Eager to diversify? Then get good at risk management!

Diversifying a business is by turns one of the most exciting and nerve-wracking processes that a manager or entrepreneur can go through. So many opportunities! Yet so much risk! Among the long grass in that commercial garden of delights could lay one or two casually placed rakes. And it doesn’t take an expert in slapstick to know that when you step on the functional end of a rake, it’s not long before you get whacked in the face.

Two firms that have suffered their own versions of that fate lately are Indian e-commerce platform Snapdeal and Korean electronics giant LG. Both have publicly admitted to mistakes linked specifically to business strategies around efforts to diversify. In Snapdeal’s case, the firm is having to lay off 600 staff and radically simplify its operation, after it fell into a bear-trap that so often claims hungry companies: trying to do too many things at once.

In an email to staff – which was also circulated to the media – Snapdeal bosses Kunal Bahl and Rohit Bansal wrote: “We started diversifying and starting new projects while we still hadn’t perfected the first, or made it profitable. We started building our team and capabilities for a much larger size of business than what was required with the present scale.” Tellingly, they added: “Ambition is critical, because that’s what motivates us to give our very best every single day – to achieve the undoable. However, a large amount of capital with ambition can be a potent mix that drives a company to defocus from its core.”

(Bahl and Bansal also announced that they’ve taken 100% pay cuts. Gulp.)

Keep every antenna tuned
LG’s problems also centred on India. Key to the firm’s strategy for this rich and colourful terrain was a desire to capture glory for its smartphone arm: a goal that had proven elusive in many other markets. However, LG’s phone operation has fared no better in India than it has in other parts of the world, with the firm achieving a market share in only the low single digits. Blue-chip rival Samsung has brand recognition that is all but impossible to touch, while the most effective newcomers have been Chinese companies Huawei, Vivo, Oppo and Gionee – plus home-grown firms like Karbonn, Lava and Micromax. That’s quite a crowd, among which LG hasn’t been able to make its phone products stand out.

Speaking to the Times of India, Kim Ki Wan – head of LG’s Indian branch – said of the firm’s strategy: “We made mistakes … our products are not attractive enough for Indian customers as yet.” He noted that the company is “focused on developing India-specific designs and functions to make a differentiation when compared to our competitors. India is huge and diverse, and we have studied this market over the last few years. Now, step by step, we are coming up with new devices with specific local functions.”

Okay – here’s the thing. No one’s telling anyone not to be ambitious. That would be a pretty risible stance to take with globe-spanning technology giants. But whether we’re talking about large companies with significant resources at their disposal, or smaller, younger ones that tend to act on instinct, the baseline approach to diversifying must always be to have every antenna tuned to the potential for risk. And for that, you have to do your homework.

SWOT risk with a PESTLE
You don’t know what you don’t know, and many mistakes that are born from ambition are fathered by ignorance – or, at any rate, a drastic shortfall of vital information. That email from Snapdeal’s founders nakedly reveals how a rolling lack of expertise has tripped them up, with successive ventures taking off in only half-formed states. And the press interview with the boss of LG India hints at a firm that has failed to take a sufficiently detailed look at the market conditions in which it wanted to operate, and is only now striving to tailor its products to that environment.

The less we’re aware of risk, the more it’s likely to bite us. That’s why I’d recommend for any company that’s contemplating doing something new only the most scrupulous and principled risk management strategy. So, you ask, where to begin? Well, in my experience, the simplest and most useful starting point for confronting the spectre of risk is by weighing up the Strengths, Weaknesses, Opportunities and Threats inherent in any new undertaking. Known for short as SWOT Analysis, this process invites firms to carefully consider areas where they may not be equipped for the road ahead, well before they start thinking about the good stuff.

There’s nothing wrong with owning up to weaknesses. It’s called realism. Indeed, many of the companies I’ve worked with have often discovered that their weaknesses are where their threats lie – so those two parts of the equation are very closely linked. In conducting a SWOT analysis, it would be wise to consider all of your critical business activities, and any factors that could have an impact on them. Having identified key risks via the SWOT method, the next step is to assess their relative importance. So all in all, the process is: 1) Identify; 2) Assess; 3) Mitigate, and 4) Manage. Together, those stages will present a firm with a bona-fide Risk Management Strategy.

For a deeper and more varied dive into the world of possibilities that risk presents, firms can also plug into PESTLE Analysis: a type of evaluation that focuses on the Political, Economic, Social, Technological, Legal and Environmental factors at play in any fresh territory they want to work in, or any new business model they’re aiming to launch.

Whether you go for SWOT, PESTLE or even both, the determinations you make will pan out as answers to these three, simple questions:

  1. What is the likelihood of ‘x’ risk(s) arising?
  2. What kind of impact could it/they have on my firm?
  3. Which mitigating measures would it be appropriate for me to put in place?

A healthy dialogue
The important thing to remember here is that SWOT and PESTLE analyses are all based on a giant, sliding scale of risk factors. Those factors will vary from firm to firm – and within each firm, from initiative to initiative. The results are bespoke, and as such will provide you with a kind of fingerprint of the risks your company is likely to face. To give you an idea of how helpful they are, here’s a couple of scenarios from my career and my network that illustrate two, extreme ends of this huge range of possibilities:

In the first, a large company I worked with decided to branch out and diversify into a new arena, and a significant flaw that would have been very hard to spot or predict cropped up in part of the new venture. It caused a great deal of consternation, and the company was prepared to spend an awful lot of money to ensure that it wouldn’t happen again. My department was tasked with carrying out a risk analysis of the error, and we concluded that the likelihood of it recurring was actually quite low. So I expressed the view that the company didn’t need to spend as much money as it was planning to. This spurred a healthy dialogue about which mitigations were proportionate.

In the second scenario, a small-business owner I know had the opportunity to work with a very large client. As you may be able to appreciate, it was a difficult gig to turn down. As the owner had worked with major firms in the past, he jumped in with both feet and went for it. But after he took the client on, the client took him down. Their demands were onerous, and the owner had to boost his hiring to maintain the output for just this one stream of work. Eventually, the costs of delivery outstripped the revenue, and the owner was forced to go out of business.

I’ve blogged before about the dangers of the “win at all costs” mentality, and how an Overextended, competitive streak can lead managers into toxic waters. The beauty of risk analysis is that you don’t have to sacrifice ambition – you just pull back from the brink of Overextended impulses. The path ahead becomes clearer. Heads become cooler. There are benefits for every type of firm. The only difference I would highlight is that larger companies are more likely to have people on staff who can carry out those analyses, while smaller firms – who are often competing at such a pace that they don’t have time to think, and are more likely to take risks – may require specialist expertise.

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