Identify Risks to Your Business

By Robert Guild

Business owners must be able to adapt to the changing economic and business environment. Successful, mature companies are those that are able to identify business risk factors and adapt to constantly changing market conditions.

Do you understand the business risk factors that influence both your industry and company?

Know the Competition
Understanding the competitive landscape is crucial to running a business. Businesses compete for clients using pricing, product quality, customer service, and a host of other factors. 

Consider the example of video rental outfit Blockbuster. During the 1990’s, Blockbuster put almost all of its smaller competitors out of business with its huge selection of movies and by expanding rapidly via acquisitions. As a result, most small video rental stores couldn’t compete with Blockbuster’s immense selection as more and more consumers were making it a “Blockbuster night.”

But by the mid-2000s, the landscape had changed. Online video subscription services provided by Netflix and Amazon offered all the titles Blockbuster did, and more, with the convenience of never having to go out to a store to rent a movie. By the time Blockbuster realized the changing business environment, it was already too late.

Blockbuster, just like the many small businesses that it put out of business, did not change their model in time. Business risk factors are constantly in flux. Business owners and managers must have a feel for the competitive environment in which they operate.

Know Your Suppliers
I’d like to share with you the following example of one of my previous employers that failed to recognize what was going on with their customers.

The company operated a gas pipeline. They would purchase gas at the wellhead, separate liquids such as butane and propane at its gas processing plant, and then sell the dry gas and liquids. The customer base consisted primarily of operators of approximately 300 low-production-volume gas wells in North Texas.

The company dominated the market in the region where they operated. Additionally, the field where gas was being pumped out of was in declining production so competition was not expected to enter the market. At the time, the company had a good number of wells under contract. Revenues were not overly dependent on production from any one group of wells or property owners.

Unfortunately, one giant error was made in the assumption that operations would continue to run smoothly. The company that pumped gas at the wellhead had to make a reasonable profit from getting the natural gas out of the ground.

If this profit was too small, they could exercise their option to “shut in” the well and stop selling gas to the pipeline until gas prices increased to a more profitable level. Also, the wells were low-gas-volume producers, which meant that the operating costs were high, relative to the revenue generated.

Soon, gas prices dropped and the producers at the well decided to stop selling gas to the pipeline until gas prices increased. With no gas flowing to the pipeline, the company went into bankruptcy. My former company failed to understand the position that its suppliers were in, and this is a mistake commonly made by many small businesses. Owners and managers should have a plan in place that accounts for supply disruptions.

Other Factors
Every industry and business is unique. Some businesses, like those in the defense and health care industry, are affected by political factors. Business risk factors can be local, regional, or global. The first step is to identify those unique risks to your business. Only then is it possible to anticipate market changes and develop strategies to adapt.


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