I was talking to a client recently about preparing a long term plan for his business. He replied that while it was interesting he really didn't need all the stuff I do for others, like business planning, marketing, and systems.
He said that he thought he was a good business man, in his words "not brilliant but I know my stuff", because he had learned how to run his business through experience.
Now let me set the scene. Let's call him Danny.
Danny is not an older business person dyed in the wool in the old ways. He's in his 40's and while he struggles a little bit with tech, he uses the internet a lot to research and find new suppliers and markets. He's not what I'd call conservative and he has run his business successfully for over 10 years.
What do I mean by "successfully"?
Well, it's a small business that supplies raw material to manufacturers. It's not a big market so Danny keeps his small customer list happy and has only lost customers when the customers have gone out of business or after being beaten on price, never through dissatisfaction.
As a small business with a small customer list Danny doesn't care about brand - he just makes sure his product is of the right quality. He was caught out once when he bought in cheaper materials but as it failed in use he withdrew it quickly.
Danny only employs 5 people who all work part time so there's no real need for organisation charts and detailed job descriptions, they do what he tells them to do as he needs them to do things.
He calculates a more or less fixed margin to his inventory so that a percentage is attached to his purchase price - up to a point where he can decide to reduce the margin to larger customers or more popular products, which he has had to do several times when he was asked to. This has happened more frequently recently, but Danny makes enough margin to cope.
And Danny makes money. Over the 10 years he's probably made saved over two million and invested most of it.
So what's wrong with that? That's pretty successful huh?
Danny definitely runs a "good" business.
But as we talked I asked Danny how much time he spent with his new wife and month old baby. Very little, he told me, because he had to keep up with things at the business, especially as he only had part-time workers who needed to be told what to do all the time.
What did he see in the long term trend for his industry, I wondered?
He thought it was pretty stable, as people always seemed to need the stuff his raw materials produced. Except that the industry was getting a bit tighter with worsening economic times as shown by the fact that he only lost customers when they went out of business - and a couple went out this year. Also, more and more long time customers have started asking for discounts or longer payment terms.
Despite that Danny thought he would be fine because with only 5 part time employees he could cut expenses pretty quickly if he had to.
And do the work himself, I asked? He said if it came to it he'd have to whether he liked it or not.
If he lost more customers, would he be worried? Danny replied that the remainder were the big boys in this industry, he thought that the core of his remaining customers would be fine even in this economic climate.
So, he felt pretty much in control of his good business.
But, with his experience, and with a wider view of what he might learn outside of his experience, could his business have been a great business?
Let me talk about (just some) of the things he could do better.
- It is in a small niche industry with a customer list made up of big companies. A competitor could really shake things up. With the size of his customers they could have significant negotiating clout about prices if a competitor popped up. Experience has shown that some of the players in the industry are not all that stable - a couple have gone out of business - why?
- He has a small customer list. Are there any other buyers for his raw materials? Has he looked? Has there been any form of target marketing? What's his long term plan?
- He's keeping things lean and mean. Great for cost but what does that do on his work-life balance scale? He can't move away from work because his workers need to be told what to do and when to do it, all the time. Not very productive because he could spend some of that time finding new customers and new markets, if only he had time.
- His product is limited. When he tried introducing something new, it failed because of quality. So why did he introduce it in the first place, didn't he look it over? His lack of time and productivity means that even when he thinks there's a new line to be brought in, he can't plan for it properly. I wonder what hidden reputational damage that experiment cost?
- What is the trend in his profitability? While profitable, is the trend downwards, or if not down in numbers is it down when compared to the effort and work he has had to put in? In other words what are his returns on investment and effort? Gut feel is not a good performance indicator.
- His formula of fixed margin with room to discount is limited. Does it build in labour content or the ability to bring in different (good quality) replacements and still make better margin or provide better prices?
So what can Danny do differently if he wanted to build a great business?
Danny should rightly acknowledge his experience and "street smarts" that have got him this far, that's something to be proud of.
But he should also be open to different ways to look at his business and do the things that would improve it, even if he thought they were "unnecessary". These include long term business planning, marketing planning to identify key target markets and customers, product planning to identify new or replacement products to meet market needs, systems and procedures so that his time is not tied up supervising staff.
Danny should use his gut knowledge of his business and industry in the preparation of a formal warts and all business plan. Danny really needs to see what the market will do to his industry and his customers in the long term. To do this he needs to go through the process of a longer term business plan, identify all the external and internal influences on his business, study his own strengths, weaknesses, opportunities and threats, and then think through some logical actions to build on strengths. This business plan should be exploring questions like:-
- How does he increase his market - new products? new customers in new industries? wider range of products? new markets? marketing?
- How does he keep out competitors - put up barriers? long term contracts?
- How can he increase productivity - more skilled staff? more training? procedures manuals? systems?
- What can the business do over the next 5 years - expand? contract? sell up?
- What does he want out of the business and life - financial goals? personal goals?
Danny should then look to implement the strategies the plan sets out so that his objectives can be met, including things like marketing campaigns, new product research and development, and teamwork improvement.
Good businesses can stagnate. But good businesses can become great businesses - just don't rest on your laurels and be open to new (but proven) methods and systems that create greatness.
If you want to know more about how you can build a great business - despite the lack of time and the stack of things on your desk - contact us at https://www.otsmanagement.com.au/ and click on the "Contact Us" tab.
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