3 Ways to Minimize Risk in Your Business Investments
A strong economy has provided distributors with more available investment capital in 2018 than they've seen in over a decade. Even small, independent distributors are making investments, adding ecommerce and other technologies to reduce their cost to serve, create frictionless buying experiences and strengthen their value proposition.
The most successful investments will be based on long-term goals. If you want to make meaningful progress, you must first define how you want your business to be positioned years down the road. How can you balance your need to invest in your business with your desire to minimize risk? Here are three ways:
Get out of your echo chamber.
Distributors tend to hold certain beliefs about their markets – but those are often based on gut feel rather than facts. To better understand the dynamics of the markets you serve, spend some time and money developing a sense of your external environment. Use your trade association as a resource to understand trends, opportunities and challenges affecting your industry. Talk to customers and do online research to learn about what the competition is doing. And learn about your customers’ new initiatives, as well as their challenges and opportunities to see where you might fit in.
Review your options.
Brainstorm ways that you can create competitive advantage on either the price side (scale with suppliers, mass customization) or cost side (greater operating scale, better processes or productivity boosts). Focus on initiatives that require you to do new things (not just the same things better).
You should also consider investing in ways to increase the customer’s switching costs; make it harder for them to walk away. Consider special inventory, special terms, consignment, VMI, custom order configurations, selling data on product usage, special pre- or post-sales support, lifecycle management and more.
If you worry about competing with Amazon, you may want to invest more into technology and clean product data. If you aren’t getting sufficient market coverage, consider more hybrid or tele-sales reps, possibly supported by technical specialists. If you are struggling to get good market data or customer insight, it may make sense to spend on market research or data analysts rather than another field sales rep.
Find the low-hanging fruit.
Where is the greatest potential for growth? I usually find that distributors significantly overestimate their current share of their customers’ total spend and underestimate the available potential in their markets. Don’t just look at where customer money is currently being spent. Use external market information to prime the pump for discussion and the gathering of more qualitative information.
What will your new investment cost? Keep in mind that long-term strategies lower your current performance to fund investments or activities that create competitive advantage for your firm in the future. You must accept that your strategic activities will consume time, money and other resources now that would otherwise have gone toward other things. Your resources are limited, so part of the cost of whatever you choose to do will be the inability to do other things.
Once you've identified which investment ideas have the highest growth potential and lowest cost, ask yourself which have the highest probability of succeeding. Start with one or two initiatives, rolled out slowly, and complete them before moving on to the next big thing.
Long-term strategy necessarily requires that you take risks and live with some level of uncertainty. But you can minimize that uncertainty with research and planning, protecting your business as you carry it forward into the future.