In the last week, other than the royal wedding, the news in the UK has been dominated by three stories; the parliamentary committee report into the collapse of Carillion; Stagecoach and Virgin losing the east coast rail franchise which has been taken back into public ownership; and the report into building control regulation following the Grenfell tower fire.

What links these three stories are businesses who acted recklessly or who did not properly assess the risks to their strategies.

Two of these stories, Carillion and Grenfell clearly involve criminal recklessness which should result in prosecutions and censure of senior board members.  The east coast rail story is a clear case where the bidding firm overestimated potential earnings and underestimated costs.  The result was that Stagecoach/Virgin overbid for the franchise and could not meet expected levels of turnover.  In the words of Chris Grayling, the lamentable transport minister (who causes chaos in whichever department he leads), “they got their sums wrong”.

The assessment of risk is central to the development of marketing and business strategies.

So where do you start?  After all there are a multitude of potential risks in such strategies.  And we can all repeat Murphy’s Law: That anything which can go wrong, will go wrong.  Such a multitude of potential risks means that appropriate assessment of them may seem impossible.

In the book Marketing Due Diligence, McDonald et al. argue that there are three common points in all business and marketing plans:

1.  The market is this big.
2. We’re going to take a share of that market
3. That share will produce this much profit.

These points lead to three risks:

1. The market isn’t as big as forecast
2. The planned strategy doesn’t provide the expected share of the market
3. The target market share doesn’t provide the expected level of profit

These three points therefore capture all the variables that can go wrong in a strategic marketing plan.

Assessing these risks is fundamental to marketing due diligence. It is not a case of counting all the risks with a plan.  It is accurately assessing the potential of these generic risks in your plan.

McDonald breaks each of the three generic risks; market risk, market share risk and profit risk into five sub-categories.

Market risk is that the market is not as big as the forecasts suggest.  When looking for competitive advantage through a gap in the market, it is always worth asking yourself not whether there is a gap in the market but: Is there a market in the gap.

Market risk arises from assumptions in a marketing plan.  All plans are based on assumptions and if they are not adequately tested the can be found to be erroneous and ill-founded.  For example, many Brexit-supporting politicians quote the work of Professor Patrick Minford on the UK economy as gospel.  However, the vast majority of economists (over 90%) see Professor Minford’s Liverpool model as making huge incorrect assumptions and ignoring advancements in economic science since the model was developed in the 1970s.

The five sub-components of market risk are:

1.  Product category risk:  The product category is smaller than planned.  This risk is higher if you are producing a new novel product or service.  This risk was at the centre of the Dot.com bubble where share values of new internet businesses rocketed with little or no evidence that the market for novel internet products was large enough to provide expected dividends.
2. Market existence risk:  This is where a segment is smaller than expected.  This risk is stronger in new market segments and lower in established segments.  I do a presentation based on an airline catering firm who produce high-end restaurant quality food for private jets.  The clear outcome of the presentation is that the owner of the business over-estimated the size of his target segment.
3. Sales volume risk:  This is where sales volumes are lower than planned.  This risk is lower if you use market research to estimate sales volume potential.
4. Forecast risk:  The market grows less quickly than forecast.  This often because of the incorrect reading of trend data.
5. Pricing risk:  Your pricing strategy is wrong and reduces the size of your market.

Assessing market risk requires careful questioning of both written and unwritten business plans.  You need a market risk assessment to moderate market size assertions.

A strong strategy will lead to strong market share.  Weak strategies won’t.  So you must objectively assess what makes a strong strategy compared to a weak strategy.  One example of a weak strategy is one which is ‘one size fits all’ rather than one which offers the customer bespoke products meeting their segment or personal needs.

However, you must not define market segments too tightly or too loosely.  For example many in the press will offer Millennial as a segment; yet the Millennial generation is roughly a third of the UK population.  Equally, if you are only aiming the target one-legged Welsh farmers, then it is unlikely that you will meet your market share expectations.

A ‘one size fits all’ strategy only really operates in quasi-monopolistic situations.

The five sub-categories of market share risk are:

1.  Target market risk:  Your strategy works for only part of your targeted market segments.  This risk is higher if you use homogenous target market segments e.g. ‘millennials’, as opposed to homogenous needs.
2. Proposition risk:  The proposition you develop for customers fails to appeal to some of your target market.  This risk is lower if segment specific propositions are delivered.
3. SWOT risks:  SWOT stands for Strengths, Weaknesses, Opportunities, Threats.  This risk occurs if you do not leverage your strengths, you do not take up opportunities, you do not protect against threats or if you do not remove weaknesses from your business.  Each of the four SWOT categories must be rigorously assessed and leveraged.
4. Uniqueness risks:  This is where you compete with others in your market head on rather than leveraging difference.  It is higher if you offer identical products nad services to those of your competitors.
5. Future risk:  This is where you do not properly account for changes in customer needs or market expectations.  A prime example is Kodak who continued to produce 35mm film for cameras when most consumers were going digital.  The Kodak situation was worsened by the fact that the digital sensor for cameras was invented by Kodak.

Profit risk arises by not properly assessing competitors’ response to your strategy.  So how do you assess what your competitors will do?

Again there are five sub-components to profit risk:

1.  Profit pool risk:  This is where the total amount of profit available in a market is less than forecast.  Therefore your competitor’s actions have a direct bearing on your profits because they do not react as you expected.  This risk is higher if the overall profit pool is static or shrinking e.g. in mature and declining markets.
2. Profit sources risk:  This risk is higher if your plan is to take your growth in profits by seizing customers from your competitors.  It is lower if you are seeking to leverage growth from new customer segments.
3. Competitor impact risk:  Profits are less than planned because of the impact of your strategy on an individual competitor.  if there is a single dominant competitor in your market, e.g. Amazon in the case of digital retail, and your strategy affects their survival, you may face stiffer competition, harder reaction and therefore lower profits than you planned.
4. Internal gross margin risk:  This is where profit margins are lower than planned due to a rise in the cost of making your product or service.  This is one area where Carillion went wrong.  The company’s directors operated on very slim margins and had a policy of gaining contracts by undercutting their competitors’ bids.  When projects began to be delayed and the costs of raw materials rose, those profit margins disappeared.  Similarly, Stagecoach found that by over-bidding to run the east coast rail line, they weren’t able to make their expected margins.
5. Other costs risks: This is where other costs associated with production, such as the costs of marketing or delivery is higher than expected.  These higher costs impact on expected profit margins.

In summary, the risk of not delivering the promised margins is high if your market is small and shrinking, your market contains one dominant competitor and you are over-optimistic in your assumptions about costs.