Speaking of risk, it is existing everywhere, no matter it is in the sports, or in the race car, or in the business. When someone said to one of the most successful race car drivers in history, Mario Andreti that “You’re just lucky!” He responded, “Luck is when preparation and circumstance come together.” While other drivers were crashing in flames, he was riding to victory lane on the shoulders of his well-prepared team. He and his team reduced the risk of crashing, set the stage for victory with a hot car, and Mario drove the car to the checkered flag time after time.
It is the same thing when comes to the business, to win the race, the business managers need to prepare and manage their financial, people, market, and operating risks well. In the other words, it’s not just how much risk you take but how well you prepare so you can win even in risky situations.
I have come cross an article on the other day when I went through some of my old paper, it talks about how to dealing with the risk – smart chances, smart choices. After re-read it again, I find it is worth to share some of the key points with you. Below are some of the excerpt towards how to manage four of the most common business risks.
Financial Risk: Cash is your fuel so use it wisely. Even big companies occasionally collide with a cash crunch but small and middle-size companies are injured or die all too often in that crunch. When faced with inadequate cash to support necessary growth, Beta Co.* needed ways to build their P&L and balance sheet to attract financing. New management and systems were brought in to make better decisions, increase efficiency, maximize sales efforts, reduce costs, train personnel, and thus improve the P&L. A focus on balance sheet management included new inventory management goals and systems, debt restructuring, new cash management tools, and efficiency improvements that reduced the need for capital investments. High-risk business choices were either not taken or were managed (delayed, information gathered, or negotiated) to reduce risk and maximize success.
The net result was they needed less cash and were able to attract higher quality (e.g. less expensive) financing to stabilize the company, enable growth, and thus reduce the risk of financial failure.
People Risk: Turnover was high, morale was not, training couldn’t keep up, and quality and efficiency suffered at Gammatron*. With all the competition, they just couldn’t seem to be able to recruit enough qualified people and when they did, they couldn’t keep them. They raced as fast as they could and still fell behind.
The secret weapon in their turn-around to success was a root-cause analysis. The root-cause analysis found that they needed to make specific changes to fix the problems not just treat the symptoms. They revised hiring specifications to recruit the right people. They adjusted compensation to be competitive. A new training program was faster and more effective. Management training improved interpersonal relationships and morale. And an efficiency program increased productivity so fewer people were needed. The net result was that turnover was reduced, quality increased, morale went up, and the customers felt better appreciated so business improved. Gammatron was back in the race.
Market Risk: It seemed that they were now in the wrong race! The rules changed and Apex, Inc.* was now sliding off track with declining margins in a market where they used to win. Customers were shifting to the competition in droves and profits were in the pits. When they looked back, they found they could have seen it coming. The race (market) was changing and they were focused on keeping their old car (business methods) in shape while the competition was building new cars (business methods).
Apex got back in the race by doing a thorough strategic market analysis. The analysis clarified the current risks and illuminated strategies for reducing that future risk while maximizing the chance of winning. They set new strategic goals, trained and reorganized the employees to achieve the goals, change supplier relationships and terms, rationalized the customer base to focus on service and profitability, improved margins with an aggressive cost reduction program, put in systems to give them a clear view of the market road ahead, and created new systems to stay on course. They started winning again.
Operating or Manufacturing Risk: In the early 1990’s the Jones Company*, was desperate for new business. They sent their salesmen out into the field with new products to win new business. Well, they landed some big ones and set about filling the orders. Unfortunately, the manufacturing process had too much chance (risk) of producing off-quality material and they couldn’t meet demand. It was as though they had entered the race with a car that wasn’t reliable enough to go the distance. Instead of winning new business they wasted vitally needed cash and resources spinning their wheels in an effort that ended up alienating customers. Operating risk is also market risk.