How to maintain a balance between risks and profitability

India is the second largest growing economy in the world and has the world’s second largest population; therefore, the market size of India is on the rise and the opportunity for doing business in India is huge. Foreseeing these circumstances as an opportunity, India will be the third largest TV market by 2025 and with 23 million households still existing with CRT sets, India’s replacement market is huge for LED TVs.

In order to capitalise on opportunities such as these, market trends have to be identified, that is, how the market has shifted over the years. For example, about 10 years ago, the market existed only for the four multinational brands, wherein consumers used to buy TVs as a luxury product. So there was very little space for brands in the affordable category. However, the market is now inclined towards smart TVs, after the introduction of smartphones. A number of brands have entered the Indian market, after having identified the opportunity here and are taking over the market share of the top four multinationals.

The above opportunity also poses as a risk to Indian businesses as there is plenty of competition and new brands are being rapidly introduced. Companies tend to create a price war in the market in order to sell their products by burning a hole in their pockets in order to capture a larger market share. However, this is only a short-term goal, as no company can sustain losses for too long and once the consumer gets used to a certain pricing, it becomes very difficult to convince the customer to buy the same product at a higher price.

Another risk is from rapidly changing government policies. With the introduction of GST and various other policies with respect to LED TVs, it becomes difficult to adapt to such changes overnight. Also, there is a certain amount of capital blockage when it comes to GST as one has to submit the same in advance. Albeit, a good initiative, it was a risky change since not all businesses in India were equipped to handle such a financial burden. This, along with factors like the ever fluctuating dollar (dollar appreciation has been 14% in the last 1.5 years), and changing price of raw materials on a daily basis exposes a business to high levels of risk.

Along with the above, a company also needs to constantly change according to the needs of the market/consumer in order to stay in the race. With constantly changing technology, there is always a risk of being outrun by a competitor who has better technology before you at better pricing.

Finance management plays a key role in risk management. We need to foresee where to block our capital so that in times of need we are not left in a boat without a sail. In India, the interest rate is the highest and the tax structure is also on a higher side with no benefits attached to the corporate taxes being paid. With GST at 28% in cases of LED TVs bigger than 32 inches, this falls under the highest GST tax grade. If the dollar rate stabilises, the market can grow at a pace of almost 10% a year.

A good risk management plan is important to insure one’s business against potential risks. It improves the company’s brand image when it is proactive and protects its employees and customers against potential risks identified above. For example, without a good financial plan integrated with good risk management, a company may not be able to retain employees in times of low sales and unforeseen capital blockage, and may need to lay off employees. This as opposed to a company which has a good risk management plan in place will be able to retain employees—who in turn will boost the confidence of employees and helps the company grow as well as create loyalty.

Another example to show the importance of a risk management plan is when the dollar fluctuates and raw material prices also go up, a company who has not factored in such risks may need to charge the end consumer more, which in turn results in loss of sales due to sudden price increase reflecting on the end consumer.

To summarise, a business is successful if it manages to create an environment where risks are welcome but are well-insured against.

The author is director and CEO, Super Plastronics Pvt Ltd, a Kodak brand licensee. Views are personal.