Business Sense: The Common Sense on What Business to Start
The difference between what successful and unsuccessful managers do isn’t complicated. It’s just Business Sense.
“What is the one thing every manager wants”
“I don’t know. Can there be one thing that every manager wants?”
“Of course. Every manager wants better results!”
Better results mean more results, more consistent results, faster results, or even different results. It’s the job of general management to get better results.
There are just a handful of things that successful managers do consistently that make the most difference in improving results. These five are the common sense of business. Each is something that management is free to do. Managers with Business Sense exercise Five Freedoms that create better results: choosing the right business, creating the right strategy, developing the right systems, designing the right organization structure, and getting the right people.
Business
If you have the option, the first effort you should make is to choose a business that gives you the best chance of success.
Are there lousy businesses? Businesses in which you just can’t win?
Absolutely. Lousy businesses are all around you.
Businesses that have low barriers to entry tend to become fragmented because more and more people go into them until the shareholder returns are no longer there. Take any of the cottage industries like shoe repair, dry cleaning. You can make a living, but not more.
Even businesses with significant barriers to entry can be lousy businesses when they become over-hyped as the “business of the future.” During the 1980’s venture capitalists invested in more than 50 startups that make disk drives for personal computers, a business that requires significant startup capital and technology. How many are still around?
In effect, lousy businesses have so little potential that it doesn’t matter what actions you take, you can’t do much that will improve results.
The best a business can do given its essential characteristics is to have potential. Good businesses have three kinds: profit potential, growth potential, and diversification potential. Any one of the three is a positive thing to have. Taken together they are dynamite. They maximize the potential for success by creating a field on which you can play and really have a chance to win.
Which one should you look for first? Growth potential! It is almost always easier to be successful in a growing business than in a declining one. Growth means that customers want more of the value than the business provides. Therefore, multiple competitors have the opportunity to be successful while avoiding fierce, direct competition.
The number and type of competitors directly affect the profit potential of the business. The profit potential is directly proportional to the supplier’s ability to provide value to the customers in excess of the cost to produce that value. The profit potential of anyone competitor in a business is directly proportional to that competitor’s ability to create and sustain a significant advantage over the competition.
No matter how good a business is today, it will eventually mature and decline. Virtually all businesses are constantly changing. Constant change is the reason for the third requirement for a good business: diversification potential. You need a new business to jump to before the old one dies.
An example of a business with excellent diversification potential is personal computers. Not only do the computers hook onto lots of other things like printers that you could also produce, but a personal computer is a “scalable product”. Increase its “scale” and you have the “engineering workstation business.” Decrease its scale and you have the “home computer business.”
The probability of successful diversification from one business to another is directly proportional to how tightly linked the two businesses are by the number of defining factors (markets, technologies, product features) they share. The tighter the linkage, the higher the probability of success.
Strategy
Even in mature or declining businesses, it is usually possible to find at least one company that is profitable and continues to enhance its shareholders’ wealth. What is it that makes the difference and the rest of the competitors in the business?
In virtually every case, it’s a brilliant strategy.
In the early 1990s, there were very few businesses that were worse to be in than the domestic passenger airline business in the United States. Of the seven major carriers, two were operating under the protection of Chapter 11 and a couple more were on the brink of bankruptcy. During a 15-month period in 1991-1992, U.S. airlines lost more money ($6 billion) than the sum of all the profits in the 67-year history of the industry.
There is one competitor, Southwest Airlines, that has consistently made money since 1973. How has the company’s management done it? The total formula is complex, but some of the key components include avoidance of head-on, across-the-board competition with the major airlines by flying only the high-frequency short-haul routes; a no-frills, low-cost service which attracts high passenger loads; one type of airplane to simplify training and service; and flexible work rules for unionized employees. The result is the lowest cost structure in the industry. Southwest has proven that even in a lousy business, it is possible to increase shareholder wealth over a long period of time.
if you want to develop the best business strategy for your business, you need to answer basic questions.
What is the current business strategy? Your business strategy is the set of decisions you have made to position the business in its environment. These decisions are the means you use to achieve your objectives. Typically, decisions are made in marketing, finance, production, and R&D.
What is the future of the industry? In most businesses, the future is highly predictable. To predict it, determine the scope of the industry, including all those businesses selling substitutable products or services. Identify the players in the industry and figure out how they are participating and what their relationships are. Ascertain what the future will hold for the industry by isolating those trends that are absolutely clear and looking for instabilities.
How good is the business strategy? To assess the “strengths and weaknesses” of a business strategy, measure its performance against objectives and competitors; test its consistency with your resources and key success factors; and determine how the strategy will perform in the future by comparing the strategy against predictions and likely competitor positions.
What are the alternative strategies? By exploring a complete set of alternatives, you will be better prepared for changes. Ways of generating alternative strategies include fixing the weaknesses and playing to the strengths of the current strategy; playing like the competition and predicting what types of moves they would make if they were to take over your business; or using a model of success from another similar type of business.
Systems
The right systems are those that provide the right information in the right form at the right time to the right people so that they can make and implement the best possible decisions.
Most companies have management information systems that provide good information on internal operations. Unfortunately, most are sadly lacking in information on customers and competitors.
Some companies use systems to gain significant advantages in their businesses. Frito-Lay distributed hand-held computers to some 10,000 truck route sales representatives. The company knows how many bags of which kinds of their chips are sold in each retail outlet each week. If sales decline, they can pinpoint where to look for new competition or changes in customer preferences. It is no accident that it is the only significant national competition in the U.S. snack-food business.
“System” refers to any routine way of doing things. All business systems are information-driven. The first step in aligning the systems with the business strategy is to take each element of the strategy and ask what processes and/or systems are being used to make each decision.
Let’s look at an example. If you are selling hard disk drives to original equipment manufacturers for computers, you might have a pricing strategy like the following:
“We will use a cost-based strategy to price our disk drives to yield a 20% gross margin. We will drive down costs at a rate commensurate with increases in volume. In doing so, we will endeavor to be the price leader in the business. If necessary we will give up margins in the short term in order to beat our competitors in high volume deals and maintain position as the volume leader.”
Obviously, your pricing strategy is a primary competitive weapon. It’s likely that you want to have some significant information before choosing such a pricing strategy: “What are our costs? What are our competitors’ costs and prices? How much do our costs decline with increases in volume? How is our volume likely to increase with price reductions?
By looking at the information you need to formulate and implement your business strategy, you can create appropriate systems that will support your general management efforts.
Structure
Designing the right organizational structure is the fourth freedom management can use to improve results. The purpose of the organization structure is to provide the framework in which management can access and use the information necessary to create and implement the right strategy.
For some reason, changing the organization’s structure is the first method most managers choose as the way to improve results. I have seen too many situations where a narrow focus on the organization’s structure has caused more problems that is solved. One company reorganized its business every six months it wasn’t performing well.
Performance didn’t improve. The problem wasn’t the organization structure, it was the strategy. Frequent reorganizations can be a sign of a company using reorganization as a substitute for effective strategy development.
How many ways are there to organize a business? Most managers believe there are thousands. In actuality, there are only four. Each is appropriate for some strategies and not others.
The most basic is the entrepreneurial form. It consists of a manager and a group of workers. Everyone does and is responsible for everything in its form of organization. Described as the lean, flat organization where employees are empowered, it’s really just the old highly focused, customer-and product-driven, understaffed, under-capitalized entrepreneurial organization. This form is appropriate when there is so little diversity among the products, markets, and technologies of the business that specialization is not needed.
The second is the functional form, where the tasks that make up the processes of the business – like marketing, finance, and production – are broken out and managed separately. Here the tasks of creating, producing, and selling the products are specialized enough that different people are required to do them. These functions can serve as checks and balances on each other.
When the diversity in markets is great enough that the job requires more than one person or small team to do it, you have two choices. You can stay with your functional organization and designate market managers within the marketing function, or you can create a matrix organization. Across the top of this structure, you have market managers for each main market. Down the left side, you have the classic functions of a business, including production, finance, marketing. Many businesses, especially those doing product work that requires flexible work teams, often must be organized as matrices.
The fourth form is the divisional structure, most often found in firms that are in multiple businesses. Single business firms may also use it when it is necessary to separate organizational units, for example, to create geographical divisions. It may be the same business in Asia, Europe, and the United States, but to run it effectively, you may need three divisions.
People
Getting the right people is always a challenge because there is so much variability among individuals. The job is easier, however, if you have chosen a great business, created a brilliant strategy, developed effective systems, and designed an efficient organizational structure. You may even find that great people seek your business as a place where they’d like to work.
Assuming that you have done the best job you can in exercising your first four management freedoms, your exercise of the fifth freedom –getting the right people–should be driven by three key questions:
· What kind of people do you need?
· How do you find more great people?
· How do you keep great people?
You have to specify all of the jobs you need to be done, and the motivation needed to do each one. Note that I didn’t say describe the job, I said specify it. What does this person have to do, specifically, to be effective in this job? Be careful that you do not simply identify traits and think they are skills. Things like intelligence and sense of humor might be useful to have, but they are traits, not skills.
Ross Perot was right: “Eagles don’t flock. You have to find them one at a time.” Whether they do the searching or hire an outside firm, managers with Business Sense realize that the probability of finding a successful prospect declines as they go down the following list of priorities for places to search:
1. People in the same business performing the same function
2. People in related businesses performing the same function
3. People performing the same function in unrelated businesses
4. People in different functions in unrelated businesses.
The last category is known as “raw talent.” The formula above indicates the order of priority of where to look to get the best people.
If you get the right people and they are part of the general management team, they can participate in exercising the Five Freedoms and be instrumental in continuing to make the business successful.
From ‘BUSINESS SENSE: Exercising Management’s Five Freedoms” by Dan Thomas.
