You launched your own business to make money. So as long as you’re generating cash, everything’s fine, right? Well, not quite. The fact that you are successful in business today does not mean you will still be succeeding five years from now.
Markets are in constant flux. The pace of technological change is accelerating and disruptors can come out of nowhere. It can be tempting to take a short view and “make hay while the sun shines”. Examples abound, however, of large companies or even whole industries that were caught out when catastrophic change happened.
This doesn’t have to be you. The smart entrepreneur invests from Day One in strategies that hedge against potential business loss. So let’s walk through five of the most important future-proofing strategies.
Don’t rely on barriers to entry
One of the oldest and best ways to protect a business model is to construct barriers to entry. The idea here is that potential rivals are effectively blocked from competing because of the difficulty in entering a given market.
Barriers can be financial. For example, it was once extremely difficult to enter the road logistics market because of the high cost of acquiring and maintaining a fleet of trucks. However, the market today is highly fragmented. Shared warehousing has reduced barriers to entry and today many third-party logistics providers outsource the last-mile piece to a vast network of self-employed delivery drivers who own their own vehicles.
Barriers might also be regulatory. Until January 2018, banks in Europe could rely on their license to keep competitors away from lucrative payment services. However, the EU Open Banking Directive has forced banks to open up their payment APIs to third parties, allowing tech companies with no banking license to compete for payments, often undercutting the banks. The US currently does not have such a piece of legislation but given the lobbying power of the software giants, is it realistic to imagine this will continue forever?
Other barriers could include expertise, but even if skills cannot be developed, they can be bought or made obsolete by disruptive innovation. By all means try to build a wall, but the best you can hope for is a temporary monopoly. In a free market, most barriers will come down eventually. Have a plan for that time.
Don’t be a single-niche business
It’s likely you started in business because you did one thing better than anyone else. While a niche strategy is indeed a smart way to get started, relying on that single niche carries risk. Think about CD makers. In under a decade, compact discs went from rapid growth to terminal decline. The model was disrupted firstly by download retailers such as Apple’s iTunes, then by streaming services such as Spotify.
Instead, follow Amazon’s lead. The retailer mastered a simple technique called “productize and scale”. Jeff Bezos started a printed book retailer but he was able to significantly scale his business. He did this not just by adding new retail categories but by packaging up the core fulfillment and logistics infrastructure as a product to sell to third-party traders on Amazon Marketplace. This simple move allowed Amazon to go from running its own distance selling business to taking a share of everyone’s distance selling business.
Next, the company packaged up its web expertise as Amazon Web Services. AWS is now a global force in web hosting. So if the market for printed books declines, Amazon won’t worry too much. The chances are, you have additional expertise that you can productize and scale.
3) Don’t just watch your own industry
If you want to future-proof your startup, you certainly need keep a sharp eye on developments in your industry. This means watching your competitors, your customers and your suppliers. However, many businesses make the mistake of stopping there. The trouble with that strategy is, most disruption comes from outside the industry it affects.
For example, Kodak was once a billion-dollar company, selling cameras and film. Unfortunately, Kodak was looking the other way when the smartphone arrived. Who would have thought everyone would have a digital camera on their phone? Clearly Kodak never imagined it. The company filed for bankruptcy in 2012, just five years after Apple launched the first iPhone.
To successfully identify threats and risk, business owners of all stripes need to conduct regular PESTEL analysis to keep up with factors in the environment that could impact their trade.
4) Create a finance department
One competency that often separates the large firm from the startup is the existence of a finance function. In many small businesses, “finance” is limited to keeping the books and preparing accounts.
In fact, the role of finance should not stop there. An effective finance department works proactively to source, move, trade, invest and spend money in the most beneficial way.
If you think this is beyond you, think again. Today, entrepreneurs can train themselves to manage money from the comfort of their own computer. Learning over the internet has reduced the time and investment barriers: small business owners can now easily afford one of the many online trading courses available from specialist providers.
Some businesses become so adept at financial management that they are able to productize and scale their investment services as consultancy or even spin them off for profit. In April 2018, Chinese internet giant Baidu Inc. span off its financial services arm to focus on search and artificial intelligence.
5) Listen to customers and track their behavior
It’s the most simple strategy but the easiest to overlook. Sometimes, busy entrepreneurs can focus so much on sales or product innovation that they forget to talk with their customers. In hindsight it seems obvious, but so many brick and mortar retailers ignored the threat of e-commerce and paid the price. Asking simple questions today about your customers’ habits and preferences can help you see tomorrow’s big change coming — and help you meet threats head on.