Over the years I’ve watched a number of businesses go from booming success to failure overnight, and I’ve noticed a common thread. In each case business success was highly dependent on one market factor that changed overnight. However, businesses that identify their risk factors can anticipate and adapt to changing market conditions.
Do you understand your risk factors? Below are some true stories about riding the gravy train over the cliff. Let these disasters spur you to consider the future of your own business.
What Is the Business Environment for Your Customers?
Let me give you an example of one of my previous employers. The company owned a gas pipeline. They purchased gas at the wellhead, separated out liquids such as butane and propane at its gas processing plant, then sold the dry gas and liquids at a nice profit.
The company’s main market consisted of operators of approximately 300 low-production-volume gas wells in North Texas. They were the “only game in town” with 100 percent market share and, since the field was in declining production, no competition was expected. With the number of wells under contract, revenue was not overly dependent on production from any one group of wells or property owners.
This seems like a pretty good “cash cow” pending depletion of the field. However I found that the most important risk factor was not included in this assessment. In order for the cash cow to continue producing, the folks that sold the gas at the wellhead to the pipeline had to make a reasonable profit from pumping 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. In addition, the wells were low-gas-volume producers, which meant that the operating costs were high relative to the revenue generated.
As you can see, the cash cow turned out to be a high-risk venture. Shortly after I left the company, gas prices dropped a small amount, producers decided to stop selling gas to the pipeline pending higher gas prices, and the company went into bankruptcy. Fortunately I didn’t have to pay too much for this lesson. The investors and company vendors did. Do you have any customers that might fit this profile?
You Diversify Your Stock Portfolio, What About Your Customers?
In an earlier post, I talked about Brian, the owner of an office supply house in Houston who went from living high to becoming an airline baggage handler. Brian found a wonderful niche market in the small “wildcatters” of the oil industry. Unfortunately the oil industry has a history of booms and busts, and the next bust took Brian’s business down with it. Hindsight is always easy. Maybe some diversification into more stable markets would have been an option. Brian also allowed customers that were in financial difficulties to continue to buy on credit. He, in effect, invested his cost of goods sold in risky ventures. Believe me when I say this. I’ve known promoters who consider vendor credit to be venture capital without the strings.
What Impact Does the Political Environment Have on Your Business?
In the late 1980s I started a software development company. I worked pretty much all the time and struggled until I had my software application installed in more than 40 hospitals. This was during a time when hospitals were selling their health care services directly to individual and business consumers, with physician referral services, “seniors” membership programs, and worker’s compensation management programs. My unique proposition was that my software that managed these programs could interface with the hospital billing system to report ROI on various marketing programs. Times were great; the cash cow was mooing.
Then Bill Clinton came into office with his agenda to reform health care. Overnight, hospitals changed their marketing strategies from direct-to-consumer to developing physician and hospital alliances to achieve clout when negotiating pricing with the new insurance alliances. Overnight, my market went away. Just like Brian, I didn’t take advantage of my good fortune to examine my business risk factors and develop other markets.
Don’t make these mistakes and watch your business fail. Identify your business risk factors now. Only then can you anticipate market changes and develop strategies to reduce your risks before they bring your company down.