What makes the perfect business?

What makes the perfect business?

Sep 14, 2018 | Marketing, Small business

A while ago after a networking meeting, a few of us went to a pub for a steak, and ended up solving the problems of the world on beer coasters.

As you do.

Given we all owned and ran small businesses, the main topic of conversation was around the nature of the perfect business, the one none of us had.

The depth of intellectual effort that had gone into  the discussion deserved preservation, so I collected the tattered and somewhat wet coasters at the end of the night.

The next day it took a greater than anticipated effort to decipher what had been very clear just a few hours before. However, following are the parameters of the perfect business we arrived at.

  • It has a wide demand area, not just the local area, the world. This is now a possibility whereas a decade ago it was still fantasy.
  • You have a ‘monopoly’ in a niche, with inelastic demand. To achieve this the business must be very specific, and very good at what it does. So good, and so specific in fact, that it is simply not worth the investment and risk of competitors coming after you, but customers need your product and are prepared to pay for it. (A former client sold a highly refined chemical into a high end niche in the professional photographic market. A tiny, narrow world market, where the users needed the product in very small quantities, so price was not an issue, but the challenges for a competitor were significant. Perfect.
  • Substitutes are hard to find. In the example above, there were substitutes, quite acceptable ones at average levels of output integrity, but at the really pointy end, there were none so he could set his own prices. This is, until digital took over, making his business one of the bits of disrupted post digital debris.
  • Labour costs are minimal, the fewer personnel the better. Contractors undertake the recurrent processes, often in lower cost locations.
  • As above with overheads, which just anchor you to a place.
  • Investments in inventory, which chews up working capital, are minimal.
  • The business is mobile, in the sense it really does not matter if the HQ is in Sydney, Melbourne, or under a tree in Port Douglas.
  • There are limited regulatory regimes that interfere in the running of the business. The opposite is also true, where the regulatory impositions are so high that they discourage competition.
  • There is some element of cash, not for tax evasion purposes (although this angle did have some attraction) but to minimise the working capital necessary to run the day to day operations.
  • It is not bricks and mortar retail. Sounds specific, but in retail there are always long hours, and problems with personnel and customers, that just get in the way of making a profit. Besides, B&M retail is in the early stages of disruption, and Amazon had just opened their warehouse in Melbourne.
  • It is a subscription business of some sort, where the revenue just rolls in without the necessity to go through the sales process again and again for every dollar of revenue.
  • It is not a straight trade of your time for money, there has to be leverage involved. The web with its opportunity to leverage content has opened up a host of opportunities not around a few years ago.
  • The business has some value to your ‘internal’ life. It is something you love, it feeds your intellect, gives you the time you need to chase a dream, whatever it is, it delivers more than just the financial rewards.

None of this allows you to be successful in the absence of real marketing understanding, a product that fills a genuine need in ways not easily replicated by others, and a bit of being in the right place at the right time. Being able to see an opportunity when it knocks is critical, as it rarely knocks twice.

Additions to the list are very welcome, and it may serve as a scorecard for your business!!

The 5 steps to optimise process development

The 5 steps to optimise process development

Sep 10, 2018 | Change, Management

 

Processes are the means by which we get stuff done, and are therefore an integral part of our personal and professional lives.

Mostly we just  allow them to evolve, usually in a pretty unthinking manner without much critical analysis. However, this is a mistake, as it leads to duplication, mistakes, omissions, personal idiosyncratic behaviour, and waste.

When valuing a business, one of the tell-tale signs of good management is the presence of a simple set of process maps which guide the way things are done, from the most mundane to the really important. This ensures, or at least makes the effort to ensure, that the same jobs get done in the same way every time, irrespective of who is actually doing the job.

The cost savings that result from this simple idea are enormous.

Creating a ‘process map’ or running sheet for the simplest to the most complicated process is pretty much the same.

The point however, is not to create a set of rules that can never be broken, it is just the opposite. A process to be optimised and improved  needs to be subjected to critical analysis on an ongoing basis, the written process just gives a stable starting point.

My experience with process mapping has involved 5 steps, that usually happen in an overlapping manner

 

Learn by observation and questions: Observe what happens currently, how things actually get done, consider the range of cause and effect chains in place, ensuring you do not confuse cause and effect with simple correlation. Go out and ask questions, seek insight into the hidden ‘wrinkles’ that exist in every process.

Experiment: An effective experiment requires discipline, primarily to test one thing at a time so you can accurately measure the impact of any change. The scientific method works: develop a hypothesis, test if it is true or false by collecting data, adjust the hypothesis and test again, until you find a hypothesis that holds true. As  Sherlock Holmes’s mentor said: ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth’

Codify: a process that remains in one persons head is no more than an opinion. To be effective the thought must be codified in such a manner that it can be accessed by anyone, and given the status of the ‘right way’ of doing something. I like visual process maps, they are easier to understand, and absorb quickly.

Distribute: once codified, the process needs to be distributed, and made easily available. There are now many digital tools around that enable distribution and simple reference. In the ‘old days’ processes would be in a manual somewhere that nobody looked at, even if they knew it existed. Nowadays there is no excuse, the process can be available to everyone with digital access.

Optimisation and creativity.  The paradox of all this is that with a stable process, you can now be creative, seeing alternative ways of delivering an outcome.  For improvement to occur you first need a stable system so the impact of changes are visible in measureable outcomes. This is the opposite to the chaos that people often consider to be a part of the ‘creative process’

Header acknowledgement:  Hugh McLeod at Gapingvoid.com

 

 

The 5 ‘Literacies’ required for superior performance

The 5 ‘Literacies’ required for superior performance

Sep 5, 2018 | Leadership, Management

Over the 23 years of working with medium sized businesses to improve their performance, the activities have all come from 5 common buckets.

  • Financial Literacy
  • Strategic Literacy
  • Operational Literacy
  • Business model Literacy
  • Revenue generation Literacy

 

Every action, strategy, and tactic employed comes from one of  them, but importantly has flow on effects on all the others, sometimes in unanticipated ways. In those cases, having the performance measures in place that show up the outcomes early enables you to double down on those that work, and back off those that do not.

Business improvement is an iterative process, ideally a tightly managed one, but iterative none the less. It also needs to provide the opportunity to incorporate ideas, insights, and new information that comes to light. What I call ‘Loose Tight’ management.

Similarly, each bucket has a hierarchy supporting it, and the more you go  into the weeds with the detail, the greater the apparent interdependence they all have.

However, thinking of them as buckets that require a series of decisions or actions helps to organise all the disparate things that get in the way of performance. You are able to sort out at each level in the supporting hierarchy which actions are important and which are not, which deserve the focus of resources over the others, recognising that you simply cannot do all the things that may seem sensible and important, no matter how big you may be. It also enables project management, timelines, cascading KPI’s and individual and group accountability to be clear.

You have to make  choices, and the choices in one arena inevitably impacts on those in others.

Add them together and you get superior performance as an outcome. The whole is always greater than the sum of the parts when done well.

A marketers explanation of Free Cash Flow.

A marketers explanation of Free Cash Flow.

Sep 3, 2018 | Governance, Management

The net flow of cash into and out of a business is to my mind the most vital measure of the success or otherwise of that business, captured in the cash flow statement.

The P&L, and Balance sheet, vital as they are as performance measures, can be susceptible to ‘management’. The flow of cash is less able to be similarly ‘managed’

It is however, like all numbers, subject to the context.

Free cash flow is the cash generated by a business less its Capital expenditure.

The summary formula is: Net operating cash flow – Capital Expenditure. (Capex)

It is a very simple calculation once you have the cash flow statement in hand.

Free Cash Flow can vary dramatically over periods of time, so the trends are a vital part of the consideration. A business might invest a lot today in capital that is expected to deliver profits in the future, and should not be penalised for doing so, rather it should be supported, so long as the investments are sensible, which is another whole set of considerations. Every business needs to invest in the productivity of existing assets by way of renovation and replacement, as well as supporting innovation and maintaining regulatory compliance.

The trends in free cash flow and Capex expenditure are key measures of commercial sustainability.

I have seen businesses being tarted up for sale that display impressive increases in free cash flow over a few years, but as always, the numbers can lie. When you go behind them, the Capex has been restrained to the long term detriment of the business, to make it more attractive in the short term.

As an antidote to the rosy picture that can be generated by reducing Capex, I like to see the free cash flow and capital expenditure trends on the same sheet of paper, and being a marketer, as a graph. You can go one step further and break up  the Capex into three categories:

Capex spent for regulatory and compliance reasons

Capex spent for productivity and capacity reasons

Capex spent on new products and processes.

The nature of the Capex can tell you a lot about the health of the business, and its prospects.

Cartoon credit to Scott Adams and Dilbert. 

The 7 foundations of a successful enterprise

The 7 foundations of a successful enterprise

Aug 31, 2018 | Governance, Leadership, Strategy

 

I was asked the question ‘what makes a truly successful enterprise’ at a workshop that had strategy development as its purpose. It is a regular question that I get in various forms, and a question that I ask myself from time to time.

The easy answer is the marketing responses:  know your customer, understand your markets, select the market niche in which  you compete in and dominate it in some way, all of which are correct, but are not the full answer.

The full answer lies in having the right foundations for the enterprise, foundations upon which everything else is built.

Like the foundations of a house, they are rarely visible, and almost never all visible at the same time.

It seems to me that they also create a virtuous circle, and the lack of one impacts on the others in a manner greater that you would expect.

None have anything to do with the tools that are used, particularly all the new digital tools and platforms.

Have a clear, well communicated strategy.

Strategy provides the framework within which enterprises make decisions at all levels that add to the value of the activities being undertaken. It is as much about what you will not do, always a harder choice than what you will do, as it requires the killing of someone’s ‘baby’ idea.

A strategy that is held in the c-suite, no matter how good it is, will be compromised by not being communicated throughout the business as the decision making foundation. Whether you set out to be the low cost supplier, supply only those  who fit a certain profile, deliver continuous innovations, whatever it is, make sure everyone understands it.

Execution.

No plan is of any real use until it is used. Execution of the plan is 9 tenths of the game. Relentless focus on the strategy, and execution with the appropriate feedback loops that enable tactical adjustments to be made as new information emerges makes a strategy successful. Without execution, strategy is just a set of potentially good ideas and vague promises.

Business model.

Many managers spend inordinate amounts of time thinking about the structures of their businesses, often missing the key component of the manner in which it delivers value to the key group of customers articulated in the strategy.

20 years ago, the number of potential business models was limited by the physical limits of communication and logistics. While this still applies, the flow of information facilitated by the net has changed the face of business, and has spawned a pile of new business models  and ways to reach customers and deliver value. It also seems that business models have trouble cohabiting. Therefore  choices need to be made that should be dictated by the strategic priorities.

Talent.

Businesses are just places where people gather to do the work, so the better the people the better the work. You need talented people to get the work done, a business is nothing without people. Taking this one step further, it is really the networks of people that deliver value.  ‘Joys law‘ named for Sun Microsystems co-founder Bill Joy holds that ‘no matter who you are, most of the smartest people work somewhere else’. The self-evidence of this statement should encourage management to find ways to include some of these people into their commercial ‘eco-systems’. In a small way, many Australian businesses are doing this already,  outsourcing increasingly complex tasks offshore. The initial push is usually cost, but many are finding that quality can be as good as or better than is available locally.

Behaviour.

The way people behave, collectively,  becomes labelled ‘culture’. Culture is usually described in the terms first used  by Michael Porter 30 years ago, as ‘The way we do things around here‘ which is also a description of the behaviour that prevails. Is it collaborative, congenial, non-discriminatory, a meritocracy? Again, the sort of behaviour you nurture is a key determinant of the culture that evolves, and should make up a key component of individual and group KPI’s.

Leadership.

The behaviour of people is driven by the leadership style of the ‘boss’ and senior group. Together they dictate the terms of the culture, select the appropriate talent for the tight reasons, select and deploy the KPI’s based on the behaviour required to execute the strategy. Falling back on the wisdom of Peter Drucker, again, who said ‘Management is doing things right, leadership is doing the right things‘. It is the leadership that extracts performance from an enterprise beyond the average, the willingness to be held accountable, inspire, and explore.

Timing.

The value of getting the timing right is a wildly underestimated contributor to success. From simple internal matters like making that key presentation to the directors when they have had a series of good results, to major external factors such as recognising the point at which a technology that may have lain dormant for years suddenly has a place. Penicillin, the computer mouse, digital camera, Wireless LAN, touch screen, and thousands of other innovations lay dormant, unused until something changed, creating an impetus for the innovation to be commercialised, often in ways unforeseen by the developers. They are in effect a solution to a problem not  yet identified, or sitting outside the sight of incumbents, or simply the wrong time wrong place in some trivial way. A personal example. In the very early eighties I worked for Cerebos in Australia, as a product manager for a number of their brands, Fountain amongst them. I saw an opportunity for a pasta sauce to complement the then very small, but expanding dry pasta market. Fortunately there was an Italian food technologist in the development team who developed a range of very good pasta sauces, which we launched in test market  in Victoria. The test failed, for a number of reasons, that had nothing to do with the quality of the products, or the strategic thinking that was behind them. Eighteen months later, Masterfoods launched ‘Alora’ pasta sauces and  built a category. In blind tests, when considering a second try, the failed Fountain sauces significantly outperformed the successful Alora products, but their timing was way better than ours.

 

When you need to inject the wisdom of ‘been there done that‘, give me a call.