Ep. 04 - Know Your External Risk Factors
Success depends as much on what is happening outside as it is on the inside of your business. Rounding up with the last episode of our four-part series, Dr. David Gruder and Jason Tuzinkewich cover how to develop a more effective relationship with external risk factors and upheavals, so your business can keep thriving no matter what the market conditions might be. So don't miss out and hear in this final installment the business exit readiness mindset, success strategies, and tactical tips that will help you take charge of your surroundings and keep your business in that upward growth trajectory.
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Know Your External Risk Factors
Take Charge Of Your Surroundings To Keep Your Business Thriving
This is the last piece in a four-part series that we've been doing that provides you with an overview of the exit mindset and operational strategies. In this episode, we're going to cover how to develop a helpful relationship with external risk factors and upheavals.
I'm so excited about this episode. I'm feeling a sense of closure already. What we're going to talk about starts with some pretty serious challenges. The thing that gets me about this topic is that it hinges on the entrepreneur and executive team feeling of not having direct control, especially for hard drivers who started their business largely because they believe they can do it better than what they've experienced in the world. That's the type of person that doesn't like not having control.
When you don't like something like that, you tend to ignore it and allow it to become its blind spot. I'm excited about this episode because we're going to talk about how business owners, executive teams, and advisory teams can help exercise the indirect control that we can exert over these external risks and threats that we've been told our whole life, those that are out of our control. We're going to help give you some of that control back. I'm deeply excited about this conversation.
Where we're going to start with is to cover three classifications or varieties of threats, organizational sociological and personal. We'll start with organizational.
Organizational threats are the group of threats that people are most aware of or comfortable with. This is Porter’s Five Forces group of threats, where you're talking about how much power your suppliers can exert over you in bargaining the sale of resources and supplies. On the other side of the equation, how much power do customers have in bargaining with you and exerting their will into your operations? Are there threats of customers substituting a different product for yours? Are there threats of disruption to brand new products hitting the marketplace that make your product or service offering irrelevant or less appealing?
All of this plays into what does the overall competitive environment for your operation. What does that look like? Is it a race-to-the-bottom type of environment? Is it fragmented? Were there a lot of people doing their thing? Is it a matter of who gets in front of the customer first that wins the race? What does that environment look like? That's going to dictate your revenue model, marketing and branding approach and a lot of things.
Outside of the organizational, some of the less known or appreciated external factors but still in the grouping of external threats that people understand exist are the sociological threats. That's the economy. A lot of people are paying attention to external economic factors from COVID through supply chain issues and inflation. Also, with national and international political environments. Are there trade wars? Are there tariffs? Are foreign governments going to do something that disrupts your ability to sell in their economy?
Finally, within this sociological bucket is disruption of social norms. It’s when our lifestyle changes in a material way, and all of a sudden, we're not having meetings in person because we have to do it on Zoom. How are those disruptions of our social norms going to impact your ability to conduct business? Those are 2 of the 3. Doctor, you're going to talk about the one that people don't think about the most. I'm excited for you to surprise and wow them with this one.
We are focusing in this episode on external risks and threats, not the internal ones in your company, which we might want to cover in another episode, but the important interplay between external threats and us. You, as the CEO, Executive, or Founder, it has to do with our attitude about what we can and can't do with external risk factors and threats.
What that personal level response is either an empowered response that says, “Yes, I'm not the boss of those external factors, yet there are a lot of things that I can do and we can do inside my company to deal with those external factors, and turn certain external factors that seem negative on the surface into great business opportunities for us.” What interferes with that positive attitude and mindset about external risk factors and threats is something that in psychology is referred to as learned helplessness.
Learned helplessness is a fancy psychobabble term where we've been trained to believe that we have less power, less impact, and less choice-making capacity than we have in dealing with factors that are themselves outside our control. Some people develop an allergy to personal power, where they are in victim mentality or learned helplessness. Some people become obsessed with being intoxicated by power and become the power controllers or the tyrants, where they have an overemphasized relationship with power.
For this episode, what we want to focus on in dealing with threats is you getting right with your relationship with power so that you're not imagining that you have more power over external factors than you have, nor are you in a state of learned helplessness where you think you have less power to deal with those factors than you have.
There's danger at the extremes.
We're not going to leave you hanging by just mentioning those kinds of threats and risk factors. We want to move into the meat and potatoes or the vegetables, if you're vegetarian, of this episode, which has to do with different operational and managerial philosophies that can mitigate the power that those threats can have over your company if you have the right relationship with power and you're not in learned helplessness. We're going to go through those three categories again in terms of organizational, sociological, and personal.
This is the part that I get excited about because we're going to take the power back. We always want to give our business owners and their advisory team the ability to control their futures and destiny. This is going to be great fun. We're going to start with the organizational items again. When we look at both the bargaining power of suppliers and the bargaining power of customers, it starts with diversification, limiting your concentration.
This can be done in a lot of different ways. Starting with suppliers, what is the biggest threat to your supply chain? What is the biggest power that your supplier has? Is it geography? Are they close by, or are they overseas where your supply line could be threatened by trade wars, storms, disasters, or some dumb blocking the Suez Canal?
There are a lot of different threats that can go into disrupting your supply chain. Having a diversification strategy that allows you to move around your supply chain to mitigate those situations when they happen is going to put the power of bargaining back into your hands and take some of that bargaining authority away from the suppliers and give you control. If they start getting dumb with their expectations, lead times, and costs, you can say, “That's fine. I'm going to cool down on ordering from you for a little while. I'm going to go order from supplier B or supplier C because I have options.”
With customer concentration, it's the same thing but a little bit different. With customers, you're going to want to make sure that you aren't relying on one individual customer for more than 12% of your revenue. If that customer goes away, you've got to backfill that revenue, but you can also look at different industries. If you are selling to one market, can you sell to a similar market in a different geography? Can you sell to a different market?
I had a client a few years back that was a gear manufacturer. He manufactured specialty gears for pumping equipment in the oil and gas industry. When we started looking at his options, we noticed that there was a very similar gear used in the real industry. Now, he's got a whole different market that he can sell to. When oil and gas do what oil and gas do every couple of years, he's not going to be sitting in the lurch.
Looking at the different vectors to new customers and options to get your products out there in a diversified way is going to give you more control over what you sell for and what your revenue model looks like. What happens in times of other threats coming into play? With regard to the threat of substitution, this is one where you have to be laser-focused on your competitive advantage. What makes your product different, unique, and special from your competitors? How do you get that message out to the client base? How do you leverage your uniqueness to make your product appear superior to everything else on the marketplace? It's no longer a decision of, “This one costs less. I'm going to try it this time.”
What I'll add there is that this ties in with understanding your marketplace. In a broader marketplace, for whatever you sell, there are going to be individuals or individual companies for whom your uniqueness doesn't matter. There are going to be others for whom your uniqueness in how you deliver what you deliver whose reaction is going to be, “Where have you been all my life?” You need to understand your sub-niching and micro-niching in your marketplace to match your unique capacities and attributes with the needs of those micro niches so that they're not going to get met by anybody other than you.
Understand your marketplace because, in a broader context, for whatever you sell, there will be individuals or companies for whom your uniqueness doesn't matter.
The last one is you want to look at how you become an innovation company. How do you lead the way in your marketplace? Rather than being worried about disruption, you are the disruptor. In the competitive environment and the threat of substitution, the simplest analogy that I always think about is a farmer's market. If you ever go to a local farmer's market, all the farmers are selling the same produce because it's what grows in that region, but one farmer may have the most beautiful stand.
Another farmer is giving away free recipe sheets to use the produce that they're selling. Another one may have jams or other products that they've already turned their vegetables into that you can buy. It's a matter of figuring out when you're in that marketplace and everybody's growing the same thing, how do you get the sales against your neighbor who is selling the same products? Between innovation, understanding your competitive environment and maximizing the uniqueness of your brand, those are the three legs of the stool that will make you an unstoppable force.
Moving into the sociological issues, first and foremost, you want to understand the impacts of the changes that are coming. You will only be able to understand the potential impacts if you know what changes are underway. If there's one thing we know about our political environment, it's that it is a very slow-moving machine. That means that we have a lot of time to know what's being discussed, what bills are being voted on, and what the likely structure of these bills is well in advance of them getting approved and going into effect.
You will only be able to understand the potential impacts if you know what changes are underway.
By simply keeping your head up, looking around, seeing what wins are blowing, and understanding what the impact they will have on your industry and marketplace, you'll be able to start strategizing and be ahead of the rest of your peers who are keeping their eyes focused inward on their business. You'll have an advantage by paying attention.
Certain environments have different benefits. There are benefits to an inflationary environment. It's a great time to pay off the debt in real money because that money is worth less. Essentially, you can pay off more debt more quickly in real money than you would in a deflationary period where the money is becoming worth more, so it's more expensive to pay off debt.
Understanding the impact on your balance sheet of these different environments and how you manage the value of money compared to the strength of your balance sheet. That's one thing that you can look at. Understanding what your balance sheet is telling you and when to stock up on your inventory for a lower cost. If you see prices rising, you may want to go from a lean inventory to a surplus inventory so that you're buying before the prices go up or at the lower end of increasing prices.
You can sell your finished goods at that increased price. You can improve your margin by paying attention and getting ahead of these things. You don't want to bet too big and end up carrying a bloated inventory that you'll suffer attrition or damage to but make those smart decisions and small adjustments. You've got three financial statements and an income statement or P&L, which is the picture of your history of where you've been. You've got the statement of cashflows, which is your present day. Where are you at as a business now? You've got your balance sheet, which is the prognostication of your business future.
When you're talking about sociological threats, you're going to want to pay a lot of attention to your balance sheet and do most of your work in balance sheet management. You can also have tax strategies. In an environment where prices are going up, maybe you want to do last in and first out inventory management for tax purposes because you'll carry more costs on your balance sheet. If prices are going down, you might want to revert to first in and first out because you're going to be carrying more value on your balance sheet for tax purposes.
Some of these structures are gaming your taxes, but if you can lower your tax burden by a reasonable amount using legal, generally accepted accounting principles, why not? Understanding different factors like how did the trade wars that were going on with China a few years back impact your position in the marketplace? If you're selling locally US products while there's a trade war going on, you're going to have a decided advantage locally because the imported products are necessarily more expensive because of the tariffs.
On the other side, when there are free trade agreements, you may have similar access to being a low-cost leader or an innovation leader in a foreign market because you're not being charged a premium in the way of tariffs to sell overseas. You might have an untapped market overseas. At the end of the day, it all comes down to being proactive and aware. Understanding the fulcrum of where these levers of power are acting so that you can always position your business on the long end of the stick, give yourself maximum leverage by being the one business in your industry that's paying attention to these external forces and leveraging and experiencing the upside rather than being taken off guard by the downside.
You've said dozens of mouthfuls there. I love how rapidly you covered so much territory in so little time. For our readers, what I want to invite you to do is take a breath. Each of these factors that Jason has been unpacking needs its attention, and that never gets done all at once. We're providing a high-level overview here, not all of the nitty-gritty details around deciding how you are going to deal with each of these factors. We want you to know what factors are on the table here in terms of external risks and threats to be aware of and develop a plan for dealing with. That then doubles back to the personal level of all of this, which is about our power in dealing with these external factors, risks, and threats.
What I will lead off with is a quote from a Greek philosopher that goes back to 1 AD. His name was Epictetus. His statement is, “People aren't disturbed by things. We're disturbed by the thoughts we have about those things. That's where power starts to live.” It's not a risk factor or a threat, whether it's internal or external, whether it's avoidable or unavoidable. It's not that external thing that's the boss of us. That external thing calls upon us to make choices because we're not the boss of whether that external factor surfaces or doesn't. We're the boss of our relationship with those factors. That goes back to the core of what power is.
Power is nothing more or less than the capacity to impact and influence. People who are too full of themselves have very arrogant, overinflated ideas. They're in control of more things than they're in control over, including something that may sound like a powerful chest-beating stance but a denial stance, which is where you might hear someone say, “There are those factors out there but we're not impacted. We're bulletproof.”
That may be true if clear, strategic, and tactical steps have been taken to become bulletproof, but the attitude I'm talking about is the ostrich sticking their head in the sand attitude that says, “We're so cool. We can't be impacted by blank.” That's denial pretending to be power. It's important to get right with power. Neither learned helplessness like what I described before the victim mentality, the mentality that says, “Those external forces are so big that they're the boss of us.” They're not. Nor the attitude of sticking your head in the sand in a very loud blustery sounding way pretending like your company is not impacted by external factors. Power is simply the capacity to have impact and influence around factors that we may not have been the inventors of.
It's that ability to ask the question, “What do we do with this information?” As long as people are inquisitive, they're in a good place with power. When they stop asking questions, they start getting into one of those two extremes. That's why they're not inquisitive anymore about situations. I appreciate that you brought that up to me. This is something that I had never thought of in the detail that you brought it up. I appreciate that.
The other thing that occurs to me as we fly through this information as an introduction is that you, as the reader, may be interested in having us unpack some of these items more deeply. Even in this show, you have the power. If we hear a cry saying, “I need to know more about how balance sheets prognosticate the future and understand this power thing more,” please share that. Subscribe and we'll make sure that we get to it.
As we're segueing into the success roadmap, we always want to leave you with a pathway to making the behavioral and operational changes that are going to deliver success. What do you look for in solutions where the threats are outside of the bounds of your business? We've said it a few times, and the good doctor stole my line about sticking your head in the sand. That's first and foremost. Be aware.
I read a lot, and I've been reading a few books by Navy SEALs. They always talk about when things start popping off in a battle situation, somebody has to be able to take one step back, lift their head above the fray and get tactical clarity. This is great advice for every single individual and especially business operators. It's so easy to get caught up in the day-to-day operations. It's imperative that somebody on your team is designated as the leader who will step back, look above the fray and gain periodic tactical clarity. That's the first and foremost piece of guidance I can offer for being successful.
It's crucial to have those canaries in your coal mine who can do exactly what you said, Jason. In addition to the awareness piece is self-management, managing yourself. What we've been covering in part in this episode is some of the ingredients in becoming what I refer to as upheavals literate, being well-versed in recognizing potential upheavals in responding to actual upheavals.
The key to upheaval literacy in self-management is becoming anxiety resilient. Some people say, “I don't get fearful about anything. I don't have any anxiety.” Maybe you're not human but I doubt it. All of us have the capacity to become fearful or anxious about something. What exists is a continuum from the core wisdom of fear, which is simply paying attention. That's what's underneath the emotion called fear.
We have a continuum with fear from simply an acknowledgment of, “This is something for me to pay attention to,” to paralysis in anxiety and being chronically, ongoingly, perpetually anxious, and everything in between. Becoming anxiety resilient is a crucial self-management piece because if we ignore things we need to pay attention to and fear that says pay attention, or if we become swallowed by anxiety, we're not doing good self-management. If we're not doing good self-management, we're not capable of leading and dealing with external risks and threats in good ways. Self-management is the second success roadmap piece for you.
It's important to pay attention to the fact that fear and anxiety manifest themselves differently in every single individual. It's crucial to have a team around you that can help you at recognizing the way that fear and anxiety are manifesting in you. You can help them do the same so that you can help each other stay on the rails. The next thing and the last piece to the success roadmap puzzle are becoming risk friendly.
I love the tech industry, the innovation that's going on and many of the mantras that come out, but I don’t think these move-fast-and-break things or fail fast, fail forward things are in the description of how you be successful. I'm more interested in seeing businesses willing to fail smart and fail in ways that guide the next step rather than moving fast and breaking things. That's important.
Go out, make changes, take risks, take chances, and hit these external factors head-on as they're approaching you but do it in a way that's informed, contemplated, and prepared in advance so that you know what you're doing when you get there. Trying to survive and thrive within the status quo is the surest way to ensure that you're going to become overwhelmed by external changes. Having a surfboard in the waves or whatever analogy you want to use, being proactive is going to be the number one way that you can set yourself up for success in the face of certain changes and challenges.
Being proactive is the number one way you can set yourself up for success in the face of certain changes and challenges.
You can think about this in terms of two offsetting risks at either side of a continuum in becoming risk friendly. One that you described, Jason, is what I call status quo addiction, “We've always done it this way, so this is the way we should keep doing it.” There may be reasons to keep doing certain things because they're still working but status quo addiction is not that. It's clinging to stuff that's outlived its usefulness, even though it's outlived its usefulness.
The other side of that continuum is impulsivity. Status quo addiction is staying with something that's no longer working for too long after it has outlived its usefulness. On the other end is being impulsive. Ready, fire aim, that kind of approach. That's the surest way to go down in flames because of external changes. Be aware of both of those ends of a risk imperiled continuum so that you can become risk friendly. I love your soundbite about don't fail fast, fail smart.
Thank you. This show has been soundbite heaven.
We'll wrap up with a couple of final sound bites with our takeaways that we want to recommend that you contemplate from this episode. Take it away with the first takeaway.
I'm going to end right where I started by saying you have more control over external forces than you think. Anybody who teaches or preaches that external threats are the threats for which you have no control is lying to you. Understand that you have control, and then exercise thoughtfulness in how you take that control.
The other takeaway at the risk of sounding self-serving, is that 1 of the 2 books that I've coauthored with Mark S A Smith. They’re interlocked volumes. One is called The Nimble C-Suite. The other is called The Nimble Company. The Nimble Company, among other things, covers in chapters 3 and 4 a complete in-depth look at the sources and root causes of upheavals and upheavals literacy, where we cover both internal and external threats and avoidable and unavoidable upheavals and how to become upheavals literate. Look for The Nimble Company wherever you like to get books, whether print version, digital version or audiobooks.
I'm enjoying the books as we speak. They're powerful. There's a ton of good information in there but these chapters 3 and 4 on The Nimble Company have great stuff to enhance what we've been talking about all day. On behalf of David Gruder and myself, we'd like to thank you for reading the episode. I'd like you to reiterate, subscribe, and comment. We do read the comments and will respond. You'll help take the power and shape the show into the future. We'll look forward to talking with you again very soon.