Is Your Marketing A Gamble?

How many times have you heard or participated in discussions about the effectiveness of marketing dollars? Personally, I can’t even begin to count. There have been so many. Undoubtedly there will be even more. However, when I ask people to describe the actions they want to undertake and the outcome they seek to achieve it often sounds more like gambling than business to me.

Businesses are organizations that take the uncertainty out of specific outcomes for their clients. Consequently, the processes and actions engaged in must take the uncertainty out of the business providing its goods and services to its customers. Marketing, as a process, is not an exception.

All too often, my own customers as well as some colleagues presents marketing plans which are so ambiguous that they seem to based on a hope and a prayer. In the worst case, they appear to be the power play of an individual or department seeking to push their own agenda to justify their existence. At the other end of the spectrum, many marketing actions seem to be motivated by something someone absorbed through the media; if worked for them it will work for us type reasoning. None of this works for me and I hope it doesn’t work for you either.

Although I can’t provide an answer that will satisfy every marketer, I would like to provide a framework for considering the marketing actions you plan to engage in: probabilities.

Do you know the odds of your marketing producing the desired outcome?

In my view, any marketing action must have a probability of outcome better than walking into a casino to play a game of craps. For those of you unfamiliar with the game it is played with 2 six sided dice, thus I figure you have a 1 in 36 chance of getting the result you want. Although this is not strictly mathematically correct it makes no difference to this argument. If you prefer, use a roulette wheel which has similar odds. My point being these odds are considered gambling. This is not business!

If the odds of achieving the objective are higher than gambling at a casino then you haven’t thought things through. To be more precise, your marketing is gambling, not business.

Before going to your boss, investors, or partner with a marketing action please, please, please, work through it so you have some idea what the odds are of success. If you don’t then you risk having another long discussion about the value of investing in marketing.

Before doing anything you and your team need to set out the goal. Whatever that goal may be ultimately it should turn into revenue. And revenue turns into gross margin and then profit. All too often I see marketing plans that cannibalize gross margin thereby never generating any profit. Don’t get caught up in circular reasoning.

Determining the odds requires testing and more testing. Holding the objective steady test the audience, the message, the connection between the two, and anything else which impacts the objective until you are no longer in the realm of gambling. The better your probability of success the easier it will be to have that budget granted.

Now, present your plan.

How Solving the Baby Boomer Problem Put Us in This Mess

Frankly, I don’t know about you but ever since I was young boy I tried my damnedest to understand the why things are the way they are in this world. After five decades, I have explained much of the world I live in to my satisfaction although not all.

When it comes to business it has always been very clear. Business people are property managers. I know. I know. It sounds reductive. Honestly, it is not. Businesses own and/or control certain key properties which are used in the products/services they make and sell to customers. And, customers seek to acquire those products/services because they take the struggle out of achieving a specific outcome. Depending on the legal framework of the jurisdiction the business operates in, the lion’s share of the value created through the process can go to the property owner, the customer, or the state (with the excuse it will be equitably redistributed). The decision about who gets what depends on the legitimacy the system gets from the community’s belief system. Its not much more complicated than this. And, I have successfully used this framework to conduct business on every continent.

But my challenge does not stop there. I also want to understand the world from a political point of view. Sure, the largest part of politics has to do with property and who and how it is used in business. However, there is – in my view – a higher level of politics that goes beyond the self-interest of one business segment, or industry, or the other to encompass the interests of the populous by which government maintains its legitimacy. This political sphere is much more interesting especially nowadays with this increasing talk of anti-establishment parties, political movements, and candidates.

For however much government and business are intertwined there is one fundamental difference: time. A business will operate within a generational timeline (25 years) or less because their property will become less competitive or even obsolete within that period. In other words, the business’s ability to make a return on that property will diminish over time to such a point that it can no longer cover the cost of capital let alone reinvest for the future. While government works on a timeline beyond the generation. Think of defense, for example. Is it in the interest of a government to invest in developing a new weapons system that is effective tomorrow or one that will be effective in a generation? A generation, of course.

Based on this understanding of the world, the governments of the most industrialized economies in the world saw the post World War II Baby Boomers are a fundamental threat to the legitimacy of the political system. A bigger threat than any other threat known at the time. Because of this perception, dealing with maintaining the well-being of Baby Boomers was deemed to be the cornerstone of most policymaking starting in the mid 20th century. Although each country followed different policies, I’d like to focus on the US and Europe because I know them best.

Although in the years after the WWII, certain inroads were made to deal with this threat to political legitimacy in Europe through the pursuit of “social” policies and in the US with creation of Social Security, it was not until the oil shocks of the 1970s that external threats amplified the internal threat. With the oil crises of the 1970s the manufacturing-based economies were deemed at risk. the US’s response came from the Reagan administration with what was called supply-side economics but which in reality was a concerted shift away from manufacturing to consumption. The UK followed suit under Thatcher but the rest of Europe was a mixed bag. Many countries wanted to partake in this brave new world but their status quo didn’t want to give up power, maintaining a strong manufacturing sector. For the US and the UK the shift to a consumption-based economy made perfect sense because as the population aged there would be less and less people to work in the factories which would have made the model and the government unsustainable. So these two dominant players were more than happy to start moving production offshore and investing in consumption. The first move offshore came in the 1980s with the rise of Japan Inc. and the creation of free trade zones, like NAFTA. As Japan’s economy matured, manufacturing went to South East Asia, in the 1990s, and then into China, at the start of the new century. Whereas, in the “West” first retailing became the big industry then finance, then the Internet. Interestingly, the Internet started out as the great leveler but was quickly highjacked by the consumption economy where it now resides.

Unfortunately, as with all well laid plans things don’t aways work out as planned. Once manufacturing was outsourced and free trade agreements were put in place wage growth stopped. Sure. As long as production and consumption are within your borders the rising time raises all boats. But when the contribution of an individual can be done in the economic center or the low cost periphery then competition dictates that it goes to the periphery. Likewise, with stagnant wages it is difficult or not impossible for asset prices to rise. The once proud notion of working and saving to buy a home, pay your kids’ education, and return comfortably was substituted by cheap loans that follow you to the grave.

But did it, does it, have to be this way? It does if you continue to work with an economic and political model that benefits the property owner. But in a consumption-based economy this – debt, debt, debt – is the result. And, if we go back to the Baby Boomer threat, the government has to maintain if not inflate those asset values in order to provide a soft landing for this ever larger segment of the population. So after the Financial Crisis of 2008 the Federal Reserve and the Treasury stepped in to put a stool under asset values. Today, this policy of asset support continues not only in the US but also in the EU and Japan with their negative rate policies. What is more desirable, paying a reserve back to maintain the corporate balance sheet or marking down those assets to reflect their real economic value? Having the reserve bank do it, of course.

So now that government has completely falsified the game by maintaining a system based on property but where citizens are asked to consume and cannot acquire property, and where policies artificially inflate asset prices for those who have assets but where those who don’t guarantee them, and where an education never gets paid off because wages are stagnant since the 1980s, and,…and,… we should not be surprised citizens perceive government as illegitimate. Yes, we can set the clock back to a time when everything was done within your borders but all that would do is oblige the government to increase taxes and redistribute to those who need help and are retired. On the surface, maybe a nice solution but in reality the US and Northern Europe would become like Southern Europe. And, I’m not referring to the weather and food! No, the only reasonable response to this quagmire is to allow asset values to deflate to levels economically sustainable based on income levels without needing to recur to enormous amounts of leverage before the biggest parts of the Baby Boomer generation retire.

labyrinth of uncertainty

The Uncertainty Model: Understanding What Business You Are In

Over the last few weeks, I have been working on a presentation of the leadership model I use during my coaching sessions, but I have to admit that preparing presentations is not my forte. So I’m posting a rough outline here to stimulate thoughts and discussion. Please bear with me as I do my best to put into words what is now in slides.

 

Since everyone comes into with world in the same way, I think it is fair to start from the human condition. We are all born into a precarious state of life and death. Up until recent history, infant mortality was a challenge. Even today, infant mortality rates are monitored and published by governments and non-governmental agencies around the world. The same can be said for a significant number of other life-affirming statistics, such as education rates, graduation rate, access to healthcare, (un) employment rates, birth rates, life expectancy, to name just a few. Therefore, we can see that our whole life is a struggle to survive.

 

One of the most touted models for understanding our struggles is Maslow’s hierarchy of needs. In it, Maslow argues that at the bottom of the pyramid there are our basic or – as I call the – alimentary needs and as we move up the five levels we attain self-realization. However excellent Maslow’s model may be, I find it flat and hyperbolic. It doesn’t really allow us to fully understand the nuances and complexities that make us who we are. Also, in most countries today we can’t really talk about needs as much as wants and desires. For this reason I have developed another model based on “uncertainties” of outcome. After all, what is Maslow describing but our struggle to overcome uncertainty; moving from a state of “need” to one of “freedom” from that need. I unimaginatively refer to this framework as the “Uncertainty Model”.

 

The model is quite simple in its constitution, making it easy for anyone to understand yet challenging in its application because of all the questions it raises. The basic premise consists in recognizing that the human condition is a struggle on three principal axes: physical existence, emotional existence and intellectual existence. In fact, you can take any element in Maslow’s model and re-categorize it according to these three axes. For example, food is a need – there is no denying that – making it a physical uncertainty. However, once we move away from the physical it can be a source of emotional or intellectual uncertainty as well. Emotionally, we have “comfort food”, or a way of building community, or a source of distress (such as what occurs with eating disorders). Intellectually, food can be a challenge if unknown, a joy to discover, a tool to create with, or a science to measure. Depending on the individual their uncertainty may be very high – a need – in one or all of these three axes and medium or low in the others. Not in the absolute but on the basis of a perceived reality. Although a portion of the world still struggles to acquire food on a daily basis, even for them food has an emotional and intellectual component albeit not as significant as for the rest of the world.

 

By way of another example I offer another of Maslow’s needs: clothing. Here too we can analyze this uncertainty based on these three axes. A person’s emotional uncertainties may be satisfied through clothing either by giving expression to who they are by donning certain clothes, or by taking on a certain persona by wearing the same. In the former case, in Maslow’s interpretation the individual is satisfying self-realization needs. In the uncertainty model, the people who are from the basic need to cover their body from the elements can now express themselves through clothing. In the latter case, the person might be seen as addressing self-esteem issues or more emotionally or psychologically undesirable challenges. Many more examples may be required to illustrate the usefulness of this model but in the interest of brevity I will wrap things up quickly, but hope I have inspired you to test this model on your own time.

 

Two more examples to clarify and then we can move on. Picture a three dimensional graph that starts at 0% and goes to 100% – from freedom to struggle – and, where each axis corresponds to physical, emotional and intellectual uncertainty. Now imagine what a person who is near 100% on all three axes looks like? This person would fall into the “neediest” part the community. Next, imagine a person who is close 0% on all three axes. This person doesn’t need to struggle almost at all to satisfy the uncertainty of their physical, emotional and intellectual outcomes. They would be at peace with themselves and the world, or very “Zen”.

 

However, most of us are somewhere in the middle and struggle to one degree or another with one, two or three of these axes on a daily basis. To overcome these uncertainties we look to those members of our community who can help us struggle less.

 

It stands to reason that if someone is experiencing a high level of uncertainty with regard to a given outcome they will value the assistance of the person who can help them struggle less to overcome it. In the case of food, a person may value a hunter, a gatherer, a farmer, a butcher, a cook, a restaurant, a supermarket, or a brand. Whoever provides them access to food will be valuable to them. Similarly, a person uncertain about their ability to understand a certain subject may look to a teach, a tutor, a family member, a learning center, a school, or a writer. Someone who can reduce their uncertainty about understanding a subject. The same thing can be said for just about everything one experiences multiple times a day through different encounters. In some small way these people we look toward to reduce the uncertainty of outcomes for us free us from our daily struggles.

 

In the ROKC Method we define a leader as an individual who has developed a view of the world – however you want to define it – that allows them to perceive a less uncertain reality, who communicates this vision to their community, inspiring them to cooperate and collaborate to bring this reality/vision into fruition. From this point of view, anyone who helps another person reduce an uncertainty for them is a leader for those they have helped. On an individual basis, we allow many people to lead us on a daily basis without even thinking about it. The person driving the train or bus this morning was your leader in getting you to and from work today. The agent at the airline kiosk who led you through the user un-friendly computerized check-in process was the leader there. The person who made your lunch at the local restaurant or company cafeteria was also a leader for you today. All these people, in one way or another, reduced the uncertainty of an outcome for you and you willing collaborated and cooperated with them to make it happen.

 

When one of these individual leaders takes their specific uncertainty-reducing magic and makes it available to an ever-increasing number of people, we call that a business. As demand grows, that individual will have to hire and train others to help satisfy all the demand. As demand grows even further, those people will explain the processes to the engineers who will mechanize all or part of the processes necessary to reduce that specific uncertainty of outcome. And so on and so forth, scaling the business to reduce uncertainty for an ever-greater number of clients.

 

However, if that individual can come up with some way to reduce uncertainty then someone else can too; the competition. There are two types of competitors: more effective and more efficient. Once again, our struggle graph helps us to understand. A competitor who struggles less but achieves the same level of outcome is considered more efficient. While a competitor who struggles just as much but reduces uncertainty to a lower level is known as more effective. As you can imagine, through the process of competition economic actors – big and small – drive the level of uncertainty of outcomes toward zero thus freeing us from the struggle to survive.

 

Unfortunately, no matter how free we are, some of us will always be uncertain about something else. Once again, a good example to illustrate this point is food. In hunter gathers communities the level of uncertainty is high so when they start domesticating plants and animals people are freed up to engage in other activities. In other words, domestication brings down uncertainty. Through mechanization agriculture becomes more efficient allowing businesses to take over from small farmers. With chemistry, agriculture becomes more effective. But each step toward freedom comes with its challenges. With fewer people required to farm a migration takes place to towns and cities, which makes getting the food to market more uncertain than it was when everyone consumed what they produced. Transportation companies developed in response. At first, food was transported to small shops run by shopkeepers and these became supermarkets because it was more efficient. However, as the uncertainty of accessing food moved to zero, consumers started to become uncertain about the way the food was produced, spurring the organic movement. A new segment of the market was thus introduced. For some people this uncertainty went ever further, they wanted locally produced food, creating a further segmentation in the market. You get the idea. The closer you get to freedom from uncertainty of outcomes the more fragmented the market becomes because new uncertainties take primacy over the old ones and/or are created as a result of the solutions that are found.

 

As I hope you can see from the above, businesses exist because someone was able to come up with way of reducing a specific uncertainty of outcome for a specific part of a community on a large scale and the members of that community value the freedom the product(s) give them.

 

Once this is well understood, it is then only a question of political, economic, cultural and societal specifications and biases that determine which stakeholder gets what portion of the value created by reducing this uncertainty.

 

The work I do with business leaders focuses heavily on helping them to clearly identify and communicate the uncertainty they are reducing and for whom. The uncertainty model gives them a framework to better understand their business’s market position as well as that of their competitors thereby significantly influencing decision-making. Lastly, by understanding the specific parameters in which the business exists they can maximize stakeholder satisfaction.

 

Give it try. You’ll like it. The Uncertainty Model.

 

Value & Price

Value & Pricing: The Great Enigma

One of the most challenging issues for any business is to understand the relationship between value and pricing. On the one hand, business leaders understand that to be in business the company must create valuable outcomes for customers and have that outcome recognized, and quantified, through monetary compensation, the price. On the other hand, determining how much value is created and what price to put on it can often be an enigma. Recently, I did some interesting work with a client on this subject, the results of which are relatable for all businesses. I will explain what was done and the results below:

The problem the client wanted to address was how to capture the most value from each business transaction. So I asked them, “Where is the company creating value, and for whom? They replied, “For the client.” But did not know where. So, I asked them to answer two questions:

  • Where do you create value?
  • What does it cost? In time and money.

At our next session my client came back with the following:

  • My business creates value for my customers and my vendors. Customers get value because we address their concerns about…. And, our vendors get value because we bring them business that keeps them working.
  • On an average job, we employ a qualified technician for 3 hours.
  • If the customer wants the financing package we add another 4 hours for the technician plus 2 hours of administrative work.

At first glance, they answered the questions. However, on closer inspection we discovered that the company was not capturing enough of the value for any of these stakeholders. The following key issues came out:

  • Do the vendors compensate you, directly or indirectly, for the business you bring them? Do they share in your costs of client acquisition?
  • Of the 3 hours of work done on an average job, how much is for the project managing the vendors? Do they compensate you for any of this?
  • How much you building into your price for all the labor required to get them the financing? Are you cannibalizing your profit margin from elsewhere?
  • In pricing are you also including benefits, other overhead costs, interest, and a profit component or is it just remuneration?

From this one exercise and the ensuing discussion, the company was able to determine where value is being created and for whom but is not capturing enough of it from either customers or vendors!

In the ROKC Method we see businesses as owning and/or controlling an asset which is used in their products/services which customers seek to acquire because it gives them a competitive advantage in achieving a specific outcome. In applying this method, it helps to breakdown the process by which this transformation occurs into all the sub-processes and then treat them as individual micro-businesses. At the very least, the transformative process should be broken down into pre-production, production, and post-production. For example:

 

  • Pre-production
    • Acquiring a client
    • Sales funnel
    • Closing the contract
  • Production
    • Organizing the job
    • Informing Vendors
    • Executing the contract
  • Post-production
    • Client sign-off
    • Collect payment
    • Pay Vendors

 

Next, determine who creates value where and the price at which it is being valued. To use my client’s business as an illustration, in the pre-production sub-process “Sales funnel” each prospective customer who makes an initial contact is called back. When the company was asked who does this and how long does it take? They replied it is the technician because it didn’t require much of their time: X minutes. Fair enough. However, in this case their salary is being viewed as a sunk cost because it is already being paid so we don’t need to count it again.

However, I know – from prior work with this client – the technicians are run ragged and would like to free up their time to do other things, more “valuable” activities. Consequently, even though this sub-process may only be a marginal part of their workday, by the end of the month it will be a significant amount time, and that time is either being built into the price asked of the client or eating into profits. So, one has to ask, “Can this work be done by a lower cost – internal or external – resource?”

When discussing this question, the client happily brought up a company they had recently encountered who impressed them with their call center service and would – potentially – be an excellent addition for this portion of the process. Perfect! They are already thinking about this.

As I hope you can see, when this sub-process is viewed as a micro-business, the value the company can ask of its customers and the costs associated with it will undoubtedly produce a loss. However, by adapting the value needed to that created it may result in a neutral, or slightly positive, outcome. Lastly, if the company can get both the client and the vendors to recognize the value in this process then the result will surely be positive for all stakeholders and the business will capture the value it needs to have recognized for its making this come positive outcome come about.

In some cases it might not be possible to create a positive outcome. In this case, you may want to seek out a substitute sub-process that allows the business to pass on the right amount of value to the customer. One such new sub-process might be automation; use an online service to walk your customer through the sales funnel. Another might be to sub-contract the work to a low-cost service provider.

It is the leader’s responsibility to adapt the value needed with the value created and to do it for the right price.

Cooperation and collaboration

What is More Important: Transactions or Relationships?

In its very basic expression, business involves a transaction between a willing seller and a willing buyer. This is, of course, true. You have to sell and collect the money in order to stay in business. And, most of us tend to focus on that part of the equation. However, the precondition for the transaction to occur is the “willing” part, which we tend not to place a lot of attention on. I think this is a mistake, the willingness to engage in the transaction is even more important.

Have you ever been to a really good restaurant but the service is lousy? Have you ever bought a product that didn’t work as you thought it would? Did you ever buy a garment and then changed your mind and sought to return it? Did you ever use a website that promised you certain results but not fulfilled that promise? Have you ever wondered if it is a good idea to work with a colleague, client or supplier? Have you ever asked your lawyer how to add make a contract even stronger than is normal? I could go on and on with example, but I think you get the idea.

Every transaction is based on establishing and maintaining a relationship between between, at least, two parties.

Unfortunately, many of the business leaders who seek out my counsel focus on increasing the number of transactions instead of first focusing on the relationship which will lead to the first transaction and hopefully many more.

I’d like to go even further into this reasoning by arguing that our ability to evolve as a society – even a species – is entirely dependent on our ability to cooperate and collaborate with each other. Consequently, a business can be better understood as cooperating and collaborating at a large scale, with many people near and far.

After all, a business exists because it owns and/or controls a asset that it uses in its products/services which customers will acquire if it provides them with a competitive advantage in achieving a specific task. By definition, the company needs to establish a relationship with the client in order to supports them in what they are trying to achieve.

The real value is in the relationship.

Interestingly, the superior value of relationships can also be found in company valuations. Relationship-based companies like Facebook and Twitter trade for much higher multiples than a transaction-based company like eBay.

  • Facebook: P/B 7.1; P/S 19.2; P/CF 42.2
  • Twitter: P/B 6.4; P/S 14.2; P/CF 172.4
  • Ebay: P/B 1.7; P/S 1.6; P/CF 6.6

(Where P/B = Price/Book; P/S= Price/Sales; P/CF= Price/Cash Flow)

In fact, the most successful Internet companies are successful because they help the user establish and maintain a relationship, for example: WhatsApp, Instagram, AirBnB, Uber,…etc. In the future, with the “Internet Of Things”, I am sure we will see many new companies establish themselves as relationship leaders with things and places, too. Do you have a relationship with your thermostat today? What a bout your front and back door? Your HVAC unit? Doesn’t Telsa manage energy by managing the relationship between the road, the car and the driver? Soon, the car will manage its relationship with other cars, people, the road, …etc.

I’m sure most of you don’t look at the Internet as a relationship platform but, in my view, it is for the very simple reason that at the base of it the Internet is a communication device. And, relationships are all about communicating efficiently and effectively.

But a focus on the relationships does not require us to only look at the Internet. If we recall the list at the start of this article, most of the questions involved traditional brick and mortar businesses. So, I recently asked a couple of my clients to approach their business as relationship building and the results have phenomenal. Client 1 has so much work he cancelled our coaching sessions so he could catch up. And client 2, whom I career coach, for the first time in year, has no problems to discuss with me. So what is the takeaway here?

Focus on building relationships that allow you to cooperate and collaborate and the transactions will follow.

Business Solutions Take Uncertainty Out of Specific Tasks

Once again, the truth comes out of the mouths of babes. Well, maybe not exactly babes but fourth graders; my truly bright twin nieces. Below you will find an article they wrote after seeing how popular a previous post based on their play was with my community. You can read the previous post here: Productive Teams is Child’s Play.

From my point of view, what is important to see in their writing below is that even at a very young age we are taught to use whatever resources are available to us to make certain tasks easier. Or, as I like to say, less uncertain. This is a fundamental approach to business that every business leader should always keep in mind when running their enterprise: the products and/or service they provide to customers must make doing a specific task less uncertain in order for customers to value it.

Please take the time to read how my nieces quite simply explain:

Why Horses Are Important to Humans

                    Horses have been very important to humans for a very long time.  Humans use and have used horses in many ways.  People also love horses for many reasons, like their beauty, and strength.  There are many more reasons for this, for example:

                    Horses were like tractors for farmers for centuries!  On farms, horses pulled plows.  They also helped pull wagons of goods, animals, and supplies.  In return, the farmers fed, cleaned, cared, etc. for the horses.

                    Horses also helped cowboys.  They herded cattle with the cowboys.  Horses also provided transportation for bringing cowboys and cattle to towns.  When a calf, bull, or cow got loose, the cowboys and their horses would chase and try to catch it.  When there was a stream, the horses would pull the cowboys across it because many people couldn’t swim.  Cowboys like to use Quarter Horses (a breed of horse) best because they are fast, can stop short, and can make sharp turns.

                   In the Middle Ages, large and strong Friesians (breed of horse) were used as battle horses.  They could carry knights in shining armor and their own shining armor.  People in the Middle Ages also used horses to pull heavy loads of things.  They also used horses because they could work in large noisy crowds.

                  Horses in Egypt were used as pack animals.  The Bedouins used these horses.  The breeds were Arabians and Barbs.  The Bedouins gave their horses camel’s milk to drink and dates to eat in the dry desert.

                  The Chinese also used horses.  They were the first people in the world to put an actual saddle on a horse.  The Chinese decorated the saddles with bells and ribbons.  People played drums on the horses.  In wars, the Chinese used horses as transportation and war animals.

                Horses pull carriages everywhere!  Big ones, small ones, short ones, tall ones.  You name it they pull it. It’s their job.  People also ride horses.  For pleasure and for work. 

                Horses worked and still work for humans around the globe.  They worked for farmers.  They also worked for cowboys in the Wild West.  They worked for people in the Middle Ages too.  The Bedouins had horses in Egypt.  The Chinese were the first to put a saddle on a horse.  Every country, except Antartica, uses horses now!  Horses made a BIG difference in life.

                -Lara & Pia      (Two, 4th graders)

Stop Thinking ONLY About Fulfilling Needs

An organization I follow on Twitter recently tweeted an Entrepreneur Magazine article from February of last year entitled How do I build a Business Plan? The article was accompanied by a nice infographic showing the “10 Keys to a successful business plan”. When I saw the first, I freaked out. Can you guess why?

entrepreneurmagazine

 

 

 

 

 

 

 

Here are my reasons:

  1. In most communities, our “needs” are satisfied but our uncertainties are not. Of course, there are exceptions even within those communities. Positing business as a solver of needs puts the bar very high. Can you imagine asking yourself if your business fulfills people’s need to eat?! No, of course not. However, your business can satisfy part of your communities concerns over the safety and nutritional quality of the food it eats by providing locally sourced, organic, non-OGM,…foods.This is a much more subtle and achievable task than a need. When you say “needs” people usually stare back at you with a blank face.
  2. By starting from the end, you are making the whole process much more difficult than it needs to be because everything can be uncertain. Yes, satisfying your customer’s uncertainties will be the end result but, historically, and politically, business has been about property and its productive abilities to satisfy those uncertainties. The whole reason business’s exist is because they own and/or control an asset that no one else can stake a claim to. No one ever went to war over hunger but they did go to war for control over the land to satisfy it. Similarly, the laws of the land define what is property, how it can be used, traded, stolen and so on. Not availing your company of the legal protection the state affords you is tantamount to throwing your money out the window since there are no barriers to entry.
  3. Companies seeking investment must be able to assuage investor fears by allowing them to enter – at least initially – at a price that recognizes the value of the asset it will be leveraging to provide customers with that uncertainty reduction. Likewise, later on, in future financing rounds, investors will be taking a participation in the company to help it accelerate growth. In this case, they will be looking for a return based on the rate at which the company satisfies customer uncertainties more than on the actually asset itself.

I am sure I could some up with a few more reasons but I am going to stop here, these are the most important.

Almost daily, I am approached by entrepreneurs, owners and executives who are so completely lost because of their focus on satisfying customer uncertainty that their company is disappearing from under them, if it ever existed in the first place. It is fundamental to business success to identify the asset that makes everything else work. In my business, I call that the Key Component. Everything the business does needs to maximize the return on the key component, which is why my method is call the ROKC ™.

ROKC recognizes that businesses exist because they own and/or control an asset that is used to make a product or service which provides customers with a competitive advantage. That is, it reduces the uncertainty of achieving a specific task. Or, as the article states a “need”. Businesses survive when they can provide customers with a reduction in uncertainty which is valued significantly above the cost of reducing it thereby providing an excess of value the company can reinvest for its future.

Think of it from a financial point of view. You have a balance sheet with one asset and shareholders equity for the same amount. the only to increase shareholders equity is to either make a profit (excess value) or revalue the asset (for example, in the case of trademark that develops brand equity).

It is for this reason it is important to measure the return the company is getting on this asset, the key component, and monitor when it goes down so as to take corrective actions: exit the business, reinvest in the asset, acquire a new asset to substitute the old one or reinforce it.

Once you identify the key component setting strategies, writing business plans,…decision making in general becomes so much easier. The converse is equally true; if you have no key component then you have a job or you need to make one such that the business exists beyond you and the people working in it. It actually becomes investable.

So the next time you want to write a business plan – or, for that matter, do anything else with a business – remember to start by identifying the key component and only after what uncertainty can be resolved for what customer. It makes everything pertaining to the business so much easier!

Better to Adapt than Change

When I was in college when I had the good fortune to meet a well respected Time magazine journalist who set me straight on the importance of language – using words with their proper meaning – I have been a stickler – read pain in the …. – ever since. This obliges me to actually listen to others. But, more importantly, I must hearwhat they are saying. So, the other night, for the umpteenth time, someone was talking about how they don’t like to change things in their life and hairs on my back started to rise.

Let’s face it, people only rarely change. On the other hand, people do adapt to changes they perceive in their lives!

Basically, as I learned in my high school physics class, like electrons, we all live at our lowest energy level until such a time when some outside stimulus makes us – or the electron – move to a higher energy state. It is the environment that changes and we adapt to that change. Or, as Darwin’s Theory of Evolution states the most adaptable of the species will survive.

This same frame of reference is pertinent to leading an organization. Way too often, the leaders I speak with want to throw the baby out with the bath water by changing almost everything in their company. This is simply way too destructive and almost never provides the results they seek. Change brings about a break from the company’s foundation, turning it into a Frankenstein monster.

Adaptation is a much more subtle approach for a business responding to a new environment. Regardless of the company’s stage of growth, adaptability means reducing – not eliminating – the influence of the past while placing more importance on some other aspect of the present.

In the ROKC™ Method, we explicitly recognize that the asset on which the business is built, the Key Component, will lose its ability to provide customers with the competitive advantage they seek. Consequently, if the business is to survive, it will to be enhance the value it creates by focusing on a new Key Component. If I think back on my college economics class, this is called the law of diminishing returns. Over time, the returns the first Key Component provides will diminish requiring the focus to change to a new Key Component that will provide higher returns. When the second Key Component wanes, focus will pass to a new one, then another and another and another, and so on into the future.

ROKC_CA_over_TimeLayer upon layer, the business adapts to changing conditions but strengthens itself around its each preceding Key Component.

If your business is challenged by changing market conditions don’t listen to anyone who tells you have to change. However, do listen and hear those who tell you your company needs to adapt.

Who Has Your Back?

Think about this question and you will see how very important it is to our sense of well-being. Truly, very important. To illustrate what I mean, let’s take a typical day. No, not even a whole day because that would take too much time. Let’s take a small fraction of a day.

At the start of the day most of us depend on our alarm clock going off. In order for that happen we depend on the clock manufacturer having made a clock that works, at least up to that morning. We also depend on others who live with us not having changed the time or the alarm setting. We depend on there not having been a power outage on the electrical grid or the battery conking out. As you can see, this one act depends on so many people near and far having our back.

Interestingly, we all have networks of people we depend on to support us both personally and professionally yet we don’t pay them any mind until things go wrong. We just assume they work and will continue to work until we decide otherwise.

Our personal network extend to family and friends, to acquaintances and colleagues, clients and suppliers, all the way to the leaders of our state. Each individual within our network is expected to fulfill a certain place so we feel secure in our very existence. A tall order indeed.

Then there is our professional network of companies and organizations we hope have our backs. From the toothpaste we brush our teeth with in the morning to the supermarket that carries our favorite breakfast cereal we depend on these economic actors to provide us with healthy and nutritious products. We delegate this responsibility to them and often blindly assume they are living up to this moral contract for in actuality most of us have no idea what those long technical terms on the packaging mean, we just know we like it. We expect these producers to have our back.

We have similar expectations about just about everyone we meet and everything we use, every day of the year. We expect the local restaurant we like to lunch in twice a week to have our back regarding a whole slew of things from good food, having our favorite dish, good service, cleanliness and hygiene, pricing, climate, beverages, and so on and so forth. We want the bus on time, traffic to flow, the sun to shine, our colleagues to be helpful, our boss to not fire us,…. In sum, in our world of modern conveniences we have delegated our sense of well-being to just about everyone on our path. All these actors have our back.

Usually that is, with the exception of ourselves!

Did you have your own back? Did you do anything to ensure your own sense of well-being?

Did you truly have anyone’s back today or did you make excuses for yourself?

Think about it and leave me your thoughts in comments section of this post.

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