There are three types of disruption that can have an adverse effect on your business, and you need different approaches to handle each of them. But there is an upside; disruption can create opportunity.
This form of disruption is unforseen, or comes with little warning. Suppose your building burnt down completely, everything destroyed, stock, plant and equipment, all your records gone in cinders and smoke. Or it could be a cyclone as has happened in northern Australia a number of times, or flood – think of Brisbane in 2011.
There are two questions to think about.
The first is - how can you mitigate the risk? Now this is a fairly familiar situation with some straight forward answers, although there is an inevitable cost. Insurance against catastrophe is readily available.
There are other steps as well, such as keeping backups of your systems and records elsewhere. Today this is easily done for even small businesses in “the cloud”, but previously been backed up to external sites. For many businesses, their most valuable asset is their customer list.
The second question is more challenging. If you were starting again or rebuilding, would you design your office, factory, workshop or whatever, and your business systems, to reproduce what you previously had? Or would you seize the opportunity to widen your thinking and remove the constraints imposed on you by your operation as it was?
What your business would look like if you built it with today’s customers in mind?
Then there are the dangers imposed by creeping obsolescence. By creeping obsolescence I mean on-going deferral of upgrading not just plant and equipment but also IT systems, operational systems and procedures. The equipment is doing a good enough job, so we’ll keep it for a while longer. And the “while longer” becomes longer and longer.
A good example is Windows XP. When Microsoft stopped supporting Windows XP early in 2014 it was estimated that 27.7 per cent of the world's computers still used it. Being so old (in IT terms) meant there was a real cost in buying new equipment and leaping a couple of generations of software; a big learning curve for users.
Similarly equipment maintenance costs will increase and their productivity decrease. I well recall an out-dated and worn punching machine in a client’s workshop that was not only taking much longer to do a simple operation than it should, but also had a much higher scrap rate.
How do you mitigate risks such as this? Businesses need to recognise the importance of strategy-driven investment decisions, taking you to your objecives, versus reactive decision-making.
It’s a little like the frog and boiling water metaphor. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of businesses to react to significant changes that occur gradually.
The frog metaphor can also be applied to the real problem of industry disruption. This is a more serious problem that can affect not just one business, but a whole industry. It occurs when the basic business model of the industry, how they service their customers, changes.
Technology is usually the cause, and technological changes in today’s world move so rapidly. Industries have been turned upside down, disrupted by innovators they didn’t see coming.
Just think of how music is now supplied to customers.
Think of mail – in most countries mail is a declining revenue source for postal services, with their only saviour being the delivery of parcels, ordered on line of course.
Think of newspapers – even the largest face declining circulations, not just because people increasingly read on-line, but also because the internet provides so many different sources of news and opinion.
In a recent article in the Business Spectator Alan Kohler suggests that even banks have now been brought to the edge of the disruption abyss.
Two questions again.
How do you mitigate the risk? Craig Reardon in Smart Company asks “Is your business future-proof?” He suggests that unfortunately few smaller business operators get the kind of opportunity to conduct a realistic assessment of their own business models as they are busy trying to survive some of these changes in the way their markets go about their business.
But given the number of industries that technology has so fundamentally transformed, the importance of doing so at the earliest opportunity shouldn’t be underestimated. Even if not fundamentally transformed, then at least in the way it operates, markets, communicates or sells. Or even just presents itself to a wired (or really wireless) world.
And if your were starting your business now, would you see technology as an opportunity and use it to service your customers in a completely different way than you have been doing? It’s the same question as for the factory burning down.
To your future profitability.
© Copyright 2014 Adam Gordon, The Profits Leak Detective
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?