Read The Facts of Business Life Online
Authors: Bill McBean
For example, if you owned a clothing store and your sales over the course of a month added up to $200,000, and your cost, or what you paid for the clothes you sold, was $125,000, your gross profit would be $75,000. If you then subtracted your total monthly expenses of $20,000, your net profit before taxes would be $50,000 for the month. Net profit gets extra attention in the marketplace war zone because it can be a tactical as well as a strategic weapon both offensively and defensively. For example, on the offensive side, the stronger you are financially, the more money you can spend on marketing and advertising, generating additional sales as well as gross and net profit. Defensively, profit can be used to fend off any attack on your turf from a competitor.
Insofar as your goal is to make as much money as you can, the obvious question is, how do you do it? You start by having as few limitations as possible. For example, trying to sell a product or service for which there is little demand limits your profit potential. So does being in a market where there is a lot of competition. In other words, if you want to make a lot of money, you have to first make sure the market is big and growing bigger so your talents as an owner can be maximized. This is a key concept because, regardless of how talented an owner you are, unless the market is sufficiently large and presents sufficient demand for whatever you're selling, your ability to exercise your talent, and your profit, will be limited.
You also have to take extenuating circumstances into consideration when you're making the opportunity decision. For example, smaller markets require less funds to enter, and when you're beginning your ownership career, money is usually a qualifier to opportunity. At the same time, some markets are extremely competitive and require considerable ownership skills to make money, so unless you want to see your dream die right at the start, even if you have the money, it's best for you to avoid situations like this. However, you may find yourself presented with an opportunity that doesn't match a lot of your criteria in terms of market size or brands but is appealing for other reasons. For example, an owner may offer you a strong ownership position in his or her profitable company if you'll agree to operate the business. This becomes a winâwin situation for you because not only does the financial risk decision evaporate, but so do other barriers that you would normally have to consider.
As important as product, sales, and gross and net profit are, they are all tied in one form or another to the owner's competitivenessâthe X factor. There are very few things that can influence a business like the competitiveness of an owner, and it's one of the few factors over which owners have complete control. Even if, for example, an owner represents an A-list product and operates a good business, if he or she is a weak competitor, the business will never make the money it should. Conversely, an owner with a strong competitive drive can get a foothold in the market even with a weaker product line, as long as he or she is a good operator, the overall market is fairly passive, and especially if the owner's overhead or expenses are significantly lower than his or her competitors. That's how important the X factor is.
Other than products, the three most common weapons owners use to compete are customer service, price, and location/convenience. In fact, the competitive climate usually forces owners to have all three of these elements in play to some degree at all times. It's the price of admission to the marketplace war zone. And not surprisingly, it's the businesses that implement these weapons with more skill than others that are generally the most successful. But knowing what should be done and doing it are altogether different things, and it's the gap between what your competitors knowâor should knowâand what they do that creates opportunities for you.
There are numerous ways to use these weapons, either individually or in combination. In a situation in which your competitors think of customer service as an expense and try to minimize it, for example, if you have processes in place that optimize the customers' experience, such as a means of dealing with customer complaints quickly or using the latest technology to serve them, you will in all likelihood realize more sales, better profits, and more control over your customers. Price can also be a very effective weapon, particularly if you have lower overhead than your competitors, because you can lower the price, sell more, make more profits, and use those profits to be more aggressive in your marketing strategy. Finally, the Internet and social media have redefined convenience, and when markets change, it invariably means new opportunities for anyone quick enough to take advantage of them. For example, eBay used the new technology to create the world's largest buying, selling, and auction business, and in the process instantly expanded the market far beyond any particular location or marketplace. Similarly, Barnes & Noble could have sat back and let the new online book sellers take away their business, but instead they fought back using their well-known brand as a launching pad for protecting their market share by developing their own electronic reader, giving customers a choice of instantly downloading books or buying them in their stores. Of course, at Level 1, it's far too early to start making use of any of these weapons. However, if you have done the kind of marketing research I've suggested, you will have learned your competitors' strengths and where they are most vulnerable to attack.
Ultimately, though, being competitive doesn't just mean knowing about an opportunity and acting on itâit means acting in such a way as to get the most out of it. That is the primary purpose of being competitive. Level 1 is where current and potential owners define what getting the most out of an opportunity means in terms of the investment of their time and money, how long it will take to get there, the net profit and market share it will produce, and the benefits that can be derived from the opportunity. Being able to make the most of every opportunity is what separates the average entrepreneur from the great one. So the opportunity question ultimately comes down to you, the owner, and the X factor.
One of the realities of the marketplace war zone is that not everyone conducts business in the same way. All of your competitors want to succeed, and most of them will play you smart and straight up, and won't cross the line between right and wrong. There are others, though, who will do whatever it takes to succeedâsay things about your business that aren't true, use false advertising to attract customers, and lie to those customers when it's in their best interests to do so. In other words, the war zone is not fair, and someone is always looking for an advantage, whether it be legitimate or not. And you have to prepare yourself for it.
To do so you have to ask yourself how you will react to this kind of pressure, that is, how you will compete. Will you be the kind of owner who wants to “win at all costs,” or will you try to dominate your competitors without crossing the line? Only you can answer this question. It is a serious question, though, and every successful owner at one time or another has to answer it. In fact, because markets and competitors invariably change over time, most owners have to answer it more than once. Unfortunately, sometimes owners wait too long to take a firm stand and are forced to make a choice in the heat of battle when emotions are high, and this is never the best time to make a critical decision.
So the sooner you make that choice, the better off you will be. And the best time to make it is now, at Level 2, when you're creating your company's DNA. That is, you need to decide on the ethics you will apply when competing externally, the weapons you will use, and the kind of battle strategy you will implement. You will also have to develop systems and processes that will back up those external weapons to make sure that what you want to happen actually does happen, every time, and be prepared to discipline those who choose to bypass these procedures. Doing so will give you a competitive edge because you will have thought these processes through and prepared yourself and your business even before the battle begins at Level 3.
Unfortunately, too many owners underestimate the intensity of the war zone and what is at stake. They analyze the market at Level 1 but neglect to think about how they will fight or how their competitors will. To compound the problem, the majority of owners, particularly first-time owners, frequently fail to set up the internal processes that are needed to back up their external marketing efforts. Just throwing wild punches at a market without a plan or preparation is not a strategyâit's a recipe for failure. The way it should work is that your marketing and advertising attracts interested buyers, and your internal processesâand the people who operate themâmake the sale. Making these kinds of preparations will not guarantee you will beat out all your competitors, but it will provide you with a leg up compared to those who don't make such preparations.
The Benefits of Understanding the Marketplace War Zone at Level 2
If you want to compete successfully in the war zone, there are two issues at this level that must be resolved regarding the product or service you're going to be selling. The first is defining your product or service and creating a means of communicating that definition to your employees. The second is, having analyzed your product or service's potential at Level 1, devising a strategy to maximize both sales and gross profit.
The primary reason for defining your product or service is to make sure your employees understand exactly what it is. That may sound like nonsenseâafter all, a product is a productâbut it's not. Here's an example. Your company makes pies that you serve in your own shops, which according to numerous food critics are the best pies in the country. If, though, a customer comes in to one of your shops and is served by someone who looks like he or she hasn't bathed in weeks, and smells like it, is the customer really going to care how good the pie tastes? Is she going to enjoy it? Is she even going to eat it? The point is that your product or service isn't just what it is, it's also how it's delivered or served to the customer. And how you want that to happen has to be communicated and constantly reinforced throughout the company. Of course, you don't
have
to do it. If you don't, though, it's likely that your business will get crushed in the marketplace war zone when your reputation and lack of repeat customers catches up to you. Again, this can be avoided by making sure your employees understand exactly what you expect of them and what is unacceptable.
By the time you get to Level 2 you will have already determined your product or service's market potential. At this level, what you have to do is create an operational DNA strategy that will enable you to maximize that potential. That means you will have to devise a marketing strategy that will capture market share and increase both sales and gross profit. One way of doing this, if you are selling a product, is to have loss leaders to help drive traffic, and train your employees to up-sell customers to more expensive products that have more benefits as well as more gross profit attached to them. If you are providing a service, you might offer some special pricing on items that are connected to this service. For example, if you are servicing air conditioners, you can train your technicians in selling and offering specials on safety inspections, dehumidifiers attached to the air conditioner, or upgrades on a customer's entire air conditioning system.
Whatever strategy you decide to pursue in the war zone, it's important to remember that it cannot be operated in isolation. That is, it has to be balanced and coordinated with the other Facts of Business Life. You will, for example, have to draw on the facts concerning planning and knowing business if you are planning to market more aggressively because you will have to budget not only for increased marketing and advertising costs but for other associated expenses, such as increased personnel or an increase in your credit line with your lender. You will also have to adjust your overall financial forecast for more sales, additional gross profit, and increased inventory, so you can see what the expected results look like on paper. However, doing so may show that you can't take advantage of the opportunity because your current financial resources will be stretched too thin. Similarly, drawing on the facts concerning leadership and planning, you may discover the pricing strategy you're thinking of using won't generate enough gross profit to adequately cover your operating costs. In addition, referring back to the facts concerning marketing and knowing business, you may find your strategy to be so rewarding that you want to double down and expand your market presence, and change your business model and business plan in order to maximize your opportunity while it's hot and your competitors haven't figured out what you're doing.