Business owners and managers have probably never faced such a period of change as we are currently seeing. Change carries with it a great sense of uncertainty, but we can get through it together!
How do we navigate our way through this economic turmoil? How do we ensure that our businesses survive in order to provide us and our employees the ability to enjoy a full and safe life outside the workplace? How do we ensure that our businesses will in fact prosper, or at least be positioned to prosper, in the future? The bottom line is that we can’t simply rely on the things we’ve done in the past or on government assistance alone to get us thru this Covid-19 crisis. We should instead use this time to evaluate every aspect of our business and chart a course for the eventual recovery from this crisis.
We decided to dedicate a series of blogs to offer some clear and concise ways for a privately held business how to re-examine itself, to identify the key elements of its success, to develop strategies for ensuring its survival during economic turmoil, and ultimately to build a plan for thriving in the present and the future. In this initial blog we will focus in the need to examine your ‘Valuable Formula’.
WHY IS A BUSINESS SUCCESSFUL?
Let’s introduce the concept of the Valuable Formula, which helps explain why any given business is successful. The success of a business is dependent on its business model and good business models are based on a Valuable Formula. Especially during this time of Covid-19 related uncertainty, it is important to evaluate your business model and any adjustments you need to make in order to take advantage of the new normal. A business model is defined as the combination of the following elements:
• WHAT products or services you sell
• WHO buys them
• WHY they buy them
• HOW you make a profit out of the transaction
The last two specific aspects of the business model are the ones you really need to understand in order to identify your valuable formula. Frist, Why do customers buy from you and second, how does your business make a its money? If you clearly understand these two things you have identifies your valuable formula!
WHY your customers come to you might be because … you have a convenient location, there is easy parking, your after sales service is good, you recognize and greet all your customers, you have a unique understanding of their business, your product/service is the best value for money, no one else can supply it and so on. There is always at least one reason why a customer buys from you (although it is usually a combination of reasons and these vary across different market segments).
In relation to HOW you make a profit, what is it you do that allows you to generate a margin over your costs? Do you have lower costs than your competitors, and if so, why? Is it because you are skilled at producing your products more efficiently? Do you have a source of raw materials that others pay more for? Can you command a price premium, and if so, why? Is it because your service is so exceptional that people are willing to pay a little more, or is it because you provide 24/7 service? There are always reasons, and understanding why is a vital piece of business intelligence. The WHY and HOW add up to your Valuable Formula.
IDENTIFYING THE VALUABLE FORMULA?
Professor Michael Porter has laid the foundation for much of our understanding in the area of competitive strategy. He argues that a business will win in the market if it is a price leader, is differentiated in some way or focuses on a particular segment. The challenge is to know which of these is at work for you, particularly if it is differentiation (because you will need to understand exactly what makes you different).
In a world where a financial crisis, technology or a pandemic are causing rapid changes your Valuable Formula can change very quickly. Consider the following classic examples: the near fatal impact of digital cameras on kodak; the virtual demise of the beautifully bound and printed Encyclopedia Britannica as a result initially of the launch of the first online encyclopedia, Encarta, and in recent times, Wikipedia; the impact of direct customer access to online flight and accommodation bookings on the traditional travel agent; or, the abrupt changes to business norms due to Covid-19.
What you really need to know about your Valuable Formula is precisely how valuable it is. For some companies the Valuable Formula is protected as Intellectual Property, in the form of patents, trademarks, copyright, or through commercial security (think Coke and the formula for this beverage, Microsoft and its software code, pharmaceutical products and so on). In other instances the Valuable Formula cannot be legally protected. Irrespective of the source of your Valuable Formula, it must be protected and it must develop and change with the times.
And herein lies the problem. In good times many businesses take their Valuable Formula for granted – or even worse they don’t really understand why it is they are successful. However, when the external environment is changing, the dynamics of your Valuable Formula can change and adverse outcomes can emerge. Businesses with a “weak” Valuable Formula are going to feel the pain quickly, but even those whose strong Valuable Formula is only gradually being eroded by change will, equally surely, come under pressure. your edge in the market will slip and this will manifest itself in reduced margins, loss of market share and declining profitability.
We use a particular strategic management framework for a business, represented in the rocket diagram, that illustrates the point.
Of course no business exists in isolation from the environment it operates in and the current crisis proves this point. The external environment, just like the internal elements of a business, can best be understood and managed when broken down into compartments. The next diagram shows the business in the context of the external environment.
There are two major threats in the current environment. The first and most pressing is the economic crisis due to the Covid-19 outbreak which is having an immediate and material impact on business confidence. The financial crisis will impact profitability with downward pressure on prices, and potentially reduce revenues, but with the businesses retaining the same cost structure.
The second major driver of change is in technology and the emergence of the digital / remote economy. This is causing a paradigm shift; the rules of business are being challenged and in some areas rewritten. The impact on the Valuable Formula cannot be underestimated. We are seeing the emergence of new dominant businesses, and the decline of many others which are still embracing their Valuable Formula based on the traditional economy.
The key point is this. you must re-examine your Valuable Formula and make sure what you are doing is relevant to the current market place, because if you are not doing the right things strategically, the right things will not happen in the rest of your business. Working harder and harder is not going to fix a broken Valuable Formula. To review the robustness of your business, work through the changes in the different elements of the external environment and ask what impact each of these might have on the various components of the business framework we discussed above.
Once you are sure your Valuable Formula is valid (or future proofed) Consideration needs to be given to certain operational parameters to cope with the economic crisis. We will cover each of the business strategic framework element beginning with Product and Services in Part Two of this series.