Do You Know Your Value Chain?
Many companies become low margin operations through fear of competition with the result that a high proportion never achieve their owners hopes and aspirations.
Why is this? One reason is failing to recognise what the business or the owner is good at and what they are not. They do not understand where they create value for their customers. For example Apple does not make phones. Foxconn in China does it for them. Where is Apple’s value generation? Think about the whole Apple offering?
I was reading an article in MoneyWeek magazine a few weeks ago that caught my imagination on this topic. It is about how a number of small to medium businesses escape the cul de sac of low profitability in which they found themselves and how to place their businesses in a space where the activity was both profitable, scalable and valued by their customers. You can see it here (see goo.gl/tpCKsc for the full item).
I found these stories quite inspiring. These may be articles from an investment magazine but the essential story of how these businesses are being transformed applies to any commercial activity. Size is irrelevant as the principal holds for all businesses. It is, as Michael Gerber says, how you go from a company of one to a company of 1000+ people.
The message in this article is about how a business can focus on the critical activities at which it should be good at and how to deal with activities at which it is poor but have to be done.
One activity that so many small businesses get wrong is financial management. All too often the business owner wants to do it themselves and the driver is keeping overheads down eg once a year accounts, spreadsheets, poor credit control etc. It takes them a lot of time and they do not know what they are doing.
Really, they should be focussing on at the most potentially profitable parts of their business (return on capital) and looking to grow these. If one gets the financial management right, the platform exists to make the best of the best opportunities within the company.
To me, this means appointing an outside business advisor with wide business experience who can help with the day to day successful running of the business finances. They can help the business owner find the key elements in the business value chain and the finance to achieve its development.
If you want or need some more ideas on this theme, please get in touch.