BECAUSE OF COVID 19, IT'S TIME FOR A STRATEGIC MANAGEMENT RISK ASSESSMANT!
BECAUSE OF COVID 19, IT’S TIME FOR A STRATEGIC MANAGEMENT RISK ASSESSMANT!
Darrell Smith CFE, ARM, CIM, FCSI
In November of 2019, we ran a digital ad “How to Prepare Your Business for the Coming Recession”. While a number of people who responded to the ad had genuine concerns, the interesting thing was a lot of business owners said that their business was doing the best ever and that their company was sound and the economy was great. Five months later everything has changed. It’s not that I had a crystal ball and knew things were going to get bad. There were signs that the economy was slowing down, with record low interest rates and record high corporate and consumer debt. I mention this to illustrate how quickly the business environment can change and the importance of strategic and risk management planning. Business need to have a strategic plan, with the flexibility to identify the risks it faces and to react accordingly.
A strategic plan establishes where your organization is going and how it will get there. It is essentially a blue print for your organizations success. It is developed by Senior Management and the Board of Directors. It consists of a Vision Statement; where is the company going, A Mission Statement; why does our organization exist, Strategy Statement; what will we do to get there and a Strategic Plan; how will we do it.
Strategic risk management is a process of identifying, analyzing and managing risks that could prevent your organization from achieving its strategic goals. It could be either internal or external risks and its goal is to protect shareholder value and is part of the Enterprise Risk Management (ERM) process. An example would be Project Failure, where new software is installed, only to have it become obsolete or not do what it was intended to do.
So let’s look specifically at the main strategic risks your company will face and can prepare for:
1. You Lose Customers: Customers have ever changing tastes, needs and preferences. Losing customers reduces sales and profits. Losing too many customers to quickly can result in the business shutting down. Staying connected with your customers and understanding their changing needs will help you prevent surprises. Working with them will help you understand their business and make you more valuable to them.
2. Your Brand Loses Its Customer Appeal: While many brands retain their customer appeal for ever (Think Coke) others lose the appeal over a period of time (Think Blackberry). Brand erosion occurs over time because of changing customers. Some reasons for brands losing their power are; poor or declining product or service quality and poor customer service. Brands can also become boring and uninteresting to the customer.
3. Your Big Project Fails: According to the PMI, more than 14% of all projects fail. With 37% of the reason for failure was a lack of clear vision and goals. A PWC study of over 10,640 projects found that only 2.5% of companies complete their projects 100% successfully. The rest either failed to meet their original target or missed their original budget or deadline. Think about the financial cost of time and materials that go into a failed project and the opportunity cost. Ask how is this project going to help us achieve our strategic goals? What are our chances of success? How can we increase those odds?
4. Your Company Sales Stop Growing: When sales stop growing, it affects cash flow and profits to the shareholders. You start losing key employees and may have to pass on other opportunities. How do you keep sales growing without creating more risk?
5. Your Business or Industry Becomes a No Profit Zone: Many industries are losing their ability to generate a profit such as retail or manufacturing. This can be because of increased competition or customer power that demands lower and lower prices. Is your industry heading this way? What opportunities are available to counteract the process?
6. An Unstoppable Competitor Enters Your Market: Think of an owner of a small town grocery store, where a Wal Mart opens up down the road. They have vast financial resources, purchasing power with suppliers, top notch Management Information Systems and a world renowned brand. How do you compete with them? You can and businesses have done it.
7. Your Industry Reaches a Fork in the Road: Technology, Customers, Economics, Regulatory or Political events can be the reason for having to choose between two possibilities. An example would be an armoured car company, assessing the fact that cash transactions will soon become obsolete. Do they move into other markets or focus on getting new customers. When an industry is transformed up to 80% of businesses fail to adapt and make the transition, (Think Blockbuster).
So as a business owner or manager, how do you assess your strategic risk? Start by identifying and quantifying your risks by going through each one of the seven types of Strategic Risks I outlined above. As an example using number 1. Ask yourself are you losing customers? What is our customer turnover ratio? Why are we losing customers? If you are increasing your customer base, then why? Track your work by putting it into a simple Strategic Risk Chart.
Risk Odds of Occurrence in% Impact in$ Action/Countermeasure % Complete
Lose 15% of 75% 30% of Sales Reduce Expenses by 10% 40%
Customer’s $300,000 Hire customer service staff
So now you have analyzed the seven strategic risks, next you need to take the top three to five risks with the highest impact on your business and develop your action plan to mitigate the risks.
Two of the goals of strategic risk management is to deflect the smaller day to day risks and to mitigate the larger risks you cannot avoid. There is a whole list of risk avoidance and risk management techniques that companies can use. Everything from reducing your fixed costs, have effective business intelligence systems to gather information that affects your customers and competitors, have early warning systems on customers’ needs and changing tastes and a whole list of other techniques.
Statistically, 20% of new businesses will close in the first year and 50% of business will have closed by their fifth year. So the odds of surviving your first year is 80% and your fifth year 50%. So from a Strategic Risk Management perspective Covid 19 has increased the odds of business failures. The Restaurant Association of Nova Scotia completed a study and said that 10% of restaurants in Nova Scotia closed this year so far and another 40% could close by March 2021.
Companies that are highly leveraged will not be able to service their debt, consumers will spend less because of higher unemployment. Yet some companies will survive and prosper and other companies will start up and beat the odds. Luck may play a part but eventually your luck runs out, that’s why you need to ensure that your Strategic Plan Is sound and you identify the risks that can get in your way.
I have simplified the process a little to make it easy to understand and to keep it short. I find the most effective way of doing a Strategic Risk Assessment is through a company workshop. I offer half day workshops on Strategic Risk Management to companies involving their executives and senior managers. They are fun to do and there is always a number of key takeaways that help the client right away.
Feel free to reach out to me if you have any questions about how to get started.