Strategy

The following article, written by Robert Follett, was suggested by our mentor Trevor Payne

Build Your Business: There’s Only One Way, by Robert Follett.

A good way to describe “business building” is: “creating wealth through profitable transactions”. I came to this definition when I was telling a friend that revenue in my business had increased three fold after I reorganised a number of procedures and he replied: “Great, but what about profit”?

This was a very good question. Business is about profits, and every department within a business should be contributing to that, even if they are so called “off-line activities” such as the training manager or the IT Department. In simplistic terms, the profit and loss sheet tells the story of a business and is comprised of just three components: revenue, costs and profit.

If a business reduces costs then profits will naturally rise. But beware of the old adage: “You can’t cost cut your way to prosperity”. This is so true. Many initiatives such as “Lean”, “Continuous Improvement” and a host of other efficiency measures, target the cost elements of a business. Unfortunately, although these may make you more competitive, they will not make you competitive against low cost labour countries, nor in general will they increase the landscape of opportunity. Put simply, they just allow for more profitable operations from the same revenue base.

The only way to increase your business in real terms is to focus on building the top line: the revenue, and there are only three ways that can be achieved.

The first is to generate more sales to the same market. This is easily achieved as a short term measure by the addition of sales staff, increased incentives and perhaps more advertising and promotions. But this is not a sustainable strategy and is too easily matched by competitors. With price cutting, the customer is the only winner. Furthermore this initiative is again easily matched by competitors.

The second is to operate in new markets with the same products. Opening up new markets, perhaps exporting or entering places where products of your type have never before been sold is another way to increase revenues. But this is both expensive and can be extremely risky. Furthermore, once you have done all the work in creating a new market you have laid the perfect foundations for your competitors to follow. This alone is not a good sustainable strategy on which to build your business.

The third and only way, to continue to expand your business is to constantly provide new and improved products and services and new ways of doing business – this is called innovation. The search for new ways must be sustained and endless, or you can be sure business stagnation and eventual failure will be the result. Statistics from USA based research cite the life expectancy of a publicly listed company in the USA today as being less than ten years, compared with some 65 years in the 1920’s. Companies that fail to innovate, ultimately fail to exist.

Most business people would acknowledge that innovation is the answer, but unfortunately many confuse innovation with the abstract notion of “creativity” and do not understanding the difference properly. In short, innovation when properly applied is a tried, proven and rigorous tool for business building.

There can be little doubt that providing new and improved products and services and ways of doing business, is the only way to reliably grow a business. So after the cost removal processes have been initiated, it may be time to start addressing the top line.

That’s the way to build a business.