Why don’t you treat your business like an investment?

I’ve noticed an interesting dissonance when discussing strategy with business owners and senior executives. They often use an entirely different vocabulary in discussing their business investments than they do vis-a-vis their financial investments.

This is fundamentally perplexing because in nearly every case the business itself (or their vested interest in its success) is far and away the most significant financial asset they hold.  And yet they often are far more committed to a broad strategic perspective of their liquid investments.

Take diversification for instance.  Portfolio theory has evolved to the point that diversification is recognized as the single most important element of success (for preservation of capital in down markets and growth of capital in up.)

And yet, for many SMBs, diversification of their target markets, and innovative approaches in reaching them, are anathema.

Relevant analogs?

Obviously managing a business IS different than picking investments.  But it’s too convenient note differences and stop there.  More helpful is to recognize the long-term investment insights that can be applied to business.

emerging markets frontier markets business diversificationThat precisely what today’s cover story in Barron’s does – and the result?  In light of consumption growth, income trends, demographics and fundamental factors, Reshma Kapadia (@reshmakapadia) notes that foreign markets are important investment locations; that BRICs aren’t the best option; and that the frontier markets (a financial varietal of emerging markets) are particularly attractive.

Interesting emerging markets that are specifically mentioned include Nigeria, Kenya, Turkey, Mexico, Vietnam, Philppines, Indonesia, Thailand, Colombia, Sri Lanka & Sub-Saharan Africa in general.

One way to play these trends?  To identify companies that are actively growing their sales and channel in these markets – that’s an indirect way to capture the future value of these opportunities.

The curse of ‘self-attribution’ bias

emerging markets diversification risk perceptionBut many business owners eschew these steps for their own business.  The typical justifications are based on either the risk of that expansion, or the lack of need based on adequacy of domestic business.

These are really two sides of the same coin, because risk is a relative measure.  They’re not necessarily saying that developing the market in Vietnam is too risky, but that it’s riskier than committing the resources, which that effort would otherwise require, to the domestic effort.

But there’s a huge flaw in that position.  Psychologists will tell you that people nearly always attribute their success to their own actions.  For the moderately successful American business owner that could be justified.  Alternatively the moderate success could be a function of a few sound actions and a generally favorable market.  In reality, it’s almost always a combination.

That means that the manager has less control over continued success than they may believe, especially since the status quo is in dramatic flux.

In other words basing future business expectations on past success is indeed a very risky proposition, particularly as market conditions change quickly and the economic center of mass shifts from the US and west to emerging markets.

Ignored risk vs. exaggerated risk

So if “doing what we’re currently doing” is much riskier than we acknowledge, instead convincing ourselves that we are expertly piloting the ship; and emerging markets are sensible as an important element in your liquid investments; then maybe there’s a lesson here.

Perhaps a dose of emerging markets, carefully selected and strategically engaged with risks mitigated really should be part of your plan for your biggest investment – your business.

And before you say “Sure, but we must stay focused”, here’s a point to ponder.  On what are you focused?  Strategic growth, or simply myopic execution of the domestic strategy that you have convinced yourself you have so masterfully crafted?

Do it right….Don’t ‘just do it’

Of course there are downsides and risks.  It would be folly to strut into the office this morning and announce your departure, out of the blue, for Nigeria later in the week.

But you could strut into the office on Monday and give us a call.  Let’s talk about your business, your product, your strategic goals and whether global expansion might support those.  For what it’s worth?  We’re into success.  If it’s not a fit, we’ll tell you pretty quickly.  But let’s figure that out – don’t just assume!

But maybe it is – and we could support your expansion into Nigeria (as we are for another client now) or any of the other enticing markets that beckon American SMBs.