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BAE Young-Il

Managing Risk in a New Business

BAE Young-Il

Aug. 6, 2010

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Peter Drucker, the father of modern management, said that even the greatest companies can't survive if they remain static for 30 years. A common characteristic of companies that take the lead and stay ahead is that they constantly explore new businesses. This is because in today's rapidly changing business environment, maintaining the status quo can ultimately lead to major problems.

Today's winners have undergone dramatic makeovers. The world's No. 1 mobile phone maker Nokia originally manufactured wood pulp. IBM, initially a computer hardware maker, transformed itself into a service firm. General Electric is shifting its business into environment-friendly services from electrical and electronic equipment manufacturing, and Apple has converged web-based services to manufacturing, creating a new level of customer-participation service. These are only a few examples of constant pursuit of new business lines.

Succeeding in a new business obviously is not easy. Data show that even with the most thorough preparations, the probability of success is only 20%. Failure of course typically means a financial loss and shaken confidence.

Companies can encounter four risks while promoting a new business.

First, companies may ignore the possibility that the new product or service they are promoting can be impractical; this is the so-called "impractical risk." This happens when a new technology or new product is not acceptable to users. For example, Sony developed a new videocassette recording format Betamax, and its developers believed it was better than the VHS format, but consumers remained satisfied with the VHS picture quality. The Betamax tapes ran for only half the time of VHS tapes, forcing users to interrupt recordings to change the tape. Sony withdrew from the business in 2002.

Impractical risk happens when companies only try to raise the efficiency of new technology. To overcome the risk, companies need to consider whether the technology answers customer needs, and emphasize to customers how the new technology differentiates from current technology or rivals'.

The second risk is "economic risk." This happens during the manufacturing process when it requires more cost and time than initially expected. For example, initial production troubles for Airbus' A380 forced European corporation Airbus its delivery for two years, costing the company 4.8 billion euro and two CEOs. Even after the first plane was finally delivered, side-effects put Airbus into management crisis and further behind arch rival Boeing.

To prevent economic risk early on, companies need to systemically manage the possible dangers at the planning stage. Keeping checklists on timeline, component provision, assemblage and quality problems will also help.

The third risk is "risk of market acceptance." This is when a company made all its efforts to launch a new product but the price is too high or it is too difficult to use. Apple's message pad released in 1993 is a key example. Considered a pioneering personal digital assistant device with a broad range of functions that captured the minds of experts, the message pad was built with an operating system called Newton . But the PDA was too difficult to use and failed. Apple's case shows how a new business can succeed with reasonable pricing and user convenience.

The fourth risk comes during the promotion stage. Companies should not remain relieved even if they have overcome major risks and are enjoying favorable consumer responses. The moment a new product enters the market it is under threat by existing alternatives.

Market-dominating rivals can immediately roll back a negative situation by leveraging their inherent strengths such as high brand image and distribution networks. For example, US-based Royal Crown Cola beat Coca-Cola and Pepsi in introducing a diet coke, but it soon lost its market lead. When the soft drink giants quickly released their own diet cokes, their strong brand power and distribution networks gave them market dominance in the new niche. This shows how important it is for a company to obtain patent and the monopoly to use technology to protect their new technology from rivals before promoting new businesses.

All these suggest that sufficient examination and planning is needed for companies to succeed in new businesses and remain sustainable. The chances for success will improve if they manage checklists.

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