August 21, 2017

Preparing Your Business for Internal and External Risks

In a previous post on this blog, I wrote, "Risks may be classified in various ways such as internal (weaknesses) and external (threats) with variations depending on geopolitical and socioeconomic conditions." This post focuses on how companies and organizations can identify and evaluate internal and external risks.

It is only natural for business owners and their managers to focus on their business' market opportunities with the goal of maximizing profit. Given the high rate of failure, however, businesses should equally consider the internal and external risks their venture may encounter.

Whether it is for a business where I hold an equity stake or corporate clients that I am advising, I evaluate the strength of any business plan or long-term strategy on the following eight risks:
  1. Product Risk;
  2. Technology Risk;
  3. Market Risk;
  4. Management Risk;
  5. Scale Risk;
  6. Climate Risk;
  7. Capital Risk; and
  8. Exit Risk.
Businesses should consider product risk, which, according to this article, is defined as "the potential for losses related to the marketing of a product or service. It is managed using a standard risk management process of identifying, treating, controlling and monitoring risk as part of product development or product management." The article presents a number of common types of product risk:

  • Demand Risk. Failure to generate demand for a product launch and other risks related to demand.
  • Operational Risk. Operational risk such as delayed product launch due to production issues.
  • Price Risk. Price risks such as a new product launch that sparks a price war with a competitor.
  • Customer Experience. Customer experience issues such as a product with poor usability.
  • Quality Risk. Poor quality. This can occur due to requirements, non-functional requirements, design, testing or quality control issues.
  • Brand Risk. A product reflects poorly on your brand. This can occur due to the customer experience and quality issues. Alternatively, it can be a product that simply doesn't appeal to your customers such that it impacts your brand image. For example, a snowboarding brand that alienates customers with a line of ski wear.
  • Inventory Risk. Problems with inventory such as shortages in one channel and excess inventory issues in another.
  • Reputation. Damage to your reputation as a firm due to a failed product and resulting publicity.
  • Compliance & Regulations. A product that is deemed to violate laws, regulations or standards. In some cases, a product can attract new regulations if it is perceived to damage markets, the environment or quality of life.
  • Product Liability. Failures of a product that cause damages such as an unsafe product that results in injuries.

Technology Risk is defined as the potential for implementing new, unproven technology looms large in most content strategy projects. This article provides 36 types of technology risk. What is more, a business must consider the risk of a cyber attack or data breach. How is your company planning for the potential of technology failures to disrupt your business such as information security incidents or service outages?

Market risk includes geographic (different risks exist when doing business in China compared to the United States, for example), as well as sector risk. Launching a new search engine brings significant competitive risks within the sector. Forming a bank involves significant regulatory risks.

Regarding management risk, is the company being led by a competent management team with a proven record of success? If not, who are the managers soliciting advice from?

The Startup Genome Report, published in 2011 and subsequently edited 2012, addresses the risk of premature scaling. A startup can maximize its speed of progress by keeping the five core dimensions of a startup: customer, product, team, business model and financials in balance. The art of high growth entrepreneurship is to master the chaos of getting each of these five dimensions to move in time and concert with one another. Most startup failures can be explained by one or more of these dimensions falling out of tune with the others.

With respect to climate risk, many businesses owners are facing the twin pressures of extreme weather events and failure of climate-change adaptation. A report by McKinsey & Company, a consultancy, classifies climate risk into two categories: Value-chain risks and external-stockholder risks. The former include physical risks ("those related to damage inflicted on infrastructure and other assets, such as factories and supply-chain operations, by the increased frequency and intensity of extreme weather events, such as wildfires, floods, or hurricanes"), price risks ("increased price volatility of raw materials and other commodities"), and product risks ("the core products becoming unpopular or even unsellable").

External-stockholder risks include ratings risk ("the possibility of higher costs of capital because of climate-related exposure such as carbon pricing, supply-chain disruption, or product obsolescence, regulation risk ("government action prompted by climate change"), and reputation risk ("either direct, stemming from a company-specific action or policy, or indirect, in the form of public perception of the overall industry").

The common starting point for creating a mitigation strategy is to undertake a full assessment of where climate-related risk lies within a firm.

Every company, whether a startup or multinational corporation, experiences capital risk. Not having adequate funds to develop the product or service, pay its employees, invest in materials and equipment are just some of the concerns businesses of all sizes may encounter during its lifespan. How you are going to mitigate the risk of running about of money? Is your startup in position to utilize any of the following options to raise capital: small business loan or line of credit, purchase order financing, vendor financing, product pre-sales or crowdfunding?

It is often said that if you are focused on your exit plan, you are not focused on your business. However, a business owner must anticipate how and when investors receive their return on investment. Listing the shares for the public to purchase through an initial public offering or being acquired by another company or private equity firm carries their own unique risks--if the opportunity to exit presents itself.

In addition to evaluating a business plan on the seven risk factors listed above, I recommend using a SWOT analysis to evaluate internal and external risks. The SWOT analysis (alternatively SWOT matrix) is an initialism for strengths, weaknesses, opportunities, and threats—and is a structured planning method that evaluates those four elements of a business venture or specific project. The questions following the SWOT matrix below will assist business owners and managers to evaluate risks by identifying specific strengths, weaknesses, opportunities, and threats.

  • What are your strengths?
  • What do you better than others?
  • What unique capabilities or resources do you possess?
  • What do others perceive as your strengths?

  • What are your weaknesses?
  • What do your competitors do better than you?
  • What can you improve given the current information?
  • What do others perceive as your weaknesses?

  • What trends or conditions may positively impact you? 
  • What opportunities are available to you? 

  • What trends or conditions may negatively impact you?
  • What are your competitors doing that may impact you?
  • Do you have solid financial support?
  • What impact do your weaknesses have on the threats to you?

How do you identify internal and external risks for your business or organization?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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