Exponential Risk Reduction helps in your business success.

In managing risk, after we arrange the chronology of action steps that lead to a desired business outcome, successful accomplishment of early steps increases the probability of accomplishment of the subsequent steps.

 

An interesting aspect we must understand, while working on our business is exponential risk reduction. Where the final outcome requires a series of actions and the occurrence of a prior action alters the risks involved in the succeeding actions, we say there is exponential risk reduction, for achieving the final outcome. This exponential risk reduction is an important phenomenon that we should take help of when we place our bets on business outcomes.

Let’s take an example; a leather product manufacturer specializes in good quality wallets of men. He has been white labeling his products for large departmental stores. He has launched wallets with his brand name. He wants to enter the competitive retail market in Mumbai. Mumbai has a large number of readymade garment and accessories stores. Most of these stores already well stocked with accessories. These stores have limited space and money allocation for leather wallets and stock products of vendors with whom they have long standing relationships. There are only two alternatives for this leather manufacturer. First is to create pull though advertising and get them to stock, which calls for large upfront investment. Second is to use channel push to build the brand over time, which is hard work. The second alternative requires lesser investment but entails harder effort. In executing the second alternative, critical investment is in having quality sales persons who are incentivized and motivated to ensure the many stores will stock the company’s wallets. At some chosen stores, the product could be stocked on consignment basis. Since most wallets are targeted on price, at the low end segment, it is important to have our wallets be premium priced high quality wallets, and be made available in many of the bigger stores.

The risk mitigating choices that ensure base probability of success, in this case, are –

a.   Avoid advertising that creates the pull but requires large investments upfront, for a product that is mostly hidden in the back pocket of your trouser. Risk is mitigated by choosing the channel push route. But this calls for hard work.

b.   Choosing premium wallets with creative design allows for higher margins and differentiating from large number of competitors who operate on price and credit periods, for their commoditized wallets.

c.   Success of this plan rests on creative and premium designs that will create a differentiated brand – this must be achieved.

d.   A necessary action is of hiring sufficient salesmen.

e.   Salesmen must be well trained and of the right caliber to support the brand image.

f.   Salesmen must be motivated and incentivized.

g.  Salesmen must visit targeted stores at targeted frequency, and meet minimum daily activity norms. Simply doing what they must do, correctly, can yield desired results.

h.  At key stores, consider buying premium display positions.

i.   Store stocking, store off-take and store replenishments must be closely monitored to create smooth and wonderful experience for the stores that stock our wallets. Supply logistics must be in place.

j.   Stock off-take monitoring, inventory management, manufacturing must be seamlessly tied to ensure that demand created with great effort will fructify into sales. Stock-outs must not occur.

If every action step above is done with earnest effort, base probability of success is achieved, and your venture is poised for success.

At every action step you will see that the prior activity increases the success probability of activity that follows. As a case point, let’s consider step (e) and step (f) above. That the salesmen are trained well, improves chances that they are well motivated. The selection of the right caliber of salesmen will increase the chances that incentive plan will work and the excellent stocking at prime stores is achieved. This in turn is critical for our achieving our sales numbers. But all this will never happen, if the first risk of making investments in a sales team is not executed. The choice of channel push necessitates that the sales persons must have the caliber to generate sales through assertive order taking. In contrast, if advertising is used, sufficient pull is generated; mere order-taking personnel could do the job.

Thus to grow your business, the first action steps you take, has the highest risk. You must do all it takes to achieve the base probability of success for that action step.When you succeed in this first critical action step, the probability of the subsequent events gets automatically changed in our favor. Thus more steps we succeed in, more easily we achieve our business goal. When you simultaneously look at all steps you need to work on; together they will seem formidable. This will bring utmost fear and prevent you from taking a single step and keep you away from pursuing your goal. Look only at the key first step, and swear you will make it happen. When the first couple of steps happen, you will begin to gather momentum with the help of naturally occurring phenomenon of exponential risk reduction, and would soon be working on a business that is transforming into a big one. Until you take courage to execute the first step, you will remain a mere bystander who only hopes that his business will grow.

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Read -

Business owner must avoid becoming a self-employed businessman.

Risk and the idea of base probability to help grow your business.

Visit www.mapcerebri.com

Also see the following links:

 

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?
Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing. 

Business Owner - Chief Worker or Chief Entrepreneurial Officer? 

Capital Adequacy and Financial leverage - preparing for opportunistic growth.

Capitalizing on External Expertise - introducing competence for performance.

Risk and the idea of base probability to help grow your business

How to manage risk depends on your understanding of risk and the idea of base probability of any business outcome. Are you doing what it takes to make your business successful, by diligently doing the “must-do” steps?

The basic role of the entrepreneur is not taking risks, but mitigating risks and increasing the chance of business success. It is important to understand risk and probability. Both are related but different concepts. Risk is a chance that the outcome you desire will or will not happen. Probability is the measure of likelihood that an event will happen.

So risk is that a lady can get pregnant if she copulates. Probability is the measure of the likelihood that she will get pregnant. It depends on whether a number of requisite concurrent factors are in place for pregnancy to be the outcome of the action. 

Similarly in business, risks are clearly known if you care to elucidate them, but the uncertainty is about the chance that all or some of them will or will not happen. Every outcome has a natural base probability of occurrence and the associated uncertainty can never be controlled or resolved. But one can influence the outcome but ensuring that the base conditions are met so the base probability is achievable.

Let me explain, imagine that you are required to throw darts to hit the bull’s eye. There is a base probability that this will happen – whoever throws it. But imagine that the dartboard is placed in a dark room, you have a dart that is bent and has broken fins, you are blindfolded, you are drunk and you don’t know which directions the dartboard is. Will you be able to achieve the base probability of hitting the bull’s eye? Surely not! Thus, to achieve the base probability you must be sober and alert, not blindfolded, have an aerodynamically designed dart, you must face the dartboard that is placed in a well lit room, be without distraction and have put in enough practice (skill development). Here you are not doing anything unusual, just doing everything that you must do. The key phrase is “everything”. Not doing even one of the activities listed above can hinder the chance that you will hit the bull’s eye as compared to a person who follows everything in that list above.

 Every business has a base probability for success (depending on the product, market and competitive presence). All you must do is to have all base events covered; to allow base probability to work. Because entrepreneurs compromise working on some important base factors, due to lethargy, callousness or cost; they sacrifice on occurrence of the base probability for business success.  Just as we had to do some base activities to increase chance of hitting bull’s eye, we must identify and execute such base activities that help us achieve base probability for business success. These base activities form what we commonly refer to as Key Success Factors, something we must do so that we will succeed.

In the blog that follows, read about “exponential risk reduction” and how it affects your business success.

Picture Courtsey -FreeDigitalPhotos.net_jscreationzs;FreeDigitalPhotos.net_pakorn
Read - Business owner must avoid becoming a self-employed businessman.

Visit www.mapcerebri.com

Also see the following links:

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?

Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing.

Business Owner - Chief Worker or Chief Entrepreneurial Officer?

Capital Adequacy and Financial leverage - preparing for opportunistic growth

Capitalizing on External Expertise - introducing competence for performance.

Business owner must avoid becoming a self-employed businessman.

As your business starts to give a steady income stream, you have to make a choice. One choice is instant gratification by sucking away your profits from the business. Second is to postpone rewarding yourself with the intent of making big gains, by reinvesting profits into your business. What you choose determines how big your business can be.

  

Whenever we speak of a primary qualification of an entrepreneur, it is always said that the entrepreneurs must be risk takers. While this is somewhat true; is not entirely true. Let me explain this – when a person chooses not to work for a salary, he takes a professional risk with his income stream. He trades the comfort of a regular salary and embraces the risk of exchanging his idea of a product or service for a larger and growing revenue steam, in the near future. At the beginning of his entrepreneurial effort, there is risk until the start of his revenue stream. Thereafter, he seeks a steady revenue stream. Following achievement of a regular and steady income; how he thinks determines, how big he can be. He can look for growing his revenue stream or look for the comfort of a steady income.

Having gone through a phase of severe paucity of personal income, a steady flow of revenue comes as a whiff of bliss; he suddenly has at his disposable income that he can use for his personal and family welfare. The more he focuses on this, the less will he want to take any risk that will disturb his steady stream of disposable income. He develops an aversion to invest in his business and therefore, fails to grow. Instead, he seeks to keep up the steady revenue stream, whilst saving costs. By doing all work himself he gets bog down. Chasing business growth needs monetary investment. The “what if” doubt is about ROI on additional investment and the necessity of sacrificing profit in the short run, to chase a prospective revenue growth.

A large number of businesses fail to make it big, because business owners see a gradual decline in their risk taking ability as their businesses start to grow. At this inflection point, business owner must make an important value decision of going for growth and glory versus settling in for mediocrity and having a stable and steady income for himself. That is to say, if he chooses the latter, he could become a self-employed businessman.

In the blog that follows, read to understand the concepts of “risk” and “probability” and how you can work yourself out of your comfort zone and grow your business into a big one.

Picture Courtsey -FreeDigitalPhotos.net_jscreationzs

Visit www.mapcerebri.com

Also see the following links:

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?

Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing.

Business Owner - Chief Worker or Chief Entrepreneurial Officer?

Capital Adequacy and Financial leverage - preparing for opportunistic growth

Capitalizing on External Expertise - introducing competence for performance.

Relating to the external world – leveraging relationships that add value

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Business happens best in an environment where symbiotic relationships develop. All business involves rational thinking yet much of the decisions are made emotionally – both at a conscious level and at the sub-conscious levels. Building good relationship with your business ecosystem is not only important but mandatory.

1. Customer relationship –it is well understood and oft repeated that growing revenue by converting customers is far more expensive than doing so from existing customers. Your goodwill is generated at all customer touch-points. How your business interfaces with customers at all touch points determines how deep your relationship with the customers. This is a comprehensive science and an art that must be implemented whole-heartedly. 
2. Vendor relationship – Vendors are a key partner for a growing organization. It would be foolhardy to believe that vendors depend on you for their business and that you can be brash with them. A good steady relationship with your vendors ensures that you get inputs of steady quality and reasonable price. They will get preferential treatment in times of sudden increase in your requirements or in times of shortage. Many times vendors can come to your rescue when you need extra credit period to overcome a working capital squeeze.

3. Business Networking – Entrepreneurship is not an introverted activity, although many entrepreneurs are introverts. Being part of industry forums and business associations are important source of exchange of knowledge and information. There is much to learn from other people’s experience. Networking is also good for business; it offers an efficient means of ‘word of mouth’ marketing. In fact, more you refer others, more referral you are likely to get too.

d.      Knowledge Network – In managing your business, you will need help in many areas of expertise. Rather than look for expertise when in a crisis, it is a better idea to have a network of acquaintances and associations of people across a wide spectrum of knowledge and expertise. Your knowledge network could include a lawyer, financial experters, senior police official, banker, doctor, journalist, local politician, etc. A large knowledge network is of great value. Strategic thinking requires a wide range of inputs; knowledge network can develop into an informal board of advisors. More active a role you play as a giver within your knowledge network, more genuine and valuable the advice that will come to you at times of need. The knowledge network only complements, but it cannot replace the outside help you will need from professional experts and must be used only for bouncing ideas, clarifying points of view, and getting an opinion.

Visit www.mapcerebri.com

To get the full picture see the following links:

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?

Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing. 

Business Owner - Chief Worker or Chief Entrepreneurial Officer?

Capital Adequacy and Financial leverage - preparing for opportunistic growth

Capitalizing on External Expertise - introducing competence for performance.

 

Capitalizing on external expertise – introducing competence for performance

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Managing a growing small business cannot be done on a do-it-yourself mode. Efficiency in running a business comes from using the right expertise. The business owner may be knowledgeable in many areas, but it would not be appropriate to do all tasks on your own and become the bottleneck in the organization’s growth. Instead use experts to multiply yourself. Your knowledge in key areas will be useful in getting better results from hired outside help. In areas you lack expertise, it is necessary to keep adding to your knowledge, only to understand the principles at work and leaving the execution to the hired expert. After all, you need not know how electricity works to switch on the light bulb. Hiring consultant or outside expert may add to cost, but it brings efficiencies that far out-weight the cost. Hiring consultants is the better way to bring unavailable expertise into a growing small business than hiring of employees. Managing employees require greater organizational commitment. Besides, is far easier to rid an under-performing consultant than an under-performing employee.

Visit www.mapcerebri.com

To get the full picture see the following links:

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?

Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing. 

Business Owner - Chief Worker or Chief Entrepreneurial Officer?

Capital Adequacy and Financial leverage - preparing for opportunistic growth

Capital Adequacy and Financial Leverage – preparing for opportunistic growth

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The need for capital adequacy and financial leverage is not for survival alone. You are now a growing successful enterprise that desires to make the transition of being small to becoming big. This is the time to prepare for opportunistic growth and not being stuck in the operational rut. To execute growth, we need to have capital adequacy and financial leverage. The following are the things we must do –

1.      Postpone gratification and invest in the business – Retain earnings into your business; don’t get greedy on paying yourself dividends. Retaining earnings in the business is the most effective source of capital for a small and growing business. Keep adding to your reserves and use it to fund your growth ideas. Trade instant gratification through dividend income for higher valuation for your invested equity.

2.      Cash Flow controls – However good your going is, keep the cash flow cycles short. Find ways to make it shorter and shorter. Leverage your vendor credits and keep your receivables in tight control. Keep the DSO low and minimize/ eradicate receivables beyond 45 days.

3.      Inventory turnover – maximizing inventory turnover is the best way to make money work harder for you. By minimizing manufacturing set-up times, improving  manufacturing process efficiencies, and managing inventory better, your working capital requirement can come down significantly; improving your ROI.  Even if you are a services company, leverage you billing man-hours efficiently; put processes in place that shortens the delivery time on every service order/project. Keep a close watch on man-hour utilization because work always expands to fill time. Monitor also the under-utilized man-hours (bench time) which is opportunity cost particularly if bench-time occurs due to poor resource planning.

4.      Bank Overdraft – this is an important source of working capital fund. Even if we are not in dire need of this facility, it is best kept ready for use to leverage sudden market opportunity when they are presented. Maintain good relations with your bank and keep a low cost bank OD facility active.

5.      Build credibility with your bank for a Long term Loan – Although you may not need a long term loan right now, keep your relationship with your bank as if you need it now. Keep you bank informed of your financials and your business plans. Deal with you bank at formal and informal levels to built your relationship. The bank should look at you are a potentially great client to have. This helps to negotiate better terms when you actually require a long term loan to fuel your growth. Approaching you bank at the eleventh hour of need gives the bank an upper hand in negotiating the terms of your debt. Bankers look for the following 5 things before they lend money –

a.      The character of the business owner and the reputation of the business.

b.      Capacity to repay; judged by the quality for your business model and the cash-flow.

c.      Availability of collateral security.

d.      Net worth of the Business.

e.      Contribution, i.e. your equity in the Business.

Visit www.mapcerebri.com

To get the full picture see the following links:

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?

Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing. 

Business Owner - Chief Worker or Chief Entrepreneurial Officer?

Business owner - Chief Worker or Chief Entrepreneurial Officer?

Photo:FreeStockPhotosDotBiz

The business owner is the Chief Entrepreneurial Officer and cannot be the Chief Worker of his enterprise. While he owns the business, he must not be the master doer of all the tasks of his enterprise. It is important to realize this key thought. Some things need to be envisioned for action, few must be pushed, but many things in an enterprise happen automatically; if only one creates the right set of processes and have people do them for you without your involvement. As a CEO you don’t have make every entry in the general ledger. An important cause of the phantom ceiling effect is that CEO, because of their personality, become the bottleneck – won’t let go and will run all aspects of their business. In the early start-up phase this may be required, but what makes good CEOs is their ability to let their organization grow on its own. CEOs must make an important transition from Doer-Managers to Thinker-Leaders.

This transition doesn’t happen easily and naturally. It is an act of will for the CEO. Where such transitions happen, most often the enterprise too makes a transformation from being small to becoming big. The CEO transition to a thinker-leader is a two step process – first step is the realization that transition is mandatory and must happen; second step is a conscious self development to make the transition. This self development can be structured by hiring consultant who can guide the organizational transition process and your learning happens as you go about it. A CEO Coach is a good option too.

Visit www.mapcerebri.com

To get the full picture see the following links:

The Phantom Ceiling Effect.

How do you recognize the Phantom Ceiling Effect?

Breaking through the Phantom ceiling Effect.

Review you Revenue Model.

Structure-System-Staff and the Role of the Chief Entrepreneurial officer.

Reviewing structure to optimize performance of a small business.

Having the right systems – standardizing for performance.
Staffing - Critical success factor to keep growing.