Business Risks that Can Kill Your Business – Part 1
Risky Business: Top Business Risks that Can Kill Your Business – Part 1
Bad things can happen to good companies when management fails to recognize and address critical risks that can lead to business failure.
C-level executives are chartered with risk management as part of their everyday responsibility. They need to continually maximize the value of the business while minimizing the risk. Where many companies go wrong, however, is in over-emphasizing the value creation and underestimating the critical nature of managing risk.
There are many kinds of risks faced by a company’s management team every day: some are uncontrollable, such as rising oil prices, run-away inflation, the effects of unexpected disaster, like Katrina. However, many risks can be foreseen. This short white paper cannot address all the categories of business risk nor all the methods through which risk can be mitigated. It will focus on five common risks that plague mid-market companies.
These risks include:
Bad hires — the wrong person in the job
Project failure — a business initiative that failed to produce the expected results
Brand Erosion — the loss of the positive image that maintains customer loyalty
Misjudging the competition — whether through hubris or ignorance, failure to recognize competitive disruptors can be a killer
Mismanaged business transitions — change and the failure to manage it well is one of the major risks a company faces
Risk avoidance is not the goal of business leadership, rather a skillful balancing of risk and reward is required. This mandates for experience in the driver’s seat – as only seasoned and experienced managers, whether on a short or long term basis, can lead a company through the morass of business-critical “stall points” such as these. This failure often derives from issues that the company lacks the experienced talent to recognize early enough to ward off.
Business Risks: The Risk of Hiring Mistakes
Hiring risks are among the most expensive risks companies make, especially at the executive level. The wrong person in the job can lead to costly and sometimes fatal results for an SMB company. The risks are several:
1) Mis-defining the role. A company hires an individual who, while possibly having great credentials in a related area, does not fit with the job at hand. For example, perhaps a company really needs a super sales person, and instead hires an expensive sales operations individual. Or needs a VP of Field Marketing, and hires a great VP of corporate marketing.
2) Mis-defining the goals. For example, a company needs a great COO to work “in” the company, and hires a CEO type who is great working “on” the company. The definition of the objective and expected results of the job at hand are at odds.
3) Mis-defining the skill set required. For example, the company really needs an entrepreneurial individual to focus on “effectiveness,” and hires a process-minded individual that is an expert on “efficiency.”
Business Risks: Risk of Project Failure
Inexperience is a key cause of project failure, especially in a small to mid-sized business (SMB). Whether the project is a new initiative or the development of a new product, research shows that “projects gone bad” constitute close to 20%, while fewer than a third of all projects were deemed true successes. Here “failed” was defined as cancelled or finished but never used. Many participants called their “challenged” projects “failed” because of the cost or time overruns or failure to meet intended results.
Figure 1: Resolution of Projects
Source: The CHAOS 2013 Study on Business Project Outcomes
Jim Johnson, founder and chairman of the Standish Group cited project manager expertise as one of the top ten criteria in ensuring project success.3 Primary risks — such as time and cost overruns, poor communications among key stakeholders, inability to meet project requirements, and simply misjudging market timing — can all stem from lack of experience at the helm.
Business Risks: Risk of Missing Customer Expectations
Just as building a better buggy whip did not lead to market growth when Ford introduced automobiles, many of today’s SMBs hit a business stall point because they fail to change to meet the preferences of their customers. Whether in how they buy (Web/retail/catalog/telephone) or in what they buy, changes in customer behavior can blindside a business that has made assumptions based on past behaviors that no longer apply.
Failure to understand and address customer preferences can lead to manufacturing the wrong product, marketing it incorrectly, selling through the wrong channel, and trying to address the wrong audience. The result for a company can be rapid brand erosion and customer loss. Talbots, as one well-known example, lost its core customers — middle-aged women — when they tried to introduce younger, flashier styles with short skirts. The company not only did not understand the buying preferences of the post-teen shoppers, they lost their traditional target until they re-instated the kind of clothes that appealed to those adult women buyers.
The last two risks of misjudging the competition and mismanaged business transitions will be discussed in Part 2 of this series.
Business Risks: The Role of Independent Leadership in Mitigating Risk
English poet William Blake once said “Execution is the chariot of genius.” Nowhere is execution more important than in today’s business world. The five risk areas identified here present potential stall points for a company that can lead to “crash and burn” when not recognized early and addressed.
Business exposure can be mitigated by bringing in experienced leadership on an interim basis. In mitigating the risk of a bad hire, an independent executive can aid in clarifying the role and the goals of the position, and articulate the skill sets required. This executive can delineate the position plan, define the profile of an ideal candidate, and, when needed, actively participate in the hiring process. And when the perfect candidate cannot be found, the use of an independent executive to fill the position can ensure that there is continuity in the role to be filled until a permanent employee is identified.
The “analysis paralysis” typical of decision-makers who have not confronted critical questions before can be eliminated through use of independent leadership skilled in recognizing and managing risk because they can make a decision rapidly, based on their expertise and prior experience. It is imperative that a company has the ability to know how to identify, evaluate, quantify, and then mitigate risk. Only with the experience and insight to foresee what might go wrong, can management analyze what could go wrong before it does go wrong. Only then can the consequences of risk be assessed and managed to ensure business continuity.
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