So many people get in touch with me to find out what is wrong their business, why it won’t grow, that I decided to share my answer with as large an audience as possible by posting it online. For the lazy readers amongst you, the quick answer is you have spent so much time online reading, listening, and viewing process driven solutions to your business problems that you haven’t paid enough attention to the fundamentals: the resource your business owns and/or controls. Business is, after all, a resource allocation problem. So the best question you can ask yourself is, “What is my resource?”
For those willing to work through my prose, here is the long answer.
Since businesses use many resources, you might be asking yourself which one I am referring to. To be clear, there is one resource without which any of the other resources are of much use. Also, the resource I have in mind is used in all the products/services your company sells. This resource is so important I call it the Key Component.
A Key Component can be just about anything. It depends on your business. Personally, I have worked with small businesses where the owner is the Key Component – a designer, artist, contractor/builder, architect, health care professional, lawyer, a chef,… – while in others it may be an employee – one of the above. Likewise, I’ve worked with more complex businesses where the Key Component is some form of property like a machine, trademark, land, patent, copyright, process, license, and so on. In even more sophisticated businesses we find what are commonly referred to as derivative products/services that will be based on an underlying property, like a insurance contract, financial derivatives and data.
To be pragmatic about it, most countries have spent centuries developing legal systems that attribute some form of legal status to the Key Component making legal recognition the common element. After all ownership is recognized by the law through titles, deeds, and what not, while control is affected through ownership it is also determined through licensing, renting, leasing, and such.
Legal recognition of the resource that makes everything else in your business possible makes perfect sense when viewed from a competitive standpoint. The law is your first line of defense against competitors. In other words, another economic actor cannot compete against your company using your own Key Component. They must come up with their own.
Let’s look at a base case. The most basic resource which can be considered a Key Component is land. In most societies, the legal system – or some other system – recognizes title to the owner allowing the owner to then derive the benefits that land produces for them. Depending on the land’s attributes it can be used for many different ways and provide many different benefits, such as: farming, grazing, building, mining, transportation, and so on. However, the owner may not want to exploit the land directly in which case it can be made available to another party by way of a rental agreement or lease, or in some other contractual form giving this party effective control.
Of course there are other Key Components. This website is built with software written by someone for which they received a copyright. I get to use it to write this article but I don’t own or control the software allowing the copyright owner to modify it as they see fit. However, this content remains mine by way of my own copyright which means the website or you can’t use it without my permission. Similarly, the website is trademarked and the owner of the trademark keeps all the rights to it. The server on which the software runs is also a Key Component for the company owning it.
Furthermore, legal recognition makes the Key Component transferable. It can be sold outright. It can be used as capital when transferred to a legal entity. A lender can use it as collateral for a loan.
Conversely, the law can limit a Key Component. Let’s take a person working as a chef in a successful restaurant as an example. The restaurant owner will exercise control over the chef through an employment contract. But this may not be enough for the chef. The chef may realize how important they are to the restaurant’s success – the Key Component – that they may seek to negotiate an ownership interest thereby aligning both parties interests in the venture and also further limiting the chef’s courses of action outside of the restaurant. An owner may seek even further control over the chef even after they leave the company by obliging the chef to sign a non-compete agreement covering a certain number of months after leaving, all in an effort to limit competition.
Here is another example. Think of airline. What is their Key Component? Can you guess?
Most people say “airplanes” but this is not correct. An airline’s Key Component is its takeoff/landing slots at the airports it serves. It is for this reason that when there is a merger between airline companies the anti-trust authorities or courts will examine the proposed merger on the basis of how many slots the merged entity will control in each airport in an effort to ensure the new entity does not control too much of the market. If it is deemed too much control may be exercised the authorities may okay the merger only on the condition that a certain number of those slots be sold to a competitor.
Now, think of a franchisee; someone who wants to acquire the rights to a Seven Eleven, for example. What is their Key Component? The trademark maybe? Wrong! The franchisee will get a license to use the trademark but so does every other franchisee. Sure, it is important but it is not the franchisee’s Key Component. The local/geographic market is what they will have effective control over making it their Key Component. It is for this reason that the franchise operator needs to pay close attention not sell the rights to too many franchisees in a given area for they risk limiting franchisee revenues which leads to unhappy franchisees and potentially less franchisees because their poor reputation.
A second attribute of the Key Component is time. A resource will lose its “power” over time either because of age, competition, or law. If you are the Key Component you may not be as effective when you are older than when you were younger. The same can be said about most organic resources, like land, which will lose nutrients the more it is farmed or disappear through erosion. Many machines only have a given useful life as they will become less performant through wear and tear. The law may also stipulate how long title is given on Key Components like intellectual property and contracts. Likewise, as you may have read in many articles, with the increasing rate of competition the useful life of many technological products becomes shorter and shorter. Software, for example, many have a long life by law – copyrights – but competition reduces it to anywhere from 18 to 36 months. In the best cases, you may reach 5 years before a new version needs to be launched.
The Key Component has many other uses in business which I don’t want to go into right now but do believe me when I state it covers everything from: asset to company valuation, mergers and acquisitions, pivoting, growth, cultural and belief systems, central bank interest rates, trade policies, labor relations, wars, and so on. Basically, the Key Component touches on all aspects of our daily life whether we know it, or not.
All I want you to takeaway from this article is this, (1) in order for a business to exist it must own and/or control a legally recognized resource, the Key Component, and (2) this resource is only useful for a certain period of time. Without understanding these two fundamental and important attributes of your business you can try all the process improvement gimmick out there and you will still be asking yourself, “What’s wrong with my business?”
If you are ready to take the next move then please contact my by messenger to schedule an exploratory call.