De-risking and diversification aren't new business terms. They've been around as long as risk has given entrepreneurs sleepless nights.
It's laughable to imagine a result-driven business (big or small) without risk. So long as there's a change of events or circumstances, threats are inevitable. How you respond to them makes all the difference.
Some businesses react to risk after the fact, ruining their profitability potential. Others plan ahead to avert pitfalls and reinforce business continuity. Where do you fall?
A solid risk management strategy sets you ahead of the pack. It helps you identify, control, and prevent financial, market, legal, and operational setbacks. De-risking and diversification are the top strategies to consider.
Discover the common risks for medium enterprises. Learn how de-risking and diversification help businesses grow their value and asset base.
Are you a medium enterprise?
You won't have a well-defined scaling strategy if you don't understand your business size. Is your enterprise small, medium, or large, and according to what parameters?
The definition of a medium enterprise varies by country, location-specific regulations, and industry.
For instance, these ventures fall between small and large enterprises in the USA. Their assets, revenues, and number of employees sit within certain thresholds.
In most jurisdictions, a medium or midsize enterprise has 100-999 employees. It typically earns an annual revenue of $50 million, but less than $1 billion.
Small and midsize enterprises are the largest contributors to the world economy. They're essential to job creation and international economic growth. These ventures account for 90% of businesses and over 50% of global employment.
You can't ignore evolving enterprise risks and still dominate this vast landscape. The US Bureau of Labor Statistics estimates one in five businesses fail within year one. Arm yourself with proven risk mitigation strategies to maintain a competitive edge.
Before investing in prevention, what threats is your medium enterprise up against?
What risks do medium enterprises face?
The role of medium enterprises in national economies is irreplaceable. Their survival matters not only to entrepreneurs but also to governments. These businesses often face unforeseen risks based on their scope and industry. Common threats to mitigate include:
Market risks
How stable is the market for your goods or services? Here are the most common market risks for medium enterprises:
- Stiff competition
- Unreliability of suppliers
- Changes in market trends
- Market stagnation
- Loss of customers
These risks affect your business value by disrupting pricing, sales, and market share.
Financial risks
Changing market conditions can trigger various financial risks. A shrinking financial capacity may derail your scaling efforts. Keep these factors in mind when crafting your financial strategy:
- Foreign exchange fluctuations
- Changing interest rates
- Defaulting credit customers
- Liquidity challenges
- Lack of expansion capital
Operational risks
A smooth business operation translates to efficiency, customer satisfaction, and increased sales. Have you documented the day-to-day challenges your enterprise could run into? They may include:
- Damage to physical assets
- Supply chain breakdowns
- System failures
- Data breaches
- Failed or recalled products
- Employee errors
Legal and compliance risks
Are you considering venturing beyond local markets? Brace for legal and compliance risks, as business environments vary by location.
Violating certain foreign laws is costly. You may attract huge fines, ruin your brand reputation, and chase customers. In the worst cases, some regulators could withdraw your operating license.
What's the safety net? Partner with a global-minded business development team like Innovation Park. They exist to help your medium enterprise soar internationally hassle-free.
Strategic risks
Does your business strategy cover all the essential bases? Did you involve all the key stakeholders at the planning stage?
A faulty business strategy can hinder your medium enterprise from reaching its goals. Your plan may be solid, but you risk failing if your business executives don't follow it.
Why not let Innovation Park strategize with you? They have over two decades of studying business environments. Their scaling experts know the strategies that work and those that don't.
What is de-risking?
De-risking is the strategy you employ to make your medium enterprise less risky.
Even though you're a midsize business, there are higher levels to aim for. De-risking is one way to accelerate your scaling efforts.
Do your business processes or internal stakeholders portray any potential threat? What are the deliberate steps you take to prevent a financial loss?
De-risking focuses on particular business risks or pitfalls. It aims to mitigate their negative impact and secure company gains.
Popular de-risking techniques include debt reduction and risk mitigation through insurance or hedging.
Debt reduction
Reducing debt promotes financial stability, flexibility, and long-term growth. It also boosts your reputation and trust among investors and customers.
Most investors view a debt-dependent business as high-risk. This perception can affect your access to capital for expansion. Reducing debt also helps you retain business control.
Here are a few tips to keep your debt appetite under control:
- Don't react; stick to a long-term strategy. Preparing your company for future success gives you enough time to make healthy decisions. For instance, within a five-year window, you can accumulate funds as you wait for opportunities.
- Scale small but steadily. Not every opportunity is worth investing in. Choosing value over hype is a solid way to grow. Certain levels of business can sustain themselves without additional debt. Alternatively, consider crowdfunding to retain company shares.
- Maximize efficiency. Streamline your business processes to reduce overheads and boost profits. Work on an irresistible value proposition to sell your brand for what it's worth. Why compromise pricing only to end up borrowing to meet your profit margins?
- Be tactical in your financing options. Ready to bring investors on board? You don't have to surrender ownership to get funding. Consider family investors or fixed-term loans for their leniency.
- Stay humble and grow. Avoid the entitlement of taking too much from the business as salary. It's more prudent to pay yourself a reasonable sum and invest the rest into the business.
Insurance
Insurance helps you de-risk your enterprise by transferring some of your threats. Identify the risks associated with different aspects of your business. Analyze their potential impact on your bottom line before settling for an insurance provider.
Your business equipment and inventory are prone to theft, fire, and natural disasters. They can sabotage your operations and profits if they fail unexpectedly. No wonder up to 40% of entrepreneurs have business interruption insurance.
Contracts
Contract signing helps clarify agreements, obligations, and responsibilities within your business. It reduces conflicts, all while promoting seamlessness and efficiency. Some essential contracts include supplier and employee contracts.
You optimize business resources when each party aligns with their expected outcomes. Clarity in your operations helps define the scope of work and timelines. It also stipulates deliverables that simplify goal-tracking.
Standard operating procedures (SOPs)
Standard operating procedures (SOPs) de-risk your business by boosting efficiency. They detail quality control protocols, safety measures, and legal requirements. It's easier to minimize mistakes, accidents, and regulatory breaches.
SOPs ensure consistent brand quality, reducing the risk of customer dissatisfaction. They also shield your business from legal tussles that may impact your finances. You enjoy business continuity, even in the absence of certain employees.
What is diversification?
Diversification serves two primary functions: growing your business while managing risk. It entails spreading your investments across different markets, assets, or industries. You can add services, products, markets, locations, or customers to your portfolio.
Below are the popular diversification strategies for medium enterprises.
Horizontal diversification
Horizontal diversification is developing new products to complement your core business. It helps you appeal to your current customers rather than seek new ones.
For instance, a fashion brand can add a trendy millennial design to its product line. This strategy may demand new skills, technology, or marketing techniques.
Vertical diversification
Vertical diversification entails moving up or down your existing production chain. It expands your business scope; you get control over various stages of your supply chain.
For example, a food distributor starts making its own meals instead of being only a courier.
Concentric diversification
Concentric diversification is updating existing products to target new markets. It leverages emerging technologies to enhance product efficiency and customer value.
For instance, a PC manufacturer can venture into laptop production to attract youngsters. The company leverages its existing marketing strategy to advertise convenience.
Conglomerate diversification
Conglomerate diversification is introducing entirely new products into your portfolio. These fresh entrants aren't related to your core business.
For example, a film studio can open a recreational park to promote entertainment. This strategy carries the highest risk as you enter an unfamiliar market.
How diversification increases business value
Diversification and de-risking are a must-have business strategy in today's fast-paced marketplace. You can no longer put all your eggs in one basket and cross your fingers.
Business risks continue to evolve at an unprecedented rate. The sad part is that some pitfalls aren't apparent. You have to hedge against them early to mitigate their occurrence.
Diversifying your business activities boosts brand value in various ways, including:
- Higher sales and revenue. Expanding to new products or services boosts your business value. A market survey shows that 27.3% of revenue and 25.2% of profits come from new products.
- Improved resilience. Featuring in different markets, products, or services helps your business withstand economic downturns. You're less prone to industry-specific pitfalls. The underperformance of one business segment can't ruin your entire network.
- Enhanced marketing approach. Did you know that 65% of your business revenue comes from existing customers? Diversifying your product line to evolve with their preferences can grow your enterprise.
- Steady cash flow. Diverse revenue streams translate into consistent and stable cash flow. This stability may attract lenders, investors, or partners, ultimately boosting business value.
- Increased competitiveness. Diversification opens your business up to a broader range of offerings. You can reach fresh markets and customers faster than your competitors. New clients have a 20% chance of boosting your sales revenue.
How diversification creates assets
Diversifying your medium enterprise may create tangible and intangible assets. It's easier to sustain your business value as your wealth grows. Here are some asset advantages you can get:
- Brand reputation. A solid diversification strategy can boost your brand image and reputation. How you manage risks matters to investors, partners, and customers. It shows you value their well-being, and they can trust you with their resources.
- Access to expansion capital. Appealing to investors and partners can generate more funds to scale your business. Entering new locations or increasing production capacity expands your asset types.
- Better technology and infrastructure. Sometimes diversification pushes you to acquire advanced technology to satisfy customers. New IT systems, hardware, and software form part of your growing assets.
- Human capital growth. Diversification may require fresh talent for new product lines or upgrading existing ones. Retaining skilled workers empowers your human capital and competitive advantage.
- Intellectual property assets. Some diversifications entail developing intellectual property (IP). Trademarks, patents, or proprietary processes can become part of your assets. Registered IP may boost your business value during a merger or acquisition.
Diversify into global markets to scale fast
The last thing you want for your medium enterprise is abrupt disruption. Business uncertainty can affect your strategy, compliance, safety, and profits. Common risks to prepare for include market, financial, operational, and strategic risks.
How do you cushion your medium enterprise to remain in business and hopefully scale? While there are numerous preventive strategies, diversification and de-risking top the list.
Properly implementing these techniques protects your company's bottom line and reputation. Brand image matters to investors, partners, and customers in growing your business value.
De-risking may involve debt reduction, insurance, and the creation of standard operating procedures. Diversification strategies range from launching new products to upgrading existing ones.
Want to diversify to international markets? Reach out to Innovation Park to discuss your strategy. With over two decades in business immigration, they have the expertise to take you global.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
