Given the arrival of the global financial crisis, the Middle East uprisings and increasingly violent natural disasters, it’s plainly evident that handling risk has become increasingly difficult over the past decade. The outcome of these crises is an expansive climate of doubt.
Joe Plumeri, chief executive of global insurance broker, Willis, believes there has been a global shift from earlier times when things appeared more settled and the pace of change less rapid, saying, “The riskier the world gets the more fearful people become. It’s the fear of the unknown.”
In order to cope with the change though, business leaders need to adapt to new circumstances in order to survive.
Plumeri believes the most important characteristics for a leader to possess is to have vision combined with a sense of realism, and must become better at managing expectations.
The importance of realism and flexibility
Where a business can originate from a single great idea, things can’t always stay that way and a change in strategy is essential to the survival and growth of the business.
One such example is South African children’s clothing brand, Keedo, shifting its focus from a predominantly export strategy to a domestic one to counter the effects of the global recession.
Company founder, Nelia Annandale, explains that staying in business for 19 years has been an achievement in itself considering the flood of Chinese clothing imports, poor cotton harvest and the collapse of the local textile industry throwing significant challenges at the business.
The element of risk
The most significant shift for Keedo though, came when the financial crisis started to hit the US, which made up 60% of Keedo’s business in 2006.
“The US market became incredibly tough and the European market was very depressed, so in 2008 we had to go back to our strategy and decided to grow our existing footprint in Southern Africa,” Annandale explains.
For Keedo, changing course where 60% of revenue was concerned was a major risk, but it was a risk worth taking. As of 2012, exports now only account for 25% to 30% of the company’s business and effort has been placed on maximising local markets.
“Our focus on the local market has paid off and driven an increase in domestic consumption,” says Annandale.
Diversification to spread risk
Diversification can also be a useful approach for spreading risk in a business. Like investing in the stock market, financial advisors always warn against putting all your eggs in one basket.
The same is true for business. While you may have a single concept that is doing well, there is no guarantee that things will remain that way and it is wise to research and develop spin-offs and have other ideas in the pipeline.
If you choose to stick to your limited/niche offering however, make sure you have enough spare cash to keep existing operations going in the event of a dry spell or diversifying the business – otherwise the whole enterprise could be at risk.
During a growth phase, balancing the risks a business faces often requires making difficult decisions. And these decisions are best made sooner rather than later.
This is not to say they should ever be rushed into and based on an emotional reaction – they should always be calculated, consulted on, planned around and then adhered to.
As a prime example of making a huge and risky decision that ultimately worked to the company’s benefit, is General Electric’s decision to invest in China.
The decision placed hundreds of millions of dollars at stake – perhaps even the future of the company – but if right, it secured the existence of the company for the next century.
CEO at the time, Jack Welch, had a massive responsibility to manage the risk being taken. In 2011 the fruits were plainly evident: GE ranked as the sixth largest firms in the US by gross revenue, and in 2012 generated $147,3 billion in revenue.
How do you make the best risk decision?
- Take a chance –History has shown that the riskiest decisions can be the most rewarding and gratifying… BUT…
- Do your homework - There are no crystal balls to full anticipate the outcome of a big risk, but you can still evaluate as many avenues and scenarios as possible to come up with contingency plans.
- Don’t look back –Once you’ve settled on a decision you can’t maintain confidence and move forward if you self-doubt and worry about the future.
- Keep mistakes in perspective –If your risk fails, the lessons learnt are invaluable.
- When planning –Ask yourself, “What’s the worst that can happen?” And make plans from there. Rather have a plan you’ll never use, than be in a situation where you have no plan.
- Don’t let perfection get in the way of risk –If you wait until everything is perfect you may miss the boat altogether. Have the basics in place and adapt on the move.
- Evaluate what you’re really risking –It may not be as scary as you initially thought, it may put the entire business at risk.