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