Your three most valuable assets are not on your balance sheet.

Your three most valuable assets are not on your balance sheet.

Dec 5, 2018 | Customers, Management, Strategy

 

The first is the value of your brands, the second is your customer list, the third is the ‘culture’ that exists, a fragile qualitative asset which is a vital part of commercial sustainability.

A balance sheet is a snapshot in time of the financial value of your business. It is based on standard accounting practice which fails to recognise the non financial assets that may be present.  Some may include an element of ‘goodwill’ but that is usually just an accounting treatment of the difference paid for a business compared to its tangible asset backing.

The value of a business is the future cash flow that will come from providing goods and services to customers. While that cash flow does come from the tangible assets of the business, in these days of ‘knowledge work’ most of it comes from the three sources noted above, not included on the balance sheet.

A professional services firm has very few tangible assets. A few desks and computers, they probably lease their premises, and their most valuable assets walk out of the office every afternoon.

In the case of a B2C business, your customers are generally different from your consumers, which just serves to increase the relative value of your brand. Consumers make the vital choice of which product to purchase, the intermediaries, wholesalers and retailers are just anticipating what choices they might make, and profiting from the arbitrage.

An acquaintance sold his business some months ago for a tidy sum. The business had been established for a considerable time, was successful, and he had kept up  the level of investment, particularly in his employees, so that it had every prospect of continuing to be successful.

The new owner closed it down.

They took on a few key employees, but locked the gates, broke the operating leases, and sold off the remaining assets.

All they wanted were the customer lists, along with what was in the heads of those few employees who had the direct relationships with the key customers, and the potential scale that was on offer with the elimination of a competitor.  The whole value of the business was tied up in the Intellectual Capital of those in the business, and the manner in which it delivered value to customers, not in the hard assets recorded in the balance sheet. However, in failing to recognise the value of the culture in the business which they destroyed, they ensured that the transaction would be a financial failure over the medium term.

Be sure you understand the full value of those assets not on your balance sheet, and invest in them, as ultimately, they will be the core of the value of the business.

 

What is the single source of competitive advantage in the 21st century?

What is the single source of competitive advantage in the 21st century?

Nov 26, 2018 | Governance, Strategy

Competitive advantage used to be about the sum of scale and the efficiencies that could be applied. Businesses like GM, GE, Exon Mobil, Wal-Mart all built scale and efficiency as the core of their success.

Our economies and institutions ran on the basis of scale and efficiency. Our political systems were fuelled by  the notion that those in charge accepted a moral obligation to be honest, tell us the truth, and act in our collective best interests for the long term.

Now things have changed.

Competitive advantage is now more about connections that deliver the scale. The planets biggest businesses, Apple, Amazon, Alphabet, Microsoft, Facebook and Alibaba, now have connections as the common element of their competitive advantage.

Over the weekend I heard Donald Trump in an interview propose that he had a ‘Platform’ in his followers on Twitter, Instagram and social platforms generally, that removed the need to rely on the institutions that had built the US. His platform was the people, he argued, with whom he now had a direct connection, independent of the institutions.

Love him or hate him, it is hard to disagree.

Equally, the Liberal wipeout in Saturdays Victorian elections will I suspect be sheeted back to the absolute lack of trust in the Liberal party generally, fuelled by the shambles in Canberra over the last decade. The Labor party should also be very careful, rather than crowing their success, as we trust them no more than the Libs.

It seems the foundation of the 21st century will be trust.

Hard won trust is easily lost, and very hard to win back.

As businesses and institutions build scale based on connections, those connections will be fuelled by trust. The absence of Trust will come to mean that your ability to build competitive advantage will be compromised. The strategic and marketing task of both public and private institutions, can be boiled down to the simple proposition that they need to be trusted, and that we, the great unwashed who vote with our feet, money and loyalty, require that they earn that trust, it will no longer be just given.

To reach that point, they need to build up the real evidence that they can be trusted, that they will act in our common interests before theirs, as distinct from the fluff and bullshit currently churned out by their publicity lackies.

As I look forward, I can see no driver of success more important than outlining a goal, articulating the route toward the achievement, then being held accountable for the actions that take us towards the goal.

In a word, trust.

Header photo: Christmas 1914 on the Western Front.

The most common cause of the failure of medium sized businesses.

The most common cause of the failure of medium sized businesses.

Nov 19, 2018 | Customers, Strategy

  Businesses fail for a lot of reasons, lack of cash, their product becomes redundant, competitors emerge at a cheaper price, distribution is not as anticipated, inadequate sales skills, and many others. However, all these failures have a common root. They were not important enough to the few who might have really cared enough to give them their business. They try to be all things to all people, and even the most successful company of the last 25 years, Apple, cannot pull that off. What on earth makes you think you can? The key to success is to do less. Relentlessly prune everything you do until there is nothing left but the stuff that is really, really important to the few, that you do better than anyone else. That combination stops those key target customers going anywhere else. Saying ‘No’ is the hardest thing any medium business has to do. However, it is also amongst the most important things. Stand for something genuinely meaningful to the few, and deliver relentlessly to them. Forget the rest. Header credit. My thanks once again to Hugh McLeod at Gapingvoid.com  
The single reason most strategy planning fails

The single reason most strategy planning fails

Nov 12, 2018 | Strategy

We confuse strategic thinking with the execution of an agreed strategy.

They are two entirely different processes, and should not be just lumped together for convenience, which is what most of us do by default.

Thinking the strategy does nothing to execute the strategy.

Effective strategic thinking is an ongoing process, it should always be on the agenda. It is evolutionary, requiring deep consideration, diverse thinking and inputs, creativity, and the ability to see connections and trends missed or ignored by others.

Strategy execution driven by  the deep strategic thinking results in priorities, processes and resource allocation decisions, and timing that can all be managed.

The leadership is in the thinking.

It is not unreasonable while doing the strategy thinking to ask yourself ‘How’, but second guessing the thinking part during execution is a recipe for disaster.

There is however a partial exception. Isn’t there always?

Incorporating new strategic information and insight gained during the execution back into the strategic thinking is essential. Feedback loops provide the opportunity to learn, understand, and adjust, and as such are an essential element of success.

Be very careful you understand which is the cart, which is the horse, and what their differing roles are!

Are you running a zombie business

Are you running a zombie business

Nov 7, 2018 | Management, Strategy

 

Zombies are the fictional ‘living dead’. A zombie business model is one that might still be alive, but may as well be dead, unless there is radical surgery undertaken.

Blockbuster was a zombie model, happily making money while Netflix emerged from its cacoon, to kill it in a few short years.

Blockbuster’s then CEO John Antico recognised the problem and instituted a solution that would probably have saved them,  but fell victim to the entrenched view of the Blockbuster model held by his board. His replacement blew some temporary life into the zombie, but missed the opportunity to rebuild, and shortly after, Blockbuster died a rapid and ugly death.

Many bricks and mortar retailers find themselves in a similar position. They know what they sell,  but have no idea to whom they sell it, and whether or not the price at which they sold maximised their margins. Meanwhile, Amazon knows what they sell, to who, at what price, when, and the details of their location, and a host of demographic and behavioural data gleaned from their big data sets. Who is the zombie in that mix?

I note that this morning Lowes announced the closure of 51 North American stores. Can somebody please ask the former Woolies MD what it was like being in bed with a Zombie!

 

 

How to swim in the profit pool

How to swim in the profit pool

Nov 5, 2018 | Customers, Strategy

 

Every industry is an amalgam of value chains, demographic, behavioural, and geographic segments of customers and suppliers.

Inevitably, some of these segments are more profitable than others for a range of reasons. Therefore it makes sense to understand where the profits in your target value chain are being made currently, and where those profits may move to in the future.

There are two challenges here, the harder is seeing the future, but the second, identifying where the profits are now, should be easier.

Apply the Pareto principal to all the segments in the whole value chain, and you will inevitably see that at each point, Pareto rules.

It therefore follows that your best strategy is to identify the areas where your value proposition can add value to the 20% that deliver 80% of the profit.

The king of this strategy is Apple, who control about 15% of the volume of mobile phones sold, but accrues 85% of the profit available in the market.

Who are the 5% of customers who truly value something only you can offer?

Find them and you will be swimming in the profit pool, with little opposition.