Imagine you have a successful business with a unique product that is highly regarded by a large and valuable niche market segment. Happy days. Then you succumb to hubris. You decide to ignore the fundamentals of your business and the things that gave your business its unique competitive advantage, and you completely change your product offering. People stop buying, and as your business fails, instead of lamenting your failure to understand why people once used to buy from you, you go public and blame your customers for failing to appreciate you.
This could never happen, right? Reflect upon the Australian Democrats. Once had the greatest tag line of any political product in Australia: "keep the bastards honest". Had a loyal following of "buyers" who were scarred by the politics of 1975.
To be sure the market place has changed over the years, and the events of 1975 grew dim in the minds of the "customer". But then the Dems decided to change their offering from one of "keeping the bastards honest" to one of a platform of their own alternative policies. In so doing, they confused their buyers and took away their reason to buy. "Buyers" wanting green or left wing policies could buy "Greens" or "Labor". And those wanting conservative policies could buy "Liberals". So why "buy Democrats" if they are only offering policies of one persuasion or another offered more or less by competitors.
The Democrats were like tyres for the motor car of politics. Drive any car you like, but if you want to drive more safely, then put Dems on your wheels. But then they thought the world needed another kind of car. You don't see a "Bridgestone" car. You don't see Microsoft or Intel PC's. Etc.
Instead of trying to "stay relevant" by changing their product, the Dems should have found ways of reminding people why their product was so valuable. The Democrats once had a unique product with no head-on competition. Then they decided to go head to head with the other parties. But the other parties had much more clearly defined competing value propositions (notably the Greens). The death of the Dems was always going to be just a matter of time after they messed with their product.
Onlooking small business proprietors should ignore the lame and uninsightful valedictory dross that they may have heard last week as the Democrats fizzled out once and for all, and note what happens when you ignore the fundamentals driving your business.
Showing posts with label small business strategy. Show all posts
Showing posts with label small business strategy. Show all posts
The IPL as a lesson for entrepreneurs eager to create value
How can a small business successfully compete in a mature and heavily contested market place? The global market for cricket is certainly mature and dominated by long established "businesses". The schedule for international test and one day cricket is set five years in advance. Surely there was no room in this market for a new competitor? Hello IPL!
The authors of an excellent business strategy book called Blue Ocean Strategy* subtitled their book How to create uncontested market space and make the competition irrelevant. This is exactly what the IPL has done. Red oceans are said to be existing markets. Blue oceans are said to be markets that do NOT exist today. Red ocean strategy is about exploiting existing demand, adapting to trends as they occur and beating the competition. Blue ocean strategy is about creating uncontested market space, creating and capturing untapped demand, shaping trends and making the competition irrelevant! The IPL is a beautiful example of "Blue Ocean Strategy". Admittedly, we are yet to see if it works, but if as a punter you always "follow the money", you would be brave to bet against the IPL.
What happens when a new venture seeks to compete in red oceans instead of creating its own blue ocean? MyHome.com.au was a late entrant in to the online real estate sales market - by now a red ocean. Realestate.com.au (REA) dominates this market space and had "first mover advantage" - tying up a very high percentage of Australia's real estate agents long before the existence of MyHome. Domain.com.au is the next biggest competitor. Being tied to print media (and advertising) giant Fairfax, Domain has a good story to tell. It certainly has some competitive advantages - as an adjunct to print advertising for example, not to mention the pulling power of Fairfax's online newspapers. MyHome, as a late entrant to this market space, needed a very good story to tell in order to succeed. One would be hard pressed to imagine what that story might be given the dominance of REA and Domain, and their strong competitive positions.
According to the Australian Financial Review, MyHome is now on "struggle street" and in trouble: "It is believed to be missing its revenue targets by tens of millions of dollars" (AFR p18, 11/02/08). Oh dear. And the CEO of REA says "I don't see [MyHome] at all as a threat or event relevant to our business". Ouch!!
The lesson for SME's here is that rather than compete with larger businesses head on in red oceans, they should seek to create value by creating blue oceans.
I highly recommend the book, but accept that some ninjas are "time poor" - so here are some online resources on "Blue Ocean Strategy":
http://blueoceanstrategy.typepad.com/about.html
http://www.slideshare.net/pchitchai/blue-ocean-strategy-bos-258800
http://en.wikipedia.org/wiki/Blue_Ocean_Strategy#Tools_and_frameworks
As always, feedback is most welcome!
*Blue Ocean Strategy: How to create uncontested market space and make the competition irrelevant, W. Chan Kim and Renee Mauborgne, Harvard Business School Press
The authors of an excellent business strategy book called Blue Ocean Strategy* subtitled their book How to create uncontested market space and make the competition irrelevant. This is exactly what the IPL has done. Red oceans are said to be existing markets. Blue oceans are said to be markets that do NOT exist today. Red ocean strategy is about exploiting existing demand, adapting to trends as they occur and beating the competition. Blue ocean strategy is about creating uncontested market space, creating and capturing untapped demand, shaping trends and making the competition irrelevant! The IPL is a beautiful example of "Blue Ocean Strategy". Admittedly, we are yet to see if it works, but if as a punter you always "follow the money", you would be brave to bet against the IPL.
What happens when a new venture seeks to compete in red oceans instead of creating its own blue ocean? MyHome.com.au was a late entrant in to the online real estate sales market - by now a red ocean. Realestate.com.au (REA) dominates this market space and had "first mover advantage" - tying up a very high percentage of Australia's real estate agents long before the existence of MyHome. Domain.com.au is the next biggest competitor. Being tied to print media (and advertising) giant Fairfax, Domain has a good story to tell. It certainly has some competitive advantages - as an adjunct to print advertising for example, not to mention the pulling power of Fairfax's online newspapers. MyHome, as a late entrant to this market space, needed a very good story to tell in order to succeed. One would be hard pressed to imagine what that story might be given the dominance of REA and Domain, and their strong competitive positions.
According to the Australian Financial Review, MyHome is now on "struggle street" and in trouble: "It is believed to be missing its revenue targets by tens of millions of dollars" (AFR p18, 11/02/08). Oh dear. And the CEO of REA says "I don't see [MyHome] at all as a threat or event relevant to our business". Ouch!!
The lesson for SME's here is that rather than compete with larger businesses head on in red oceans, they should seek to create value by creating blue oceans.
I highly recommend the book, but accept that some ninjas are "time poor" - so here are some online resources on "Blue Ocean Strategy":
http://blueoceanstrategy.typepad.com/about.html
http://www.slideshare.net/pchitchai/blue-ocean-strategy-bos-258800
http://en.wikipedia.org/wiki/Blue_Ocean_Strategy#Tools_and_frameworks
As always, feedback is most welcome!
*Blue Ocean Strategy: How to create uncontested market space and make the competition irrelevant, W. Chan Kim and Renee Mauborgne, Harvard Business School Press
Market volatilty: What are the shares in your client's small business worth?
Understanding how stock markets value businesses seems to many to be a dark art. Never more so than in times such as the past few trading days when valuations (reflected in stock prices) have been alarmingly volatile. How are listed companies valued? Do similar principles apply to small businesses, and what are the implications for small business owners?
Businesses are generally valued on the basis of a multiple of earnings (see the papers for the daily price-earnings ratios implicit in publicly listed stock prices). Yes rocket scientists, its much more complex than that, but even you will concede that the NPV of future maintainable earnings can be reduced to some kind of earnings multiple.
This principle applies to large and small businesses alike.
So if a business is valued at a multiple of its earnings - what is the "multiple", and how do you define "earnings"?
The last bit first - earnings these days are generally defined as EBITDA - earnings before interest, tax and depreciation. The rationale for adding back interest is that the value of the business should not be determined by its debt structures.
As for the applicable "multiple" - that depends on the sustainability and quality of the earnings - and "volatility" in yearly earnings is a surrogate for these two factors.
How should you advise a small business owner looking to increase the value of their business so they can sell to a generous competitor and retire early?
Firstly, my bias is for business growth over cost cutting to achieve better quality earnings. Cost cutting can enhance the bottom line in the short-term, but for long term sustainable profits, the fundamentals need to be looked at.
Which leads me to my second point. A business - no matter how small - that dominates a market segment or niche, is going to enjoy greater earnings and attract higher multiples. So the small business owner should be focused on looking for market segments or niches to "own" in order to increase the value of their business.
Given that "earnings" for valuation purposes are before interest, using debt to grow the business should be seriously looked at - subject obviously to risk and the ability of the owners of the business to employ the debt funds profitably.
Are small business valuations as volatile as stock prices? Market forces still apply - supply and demand, the cost of money and the general availability of funds. Lower multiples apply when interest rates are high. And if credit tightens at the retail level, then this will impact on business valuations in the same way other asset prices are effected. What do you think?
Businesses are generally valued on the basis of a multiple of earnings (see the papers for the daily price-earnings ratios implicit in publicly listed stock prices). Yes rocket scientists, its much more complex than that, but even you will concede that the NPV of future maintainable earnings can be reduced to some kind of earnings multiple.
This principle applies to large and small businesses alike.
So if a business is valued at a multiple of its earnings - what is the "multiple", and how do you define "earnings"?
The last bit first - earnings these days are generally defined as EBITDA - earnings before interest, tax and depreciation. The rationale for adding back interest is that the value of the business should not be determined by its debt structures.
As for the applicable "multiple" - that depends on the sustainability and quality of the earnings - and "volatility" in yearly earnings is a surrogate for these two factors.
How should you advise a small business owner looking to increase the value of their business so they can sell to a generous competitor and retire early?
Firstly, my bias is for business growth over cost cutting to achieve better quality earnings. Cost cutting can enhance the bottom line in the short-term, but for long term sustainable profits, the fundamentals need to be looked at.
Which leads me to my second point. A business - no matter how small - that dominates a market segment or niche, is going to enjoy greater earnings and attract higher multiples. So the small business owner should be focused on looking for market segments or niches to "own" in order to increase the value of their business.
Given that "earnings" for valuation purposes are before interest, using debt to grow the business should be seriously looked at - subject obviously to risk and the ability of the owners of the business to employ the debt funds profitably.
Are small business valuations as volatile as stock prices? Market forces still apply - supply and demand, the cost of money and the general availability of funds. Lower multiples apply when interest rates are high. And if credit tightens at the retail level, then this will impact on business valuations in the same way other asset prices are effected. What do you think?
Small business "crisis" and the Minneapolis bridge collapse
Apparently this Chinese character for "crisis" is a compilation of the characters for "danger" and "opportunity". A couple of weeks ago, I posted an article here called "A business in denial is a crisis already underway". In that article, I outlined a model for "the four stages of crisis". Can I use this model to make a prediction on what will be in the final report into the Minneapolis bridge collapse.Question: Why did the Minneapolis bridge collapse?
Predicted answer (using the four stage model):
- Essential data that would have otherwise presented early warning signs of danger was not being collected. This was a result of a combination of poor systems, and management decision processes heavily biased towards actions that had been successful in the past for reasons that were no longer valid (crisis stage one - "hidden crisis").
- When data was available, the early warning signs were explained away, mis-interpreted or not taken seriously enough (crisis stage two - "crisis denial").
- When the warning signs were finally recognised, only the symptoms were treated, instead of the underlying causes. As a result, the underlying causes of trouble kept on doing damage (crisis stage three - disintegration begins).
- Finally - the devastating collapse (crisis stage four - "collapse").
Why should this interest small business advisors? Because the answer appearing above could be applied to 90% of business failures. Why did XYZ Widget Importers Pty Limited collapse? Word for word, the answer above will more than likely provide the explanation. Ditto for HIH, Ansett and Westpoint. And ditto for all manner of disasters, from railway accidents, to space shuttle disasters, failed personal relationships, and boiled frogs.
This "four stages" model of business crisis has been in circulation for over twenty years. It should be a useful tool for business advisors wanting to practice "early intervention".
If you need a list of "early warning signs" of trouble, see page three of the ASIC document entitled "Insolvency: a guide for directors".
Hopefully understanding the Chinese characterisation of "crisis" gives us insight, and the impetus to help small business proprietors understand that if they respect the signs of "danger", they may then be better placed to seize the "opportunity"!
Playing the "blind side" for business growth
It is sometimes difficult for small business owners caught up in the day to day running of their business to maintain the right marketing mentality. Being switched on to the concept of the "blind side" as it is used in rugby may help!
The "blind side" is the narrow side of the ball contest on the rugby field, and by definition is usually sparsely defended, and therefore not seen as the logical side of the scrum to run the ball. (Follow the link for a three page treatise on "The Blind Side" by English Rugby legend Don Rutherford).
What does this have to do with marketing? Recently I have come across three excellent examples of "blind side thinking" that may help you make the connection.
The first is this ad for the iconic Mars Bar. The obvious space for Mars to contest is the confectionery market, right? In this ad, Mars takes a run straight into the "energy drink" space that is uncontested by other confectionery bars. It is taking on sports drinks, whilst at the same time positioning itself as an energy bar. Very clever.
The second is the internet search engine globalspec.com. Everyone knows that Google has won the search engine wars, right? Not quite. Topic-specific search engines are now beginning to emerge and these businesses are re-positioning Google as a "generalist"search engine. Globalspec is for engineers. Other "vertical" search engines exist specialising in the medical field (such as healthline). The point is, that even in a market space seemingly heavily defended by a giant such as Google, "blind side" opportunities exist.
The third example is Smintair (Smokers International Airlines) - a new German airline providing business-class-only travel for smokers (see the SMH article). Even the crew can smoke on this new airline! This is another great example of thinking laterally to find an un-serviced market segment.
The blind side has to be the natural option for small businesses who are not usually able to take on the heavy defenses of their larger competitors. It is also the natural play for Cash Flow Ninjas!
The secret to "blind side" rugby, according to Don Rutherford, is to be a "head up" as opposed to "head down or blinkered" player. The head up player has a "head up" mentality. Always looking for blind side opportunities, and making assessments of the risks attached to pursuing those opportunities before the ball is in their hands - that is before the heat of the next contest can cloud their judgement.
To maximise blind side opportunities, Rutherford's advice is to "take the ball as flat as possible [ie sprinting, not standing], aim for space, pin your ears back and go". What are the blind side opportunities in your market place?
The "blind side" is the narrow side of the ball contest on the rugby field, and by definition is usually sparsely defended, and therefore not seen as the logical side of the scrum to run the ball. (Follow the link for a three page treatise on "The Blind Side" by English Rugby legend Don Rutherford).
What does this have to do with marketing? Recently I have come across three excellent examples of "blind side thinking" that may help you make the connection.
The first is this ad for the iconic Mars Bar. The obvious space for Mars to contest is the confectionery market, right? In this ad, Mars takes a run straight into the "energy drink" space that is uncontested by other confectionery bars. It is taking on sports drinks, whilst at the same time positioning itself as an energy bar. Very clever.
The second is the internet search engine globalspec.com. Everyone knows that Google has won the search engine wars, right? Not quite. Topic-specific search engines are now beginning to emerge and these businesses are re-positioning Google as a "generalist"search engine. Globalspec is for engineers. Other "vertical" search engines exist specialising in the medical field (such as healthline). The point is, that even in a market space seemingly heavily defended by a giant such as Google, "blind side" opportunities exist.
The third example is Smintair (Smokers International Airlines) - a new German airline providing business-class-only travel for smokers (see the SMH article). Even the crew can smoke on this new airline! This is another great example of thinking laterally to find an un-serviced market segment.
The blind side has to be the natural option for small businesses who are not usually able to take on the heavy defenses of their larger competitors. It is also the natural play for Cash Flow Ninjas!
The secret to "blind side" rugby, according to Don Rutherford, is to be a "head up" as opposed to "head down or blinkered" player. The head up player has a "head up" mentality. Always looking for blind side opportunities, and making assessments of the risks attached to pursuing those opportunities before the ball is in their hands - that is before the heat of the next contest can cloud their judgement.
To maximise blind side opportunities, Rutherford's advice is to "take the ball as flat as possible [ie sprinting, not standing], aim for space, pin your ears back and go". What are the blind side opportunities in your market place?
What business are you in?
How a small business owner answers the question "what business are you in?" can be very instructive in at least two ways.
Firstly, a business owner needs to be able to clearly and succinctly articulate their business model so that almost anyone can understand it. The term "business model" came into vogue in the dot-com era, and simply refers to the firms' basic value proposition, including how it creates and delivers value to the market place. The business model for a supermarket for example, is to assemble a variety of grocery items at a convenient location, in a way that delivers value to its customers through both saved time (they can buy all their grocery needs under the one roof) and saved money (by passing on to its customers the discounts it achieves by bulk buying).
If a small business owner can't neatly describe his or her business model to prospective bankers or business partners, there is a real risk that the target market won't "get it" either, and the business may struggle.
Secondly, how the question "what business are you in" is answered indicates the "space" the owner of the business wants to play in, in terms of potential customers, product offerings and, importantly, competition. The example of the former Australian transport business icon, Cobb & Co, will help to illustrate the importance of this facet of "business definition" (a recent book tells the story of Cobb & Co - Wild Ride: The Rise and Fall of Cobb & Co).
Ninjas of my vintage may recall learning at school that Cobb & Co coaches were at one time to be found transporting mail, cargo and passengers down every highway and dirt trail in colonial Australia. We were told that the need for Cobb & Co's services - which relied upon horse drawn coaches, had come to an end once the horse was superseded by the car.
Cobb & Co is said to have been the Qantas of its day. At school the lesson was one of history, and Cobb & Co were given as an example of the way things used to be. However there is a much more powerful business lesson to be learned. How come Cobb & Co today is little more than a tourist museum, whilst the American company that its founders modeled it upon became American Express?
On the surface this would seem to be a classic example of "marketing myopia" - that is the trap many businesses fall into when they define their businesses too narrowly. Cobb & Co used to ship people and gold around the Australian colony - remember Australia's gold fields fuelled much of the country's expansion at one stage. And in some senses, is that not what American Express does internationally today? The two businesses could be said to have the same (very) broad business definition. But the more narrowly defined business failed to recognise opportunities (to evolve from transporting people and gold into a global travel and financial services business) and threats (to horse drawn travel).
"What business are you in?" appears to be such a simple and innocuous question. Yet to the well trained ninja, it can be a powerful diagnostic tool for gaining deep insight into a business.
Firstly, a business owner needs to be able to clearly and succinctly articulate their business model so that almost anyone can understand it. The term "business model" came into vogue in the dot-com era, and simply refers to the firms' basic value proposition, including how it creates and delivers value to the market place. The business model for a supermarket for example, is to assemble a variety of grocery items at a convenient location, in a way that delivers value to its customers through both saved time (they can buy all their grocery needs under the one roof) and saved money (by passing on to its customers the discounts it achieves by bulk buying).
If a small business owner can't neatly describe his or her business model to prospective bankers or business partners, there is a real risk that the target market won't "get it" either, and the business may struggle.
Secondly, how the question "what business are you in" is answered indicates the "space" the owner of the business wants to play in, in terms of potential customers, product offerings and, importantly, competition. The example of the former Australian transport business icon, Cobb & Co, will help to illustrate the importance of this facet of "business definition" (a recent book tells the story of Cobb & Co - Wild Ride: The Rise and Fall of Cobb & Co).
Ninjas of my vintage may recall learning at school that Cobb & Co coaches were at one time to be found transporting mail, cargo and passengers down every highway and dirt trail in colonial Australia. We were told that the need for Cobb & Co's services - which relied upon horse drawn coaches, had come to an end once the horse was superseded by the car.
Cobb & Co is said to have been the Qantas of its day. At school the lesson was one of history, and Cobb & Co were given as an example of the way things used to be. However there is a much more powerful business lesson to be learned. How come Cobb & Co today is little more than a tourist museum, whilst the American company that its founders modeled it upon became American Express?
On the surface this would seem to be a classic example of "marketing myopia" - that is the trap many businesses fall into when they define their businesses too narrowly. Cobb & Co used to ship people and gold around the Australian colony - remember Australia's gold fields fuelled much of the country's expansion at one stage. And in some senses, is that not what American Express does internationally today? The two businesses could be said to have the same (very) broad business definition. But the more narrowly defined business failed to recognise opportunities (to evolve from transporting people and gold into a global travel and financial services business) and threats (to horse drawn travel).
"What business are you in?" appears to be such a simple and innocuous question. Yet to the well trained ninja, it can be a powerful diagnostic tool for gaining deep insight into a business.
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