Risk Management Plan
Risk Management Plan
Risks are unforeseen events that have negative impacts on the business (Clarke, 2011). Risks are an essential part of all business since there is a direct correlation between risks and returns. Where there is a possibility of getting returns, there is also a possibility of suffering losses. Thus, any business that wishes to male return must be prepared for the risks involved. A large proportion of new business close down with 5 years because of the failure to manage risks (Clarke, 2011). Risk management is a proactive process of identifying risk and developing strategies for handling them if they occur.
- Risk Assessment
The process of risk management begins with the assessment of risks (Clarke, 2011). The cleaning business is exposed to numerous risks. The risks assessment process enables the business to identify the most significant risks and arrange them according to priority. This plan has established various risks that are likely to affect the cleaning business (Clarke, 2011). The risks were categorized according to their probability of occurrence and their impacts to the business. The plan accords priority to risks with the highest possibility of occurrence and high impact on the cleaning business.
The biggest threat to stability of the cleaning business is financial risks (Harner, 2011). The business needs financial resources in order to launch its operation. The business requires substantial initial investments in order to acquire equipments. The business also requires a substantial amount in order to facilitate the daily operations of the business. The initial months are the most crucial since the organization will not be generating sufficient revenue to cover its operations (Harner, 2011). This means that if the financiers’ pullout the business could land into problems. Financial risk can also arise from an increase in interest rates, default by customers, increased cost of inputs, and many other factors.
Competitive risks are also significant threats to the business (Clarke, 2011). There are numerous other players fighting for the cleaning market. Additional players will also join the market after we have started our operation. Increased competition may results in negative consequences such as price wars and increased cost of business. This may increase the organization’s cost or hinder the organization from achieving it financial and growth forecasts.
Operational risks are also a serious threat to the business. Cleaning businesses makes use of specialized equipments to provide services (Clarke, 2011). Breakdown of equipments can stall the operations of the business. Other operational risks include; accidents, theft of equipments, destructions and others. Occurrence of such tragedy may cripple the operations of the business.
- Contingency Plan
The second stage in risk management entails the development of contingency plans (Clarke, 2011). Contingency plans are standby measures that are developed by the organization in order to implement them when a given risk occurs. Contingency planning is a proactive approach of addressing risks. Organizations identify potential problems and develop plans for addressing them before they occur.
This business has identified alternative sources of finance in order to mitigate the financial risks (Harner, 2011). Overdependence on the identified sources of finance exposes the business to financial risks. In order to avoid the collapse of the business as results of the financial pulling out, the organization has made arrangements for alternative sources of funds. Alternative sources of finance give organizations a lifeline when the financial goals are not met (Clarke, 2011). Insurance will also help the organization to overcome some operational risks. The organization may minimize the impact of events such as; fire, theft and damages by insuring the business.
Strategy for Growth
Every business aspires to grow. Remaining small does not help in sustaining the competitiveness of the business (Allen, 2011). This is why it is essential for the cleaning business to identify effective strategies for growth. A number of growth strategies have been evaluated in this plan. These include; penetration strategy, market development strategy, service development and diversification strategy.
$1i. Penetration Strategy
Penetration strategy focuses on selling additional products to the organization existing customers. This achieved by identifying new uses for the company’s product or taking over the competitors customers (Allen, 2011). The cleaning business specializes in the home cleaning market. Penetration strategy would entail getting additional home owners to use the company’s services. This venture plans to implement the penetration strategy. As a new company, the venture needs to make as much sales as possible. Penetration strategy will enable the company to increase sales getting additional customers to use the company’s products (Allen, 2011). The penetration strategy is also appropriate since it provides the organization with a way of promoting growth that is least risky. Penetration strategy does not require massive investment in processes such as researches and product development. This makes this strategy least risky.
The penetration strategy is also appropriate because the current market has immense opportunity for growth. There numerous home owners within the city. The real estate industry is also expanding and, thus additional people are likely to own homes in the future (Madura, 2007). Thus, the home clean market presents immense opportunity for growth. The organization will use pricing in order to penetrate the market. Currently, home owners are paying hefty prices in order to receive home cleaning services. This organization plans to attract customers by offering services at affordable prices. Operation efficiency will be the focus of the business (Madura, 2007). This will enable the organization to lower cost substantially, thus providing reasonable process to the customers. Other short term tactics such as discounts, advertisements and direct selling will be used to penetrate the market.
$1ii. Market Development Strategy
Market development strategy entails selling the firm’s existing services to a new market. It may involve expanding from residential property cleaning to cleaning of commercial buildings. It may also entail expanding to new geographical regions (Madura, 2007). After the market penetration strategy, the business will focus on expanding the market. Market development strategy provides the venture with an opportunity to expand its revenues and control of the market. The venture will focus on geographical expansion rather than moving into the commercial cleaning market (Madura, 2007). This is because the residential cleaning market provides more opportunities for growth than the cleaning of commercial buildings, which is already saturated.
Geographical expansion will provide the firm with additional space to serve the existing target market. There various strategies for market development. Opening new company owned branches within the new geographical regions is one of the strategies (Allen, 2011). This strategy presents the venture with the advantage of retaining control over the business. However, the strategy requires heavy investment of resources. Inadequacy of resources may slow down the growth process. The other strategy is for the firm to establish franchises within the new geographical locations (Inma, 2002). The franchise arrangement will see independent investors establish new operations using the firms’ brand. The franchisee will be expected to stick to the standard of the business and pay a royalty fee to the venture. This strategy will bring about aggressive growth since the problem of lack of resources is eliminated.
$1iii. Service Development Strategy
This strategy entails developing new services for sale to new and existing customers. It may entails modification of existing products or creation of new lines of product (Allen, 2011). The business does not intend to pursue this strategy at present. This is because the cleaning business is a relatively new company and would, therefore, like to concentrate on the existing product. There is a need to ensure that the first brand of services becomes successful before thinking of developing another brand (Allen, 2011). Establishing another brand at present may hinder the success of the company as the firm will have divided its resources in order to sell the two products.
Service development strategy also presents higher risks to the organization than penetration and market development strategy. This is because the strategy entails launching a product that has not been tested to the market (Madura, 2007). The organization is not certain how the market will react to the services, thus presenting risks to the organization. The organization is not ready to take such a risk since it is in the startup stage.
Service development strategy also requires heavy investment of resources. The organization must undergo all the processes involved in coming up with a new product. This process entails idea generation (Madura, 2007). The venture has to develop the idea of the new services through market research and other forms of analysis. The venture must also screen the new idea. This entail assessing the value presented to the customers, the competitive environment and the feasibility of the service idea. The organization must also develop the concept and run test. The organization must also implement the new service concept. This includes mobilizing all the resources required for the process.
$1iv. Diversification Strategy
This is an aggressive growth strategy that entails moving into other lines of businesses. There are various advantages of diversification (Allen, 2011). There are three main diversification strategies. One of the strategies is horizontal integration. This strategy entails the acquisition of competing business. The company acquires business that operates in the same line of service. Horizontal acquisition facilitates growth by ensuring that the competitors are eliminated. The organization also enhances competencies by incorporating the ideas and human resources of acquired business. Horizontal integration also enhances competitiveness by introducing economy of scale.
Another diversification strategy is backward integration. This diversification strategy entails acquiring suppliers. There are various advantages of backward investigation. One advantage is that it reduced cost as a result of consolidation of operation (Allen, 2011). Backward integration enables the organization to reduce cost by eliminating transaction costs. When the business acquires suppliers, it reduces the cost of acquiring inputs and thus reducing the cost of doing business. It also assists business to develop products at a faster rate by facilitating the acquisition and movement of essential inputs. Backward integration also enables the organization to take advantage of economy of scale.
The third diversification strategy is forward integration. Forward integration entails the acquisition of businesses that are at a lower level of the production chain (Madura, 2007). This may entail purchasing the distributors, retailers and others. Forward integration also has a number of advantages. Vertical integration enables organizations to enhance the distribution of products (Madura, 2007). Acquiring intermediaries enables the company services to move much faster. Forward integration also reduces business cost by reducing transaction costs.
The cleaning industry does not consider any of the above diversification strategies at present (Madura, 2007). This is because the business is at the start up stage and thus its resources are constrained. However, the business may consider using the horizontal integration strategy in the future. This is the most suitable diversification strategy as it will not only enable the venture to grow but will also help the organization to reduce competition. Horizontal integration will also enhance the operations of the business by introducing fresh ideas and fresh ways of doing things. This will also add into the competitiveness of the business.
Franchising
Franchising is the most appropriate growth strategy for the business at present. Franchising is a growth strategy that entails licensing independent business to operate using the company’s brand. The company becomes the franchiser while the independent business becomes the franchisee. The independent investors expand the company’s brand by opening up new operations. The franchisee adheres to the standard set by the franchiser and pays a certain fee to the franchiser. The fee, which is known as royalty fee, becomes the main source of revenue for the franchiser. However, a franchise arrangement does not bar the parent company from opening up new branches of its own.
Franchising is the most suitable growth strategy at present because it does not require massive investment of resources. As a start up business, the organization does not have adequate resources to establish new branches or acquire other businesses. In the franchising arrangement, the cleaning business will license other investors to open up branches using the firm’s brand. This means that the brand of the company will grow with minimal financial investment. This will not only enable the organization to overcome the resource constraints, but will also promote aggressive growth.
The franchising model will also facilitate future growth of the business. The franchising model will provide the company with an avenue to popularize its brand. The franchisees will help to propagate the company’s brand to new geographical markets. The franchisee will also invest in promotional activities that will also assist the company’s brand.
Projected Growth
We expect the venture to exhibit strong growth in the fast 2 years. During this period, the firm will concentrate of establishing its brand in the market. Thus, the company will rely on the penetration strategy. At the end of the 2nd year of operation, we expect to control 25% of the home cleaning market within the city.
Once the business brand has become establish in the market, the company will shift focus to promoting geographical growth of the business. The company will make use of franchising model to drive its growth agenda. We expect to open 9 new branches by the end of the 5th year of operation. This will expand the company’s influence in the market, as well as, enhance the company’s financial performance.
Further growth is expected in the next five years. The company will undertake massive marketing campaigns to popularize the company’s brand. Both penetration and market development strategies will be used to advance the company’s growth agenda. We expect to have a total of 30 branches at the end of 10 years and a revenue base of $ 50 million.
References
Allen, K. (2011). Launching new ventures: An entrepreneurial approach. Mason, OH: South Western
Clarke G. (2011). Business Start-Up and Future Planning. Straight Forward Publishers
Harner M. (2011). Mitigating Financial Risk for Small Business Entrepreneurs. Ohio Business Law Journal. 6 (2): 470- 489
Inma C. (2002). Building Successful Franchises. December 15, 2012. http://researchrepository.murdoch.edu.au/107/1/01Front.pdf
Madura J. (2007). Introduction to Business. USA. Cengage Learning
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