Here are some key ways that shareholder-managers and directors of SMEs and privately-held companies can create enduring value through challenging the business model.
The Toughest Question
Have the courage to challenge whether or not the business model can actually create money and value in the long-term. Many business founders claim that cash flow is the reason why they face so many challenges.
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The reality? The business model does not have the legs. When I do turnaround strategies with companies, I pose this question: If you continue to put in capital, expertise or effort, would you improve the long-term ability to drive value or would it continue to be tough? Be willing to accept that the business idea itself may not be sustainable.
Define Your Customers
A quick way to destroy value is to not clearly understand your value proposition or to believe that you should sell to anyone who is willing to buy. This is a problem of focus. Selling everything to everyone requires precious energy across a broad base of options and you soon learn that not every customer is profitable.
Rather focus on getting clear on who your customers are and then direct your efforts towards finding those customers who resonate with the value you offer. A laser beam is much more effective than a torch flashed aimlessly around.
Revenue Is Key
Your revenue model depicts how you generate cash from delivering your value to your defined customers. Revenue streams might accrue from product or asset sales, usage fees, leasing or licensing agreements, service fees or advertising. Your pricing may fluctuate from deal to deal or you may operate on a fixed price basis.
You may sell your products or services through an annuity model or rely on repeat purchases. Get to grips with how the business earns its money and look for ways to shift revenue potential by the way it accrues.
For example, Dollar Shave Club created market disruption through its quirky, subscription-based approach to selling razors that has challenged large brands like Gillette, yet also delivered an effective business model.
Be clear on the costs required to operate your business model and which costs are most important. If hiring the best expertise you can is critical to delivering value, make sure your cost structure represents that constraint. If you then do not invest in people, you are unlikely to deliver the value you have promised.
If retail branches, as a channel, are a critical cost, then a different set of assumptions is required. A ‘spend formula’ is effective in mapping each unit of revenue to the required costs. This formula will change as your business grows and evolves.
Say your revenue is 100%, what percentage should you allocate to: Net profit; employee costs; research and development; overheads; sales and marketing; and production or delivery costs? This financial formula becomes a guiding principle against which day-to-day business decisions can be evaluated and agreed upon, and actual results can be compared.
These are a few dimensions of value creation that directors and shareholder-managers should consider. Other areas include: The key business activities that drive value; critical partnerships; the channels used to reach customers; and the resources that will drive long-term value creation.