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ii. Weaknesses
In a symmetric fashion, you should analyze what are the operational and financial weaknesses of your business.
An example of operational weakness that was not developed above is given by a production model that relies too heavily on fixed costs. Fixed costs are costs which are incurred and do not vary with the quantity of products manufactured. For instance, purchasing a new factory in order to develop one’s production capacity can be seen as a fixed cost: no matter how much I will produce and sell, the price I paid for the factory won’t be recovered and does not depend upon the number of products manufactured. Of course, the notion of “fixed costs” is relevant only for a determined time horizon. In our example, the purchase of a new factory will represent a fixed cost for a time horizon of 15 years, but might very well be assimilated with a variable cost if the time horizon considered is 50 years, in which case you will need to build several factories if you want to keep working with modern equipments and thus preserve your competitive edge).
So why are too many fixed costs dangerous in the first place ? Because they take away some of your company’s flexibility: indeed, imagine that there is a sudden drop in demand for your products for whatever reason (because of a decrease in the population’s average purchasing power, for instance). Then because you already incurred so many fixed costs, you won’t be able to downsize production easily.
Conversely, why would manufacturers be interested in maintaining a high level of fixed costs ? Because “high fixed costs” is often synonymous with “low variable costs”: if you are heavily equipped with the most modern tools, you will produce more efficiently and thus for each unit produced you will bear few extra charges (in other words, lower variable costs). Therefore, past a certain level of production, the total cost of production will be lower when your fixed costs are high … except that this operational leverage may turn into a nightmare if the economy is bad and you need to lower production.
A weakness might also lie within a relation of subordination: imagine that you are operating a web business and that you cannot afford marketing campaigns. In this situation, most visitors are driven to your website by the major search engines (the most powerful one, at the moment, being Google, which detains over 80% of the market). What is going to happen if your website ever gets dropped from Google index ? You will end up receiving significantly less organic traffic and will need to resort to marketing in order to counter this effect. However, since your margins were too small to afford marketing campaigns and since they have become even smaller now that you don’t receive organic traffic anymore, you won’t be able to market your products and your income will drop to a (much) lower level.
What is the main lesson to be drawn from this ? It could be summed up by the following: never leave all the power in the hands of a single player, or differently said: never put all your eggs in the same basket. Practically, within the above framework, you might want to factor the marketing costs into the price of your products, or propose some complementary content in order to retain visitors and attract new ones by word of mouth (which will always remain the cheapest form of marketing, considering it’s free).
Once you have identified the weaknesses of your future or current company, you will want to try and figure out the possible remedies in order to maximize your chances of success. Surely enough, despite many efforts, you will end up with an irreducible list of weaknesses that you won’t be able to eliminate (they are probably inherent to your industry). But at the end of day, you will be the one to decide whether you are willing to bear the risk of these weaknesses and whether there are some alternatives to get rid of them (at a cost, if necessary, for instance through the subscription of an insurance). Being aware is already being halfway to success.