?
Understanding risk is the first step to managing it properly. Now that you have knowledge about the four main risk types, you can better handle what comes your way.
In the Age of Flux, continuous improvement, speed of change, and breadth of ambition are more important than ever. You’ll see this clearly by the way these companies succeed. They offer many lessons that cross industry:
– Social is now a layer for everyone
– Software is the “wow” factor- Data makes a big difference
– In a world of instant gratification, long-term investment still matters
You’ll find many other lessons which are relevant to our time and environment.
CEO and Co-Founder
neXtep Business Builder Community Pte Ltd
Singapore ACRA Business Registration Number: 201424522Z
80 Kitchener Road #09-09/10 Singapore 208539