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	Monday, July 25, 2005

Risky Businesses, Good Businesses, Bad Businesses  (EntrepreViews)    (selected articles in bizdrivenlife compiled) There was a time when young when I thought that management and attitude were the cure-alls.  Maybe I read too many inspirational stories in which your determination beats the odds.  Now, maybe I am wiser, or maybe just older.  After so many years, I have formed the conclusion many now knew -- sometimes, success just depends on luck, and sometimes, your industry and the economic scenario.  You can be a great manager who happened to be in an industry where the situation is really bad, and no amount of talent or determination can turn things around.  And many times, there are just so many bad managers who were just in the right place at the right time, and succeeded. So, the first thing you need to know before embarking on a business, is to know the industry you are in.  Is it a conservative industry, or is it a risky industry.  Is it in the period of growth, or just plain bad?  For  instance, for the last few years, you could be the best manager around, but no way you can turn around an industry like telecommunications, or computer hardware.  In the last few months, you could be in oil industry when the prices zoom up, and you could be wildly profitable even if you make a lot of mistakes and waste. I have made some simplistic charts in which you can use to evaluate the industry you plan to be in. Of course, a lot of these hinges on risk versus returns. This is a good chart that shows an industry which is conservative.  You perform average, and you would break even.  You are slightly unlucky or turn in a bad performance, and you would lose a little money.  You perform really above average, and you would earn a little bit more. In short, there is little more return for good performance  but then there is little to lose if you don't perform. This is a good chart about a typical risky business.  You have a slightly above average performance level, and you would earn much more, but you perform below par, and you would end up losing also a lot. However, a lot of businesses also fall a lot in between.  The following is a business you don't want to be into: This risky business needs a substantially high performance in order for you to break even.  So, you are more likely to lose a lot of money if you don't perform really well.  A performance that only breaks even in this industry could already have made you a lot of money in a different business or industry.  This is what I would call a worse business scenario. This is what I would call the worst business to be in.... It not only entails a high level of performance in order to break even, but performance higher than required will also yield low returns while a slight mistake could make you lose a lot of money. Now knowing 2 businesses that you don't want to be in, the businesses you want to be in is the exact opposite. This is one of the better businesses you want to be in.  It doesn't require a high level of performance to break even.  So even mediocre performance can turn a very good return. This is the ideal business you want to be in - the best scenario.  It doesn't need a very good performance to break even, and even mediocre performance lose only a little money, while above breakeven performance over mediocre will mean a very good return. The overview is simplistic, but it would be a good rule of thumb to evaluate the business you want to be in.  Does it offer good prospects of return even if you don't excel, or do you need to have a very high level of performance before it even breaks even.   8:00:40 PM     comment []   trackback []