The Facts of Business Life (48 page)

As I mentioned earlier, if on arriving at your success destination you decide to stay there and rest on your laurels, you will not be able to maintain success. Not only won't your competitors allow you to maintain your position, your customers' wants, needs, and expectations will change over time, which in turn will impact on your marketing, products, and war zone strategy, among other things. In other words, there is no standing still in the market. Whether you like it or not, it's the way it is, and it's out of your control. But there are things you can control, and if you want to maintain success, you must know what they are and how you can use them to your advantage.

There are basically two things you can do in order to maintain success, and all of them require you to exercise all of your knowledge of business. The first is to develop a market share strategy focused on small but continuous market share gains. This might include visiting an industry peer in another market to look for sales you may be missing in your own or testing the price sensitivity of a product by finding a way to lower your cost, then lowering your price accordingly to see if sales increases match the lowered pricing. You might also attack a particular segment of the market or look for a way to overpower one of your weaker competitors. This is a conservative approach to maintaining success in that it's focused on moving the business forward in a way that minimizes risk to the overall business. The downside to this approach is that it can feel like you're swimming against the current because your progress is slow when compared to the energy you are devoting to it. And, in fact, it's not your imagination. This is an example of what economists call the “law of diminishing returns,” that is, as your market share increases, it takes more and more effort to move your business noticeably forward.

The second strategy you can use is to purchase a competitor or competitors, or expand your business to a significantly new level so you can permanently shift market share in your favor. Unlike the first strategy, this one can enable you to increase your market share immediately. However, using it also exposes your business to added risk because it generally requires you to take on more debt, which can become a company-wide problem if the expansion doesn't work. But if the expansion plan does work, the rewards are considerably greater, including increased market dominance, increased profits, and additional cash flow. If you are considering such a move, however, you must essentially go back to Level 2, Opportunity and Ownership, and do the same kind of evaluation you did when you were just starting your business. And if after that evaluation you find that the opportunity meets your goals and makes sense financially, you have to begin working your way through the levels again, one at a time, because if you expand your business or buy a competitor, you will not only have to redefine what success means but also determine how you will get there.

The Benefits of Knowing Business at Level 4

• Knowing business helps you understand and evaluate how best to maintain success and/or expand your business.
  
• Knowing business enables you to focus your new knowledge and turn it into added profits and market share.
  
• Knowing business helps you understand the numerous barriers to maintaining success, such as the law of diminishing returns.
  
• Knowing business helps you realize that market growth—or slippage—depends on the accumulated knowledge gained, and that the better you pass that knowledge on to your employees, the more likely you are to maintain success.
  
• Knowing business helps you recognize that some of the employees you have counted on may begin to disappoint you at this level, while others surprise you by stepping up their performances.
  

Whichever strategy you choose to maintain your company's success, product will inevitably lead the way. As I have pointed out before, the more natural demand a product has, the better the chances you have of succeeding. And it's no different in maintaining success. That is, the greater the demand, the easier it will be to maintain success because a great product and the gross profit it generates cover a host of sins.

As far as product is concerned, however, there is an important difference between Levels 3 and 4. At Level 3, your business and its products were offensive in nature, trying to punch a hole in the market big enough to allow your business to succeed. At Level 4, though, your product is both a weapon and an asset that needs protection, especially in the war zone, where you have to protect the market share you have already won. And this isn't something over which you have a choice—it's your reality. Every one of your competitors wants what you have, and you have no choice but to defend your position in the market. Actually, the stronger and more aggressive your attack on the market is at Level 4, the easier it will be to defend your product lineup. That's because if your competitors are busy reacting to what you're doing in the market, they can't be thinking about how they are going to attack your customers and market share.

To be honest, though, defending—and increasing—your market share is not easy to do, and it can't be done without understanding the effect your increased sales will have on your overall business. In fact, making an aggressive effort to maintain success is more of a balancing act than anything else. That is, by Level 4 you will have realized that business decisions have consequences, and little happens in isolation, all of which has to be taken into consideration. For example, being aggressive will mean your war zone strategy will have to be rethought because you're going for more sales. That means more money will have to be spent on marketing and inventory. It also means you will have to ramp up expectations of your staff, possibly even add people and then train them, to meet the increased demand for your product. That, in turn, means you will have to have more or at least improved controls, and that accounting and finance will have to make sure the proper information is flowing in and out so you and your managers can monitor important variables like gross profit margins on your product lineup, mix of business, cash flow, and others.

At this level, there are some serious owner–employee issues you have to be concerned with. Until success has been achieved, it is essentially you who are leading the charge and making sure your employees are operating the processes the way you want them to and with the results you expect. But even before you get to Level 4, you can no longer risk the business being entirely dependent on you, and for three very good reasons. First, you can burn out and, despite your best intentions, start leading the business on a downward slide. Second, if you were to suffer a serious injury or worse, the business would lose its only leader. And third, if you choose to micromanage your company, you are likely to retard its growth because if everything has to go through you, everyone else has to wait for your decision before moving ahead. The answer to this problem is to develop and educate key staff members so their collective knowledge and talents can be focused on maintaining success. Basically, this means you have to remove yourself from any day-to-day operations, which is something some owners are reluctant to do. Nevertheless, if you want to maintain the success you've worked so hard to achieve, it is necessary.

The first step, of course, is to select appropriate employees to take over your responsibilities. This is usually not particularly difficult because by now you will have developed a very good sense of your key employees' abilities, as well as their ambitions. The difficult part, in fact, is molding these key employees to work as a team and get them to understand what you have learned—that a successful business depends on a number of business principles operating in unison. Perhaps the best way of doing this is to widen their perspective of the business by concentrating on teaching them about how the various parts of the business operate and interact with each other rather than focusing on their own departments. While it is possible for egos and/or attitudes to get in the way of this process, it is essential that you, as the owner, be prepared to take swift and decisive action if they do. Eventually, your employees will figure out that they need each other's wisdom to grow their departments, solve problems, and help move the business forward, and the result will be continued success for everyone involved.

As I've already noted, the vast majority of owners would not list accounting and finance as one of their business strengths. However, after a couple of “rude” and expensive surprises and lessons learned, they begin to realize the value of financial analyses and the proactive power they give company. They realize, for example, that such analyses can protect them from making bad decisions based on wrong information and assumptions, or alert them to problems that need attention before they become crises. Accounting and finance can also help an owner fine-tune the business by proactively controlling expenses, working on inventory turns, identifying which products are hurting the business's overall gross profit margins, and generally providing the owner with “what-could-be” scenarios if he or she did this or that. At the same time, though, even having this kind of important information will be of little value to an owner who has limited overall business knowledge, simply because he or she won't know what to do with it.

All successful owners, depending on their experience and business knowledge, have certain “key” ratios, asset or liability balances they look for, or industry standards they measure themselves against. It's these warning signs and measurements, used skillfully, that can make the difference between a good business and a continuously great one. Benchmarking, for example, is a great way for owners to measure their business performance as it is usually a summation of their industry's best practices. In fact, for owners who benchmark and drive their businesses toward these key measurements, owning a great business may only be a matter of time and talent. What is perhaps most important is knowing what needs to be measured and what the measurements mean. And, again, unless you have a good understanding of business in general, you will not be able to do that.

In addition, sharing your knowledge of business with key employees and exposing them to accounting and finance is a great way to teach them how their departments work in conjunction with all the other departments, and how the success of one department helps the overall business achieve its goals. For example, by sharing how your managers' departments are measured by the company's balance sheet and profit-and-loss statement, you not only increase their knowledge, you show them how you are judging and grading them as well. Teaching your key staff members how everything in business is related changes their paradigms about the business, and generates efficiencies within departments that move the business closer to the benchmarks, positively affects the bottom line, and helps maintain success.

One of the things that happens at Level 4 when you start letting your employees take on more responsibility for the company is that you begin to see yourself and your life as separate from the business. For the first time, in fact, you realize that your personal goals and the company's goals can be separated, and that's when you begin thinking about how you will exit the business. This is not to suggest, of course, that it isn't something you won't have thought about before. Rather, it's at this point that it starts to take on a reality it never had in the past, and it's now that your paradigm begins to change. That is, you begin to wonder how much your business would be worth if you sold it, or what you might need to do to make it easier for a successor to take it over. You are also likely to feel a greater urgency to increase both sales and profits, as well as look for other ways to add value to your business to make it more attractive to possible buyers or successors. Eventually, this change of paradigm leads you to define a new destination for the business, that is, new objectives and goals, as well as a new idea of what maintaining success means.

You may decide, when you first start thinking along these lines, that you're not ready to exit the business yet. Even so, it won't stop you from wondering what could be, or from focusing more carefully on how your business operates and how it generates its profits. In other words, you will begin to realize what happens from one year to the next has a new and different meaning than it did before. However, if your understanding of business is limited at this point, your ability to exit the business successfully will also be limited. You will not, for example, be able to identify who your best buyer is, point out the upside potential of the business to a buyer, or increase profits in order to maximize your payout. You also may not be able to choose the most appropriate successor or give that successor the best possible chance of success. In other words, as in virtually everything you do in business, the more you know about business in general, the better off you will be.

On one level, the decision to exit your business may seem fairly simple—you have to decide if the reasons to stay outweigh the reasons to go. Unfortunately—and perhaps not surprisingly—this is not as simple as it seems. In fact, as I've already discussed, there are a great number of issues you have to take into account when you're thinking about moving on. Some of those issues are of a more personal nature, but from a business point of view there is perhaps nothing more important than the question of valuing your business. And, perhaps also not surprisingly, the greater your understanding of business, the easier that valuation will be.

In determining the value of your company there are essentially two questions you must ask. The first is “how much is the business worth now?” As I've already discussed, there are three elements that have to be taken into consideration in valuing a business—assets, real estate, and goodwill. Adding these three figures together will give you, as close as possible, the amount of money your business is worth at the moment, which is the figure you will take into account in devising an asking price when you offer the company for sale. The second question you must ask is “how much will it be worth at some specific point in the future?” Determining this figure is considerably more difficult. The reason for this is that there are many more things that have to be taken into consideration. And this is where your general knowledge of business—or lack of it—comes into play. In order to calculate the future value of your company, you must consider the strength of the market today and in the future, how much your employees and processes are likely to improve over time, and how this will affect profits; and demonstrate through the profit-and-loss statement exactly how these positive changes will affect future profits. Beyond this, however, you should also take into consideration such items as the strength of your competition going forward, that is, their performance in the war zone; the life of your products (marketing); possible changes in the industry (leadership); maximizing the business's assets (asset protection); and others. The point is that determining a business's future value is not as easy as it might appear to be, and to do it well it's important that you have a broad understanding of the various aspects of business.