Driving Your Company's Value

Key Performance Indicators & Value

Understanding a business's key performance indicator(s), or KPI, is critical to identifying and enhancing business value. KPIs measure what it is that drives a business' value.

For example, the customer retention rate is a KPI for a business that relies primarily on recurring customer revenue (such as the provider of this blog tool or other subcription-based business models). The reason for such is that the marketing and adminstrative costs to maintain an existing customer are typically significantly less than the marketing and adminstrative costs to obtain and setup a new customer. Therefore the higher the customer retention rate (or lower the customer attrition rate), the better operating margins are. All other things equal, that translates into higher value.

Now while a KPI is often measured in financial or other quantitative terms, it is generally driven by operational activity. Illustratively, restaurant owners measure seat turnover rates and average check as KPIs for their business, but what drives those rates? Customer satisfaction? Rate of menu changes? Reservation policies? Size of the wine list? When owners make the connection between operational activity and KPIs,they can then develop and implement strategies that enhance value, and measure their success to that end.

Why Business Plans Don't Deliver

Yesterday's Wall Street Journal had an article by Dr. John W. Mullins entitled "Why Business Plans Don't Deliver" which I found very insightful. Following is part of the article, which identifies five common errors in business plans. For the complete article, go to: http://online.wsj.com/article.

HERE I AM, NEVER MIND THE PROBLEM
In this kind of plan, the writer is smitten with the elegance of his or her technology. The plan begins not with the identification of a customer problem to resolve, but with a detailed explanation of how the technology works, why it is cutting-edge or state-of-the-art, and how it is better, faster and cheaper than current solutions. A Me-First plan sends a clear signal that the writer’s priorities are misplaced. What matters more than great technology or a great idea is the problem or pain that the new solution or technology resolves.

A COKE FOR EVERY KID IN CHINA
This gambit rests its case on a plethora of secondary data to show how large and fast-growing a market is. The plan then makes a heroic leap and assumes that the new venture will grab X percent of that market—it could be 1%, 10%, 30% or whatever. “Surely,” the plan argues, “with the large number of customers in our market, we’ll easily get enough. We only need a small fraction to have a very nice business.” Plans like this reveal that the writer isn’t sure what the initial target market is. Rather, it is much easier to win a large share of a carefully targeted but narrow market than it is to win a small share of a very large market.

JUST LOOK AT OUR (PAPER) PROFITS
Of the five fundamentally flawed business plans, this one is perhaps the most difficult to spot. The archetype is the failed Internet business, Pets.com, which offered pet supplies via the Internet. Simply put, the economics of delivering large, heavy bags of dog food one at a time could not compete with the economics of putting pallet-loads of the same bags of dog food on supermarket or discount-store shelves and letting the customers do the delivery.

OUR TEAM WALKS ON WATER
Investors won’t be snowed by top-tier diplomas or past employment with a leading company. Investors care first about the main challenges of the industry in question, and whether the proposed team has hands-on experience tackling those challenges. Every industry has critical success factors—typically two or three—that, when addressed effectively, are likely to bring success even if less-important challenges aren’t handled well. Location, for instance, is a critical success factor in much of retailing.

EVERYTHING IS WONDERFUL
The most common type of business plan, and the one that goes most quickly into the trash, is the one in which the writer can’t find anything but good things to say about the opportunity and plans to pursue it. Rather than attempt to paper over the rough spots and uncertainty, identify them yourself and deal with them candidly in your plan.

We're back..

With Jimmy's death in January and my health problems, the blog ended up on the back burner for a while. For those of you following it, my apologies. We're back on line and posts will (hopefully) be regular again.

Marketing is Not Sales - The Discipline of the Marketing Leader

Marketing is the function that drives growth, builds the brand, establishes the company’s positioning in the marketplace. According to Michael Gerber in his book E-Myth Mastery, Marketing attempts to answer the questions:what do we own, what do we do, how do we look, how do we act and feel and perform that differentiates our company from the competition? I would add to that, from the perspective of the customer. For the only differentiation that matters is what the customer thinks about your product or service, not what you and your employees think.

This is one of the seven disciplines Gerber describes in his book as one piece of the puzzle that makes up the enterprise. It’s not a step-by-step process, but rather a piece of the jigsaw puzzle that needs to interact with the other pieces to complete the whole. Marketing depends on the enterprise leader to set the vision, mission and values for the company. Then Marketing can take over to create a picture of what the company looks, acts and feels like and differentiates it from the competition in the mind of the customer.

The first place to start is to identify who and where your customers are. What’s the make-up of your ideal customer in terms of age, income, education, occupation, gender, marital status, family or business size, ethnicity, and location. There are many tools that will help you target your market. One of the best companies to supply this type of information is Claritas. If your company is a retail operation, you need to know how far your customers come to shop at your store – two miles, five, ten or more? With the help of tools from Claritas, you can get a wealth of information about the population that lives and works within a two, five, ten or more mile radius of your store, as well as information about the competition.

That’s just for starters. Claritas can also supply basic demographic information about your market, as well as help you segment the population into target groups that are most likely to buy your products and services. This information will help you design your marketing materials and promotional campaigns to reach these key customers. Alternatively, you can use the Customer Demographic Questionnaire that comes with Gerber’s book, and survey your customers yourself. Be sure to add where they’re located, however, to capture the zip codes in which they live and work, and whether they come from work or home when they visit your store. You’re not likely to get their address, but you do want to capture their e-mail address to keep them informed of special sales and product opportunities.

The second step is to identify who and where the competition is and what their differentiating characteristics are. Again, Claritas can help with this, but so can your sales staff. Talk to your sales people. They’ll know who they compete against every day for a sale and which are the strongest competitors. Next survey your customers to get their feedback on your competitors and how your company stacks up against them.

The Star Positioning Advantage:
With all this information in hand, look critically at your own company to determine on which of the following points you have a competitive advantage. Do the same for your competition so you know exactly who you compete against in each area. The key is to identify the one area where you are better than the competition that makes people want to do business with you, in the eyes of the customer. You can’t be dominant in all areas, but you MUST be competitive in them. That means your product or service or company ranks 2nd or 3rd in the marketplace on four out of five of the following points, and first on one: Personal Choice, Caring Service, High Quality, Total Cost, Responsiveness. I recommend bringing a cross section of your key managers together to work on this after you've gathered the market and customer data. Once you've determined your competitive positioning, you can begin to build your marketing message, materials and promotional campaigns.

Simple (but fair?) Valuation Methods

One of the key components to any buy-sell agreement is the valuation method employed.  How will the business, or an ownership interest in the business, be valued for purposes of executing a transaction governed by the buy-sell agreement?

Two valuation methods exist that I will refer to as "simple" valuation methods.  The first of these methods is the fixed price method, whereby the owners agree in advance what the valuation will be.  Simple? Yes.  Accurate? Probably not.  Things change daily in business, and that usually means the value of the business is frequently changing.  The day after a fixed price is agreed to, events could occur that render that value worthless.

Another "simple" valuation method is to use a pre-defined formula.  For example, "the value of the business will be equal to annual revenue times three."  This method isn't quite as simple as a fixed price, but is not far from it.  Accurate? Possibly.  Fair? Hard to say.

Let's consider a situation that could be problematic.  Let's say a company formed another business unit that Shareholder A ran by themselves with no input or involvement from Shareholder B.  Further, let's assume this business unit and its financial results are not reported separately, where it would be easy to carve this business unit out for purposes of applying the formula.  The real question is, though, should the unit and its financial results even be considered if Shareholder B were being bought out?  Chances are the two shareholders would have different views of this.  Unfortunately, our simple formula provides no guidance in a situation like this.

Simple methods of valuation achieve many desirable objectives.  But if the overriding objective of your buy-sell agreement is fairness to all owners, these methods may not achieve the goal.

Disciplines of the Entrepreneur: The Enterprise Leader

According to Michael Gerber, author of E-Myth Mastery, there are seven disciplines that a successful entrepreneur must develop to build a World Class Company. Each discipline is like a puzzle piece that makes up the enterprise. Each discipline is like a puzzle piece that makes up the enterprise. It’s not a building block working in a linear fashion, but rather part of a system of components that work together to complete the whole that make up the company. The entrepreneur must have all disciplines regardless of the size of the company in order to achieve his or her desired objective, the vision of what he or she is trying to create.

The seven disciplines are: 

1. The Enterprise Leader
2. The Marketing Leader
3. The Financial Leader
4. The Management Leader
5. The Client Fulfillment Leader
6. The Lead Conversion Leader
7. The Lead Generation Leader

There are five essential skills the Enterprise Leader must have

Concentration, Discrimination, Organization, Innovation and Communication. The skill of Concentration is learning to feel comfortable with being a lone. We’ve heard the phrase, “It’s lonely at the top.” It’s true. The entrepreneur is the final decision-maker. Good or bad, your decisions are the ones that will create the company of your dreams. As the enterprise leader, your work is to lead, not do. According to Gerber in his book E-Myth Mastery, you need to remind yourself every day, “I am a leader. My job is to do the work of leadership.” This skill deals with how to focus your attention. 

The second skill, Discrimination, deals with where to focus your attention. You need to learn how to choose between alternatives. The most important things for an enterprise leader to consider are the vision, mission and values (the culture or consciousness) of your enterprise. Focus on the end game of what you’re trying to create. Every option or path you choose to pursue should be held up against those elements. Ask the question, “will this path get me to the vision I’m trying to create? Does it tie into the mission of what we’re doing?”

The third skill, Organization, deals with the functional components of your enterprise. This is how you organize your business, turn chaos into order, how you structure your business so everything has a place and function and it works in an orderly fashion.   

Innovation, the fourth skill, depends on Discrimination. Everything you do must be held up against the standards of you vision, mission and values. Performance is judged by the standards of how well it contributes to achieving the future objective of the enterprise. Innovation comes from following a series of steps that include determining what you want to improve, deciding how to improve it, quantifying the improvement or its effect on the enterprise, testing it, and re-quantifying, and testing it again and again, until you get positive results.

The fifth skill is Communication. This involves how you communicate to
your people what you expect of them, how you listen to their understanding of your expectations, and how you improve your communication to close the gap between your expectations and their understanding of them. Organize your communication so it’s clear, compelling and inspiring. Present it in a variety of ways, in person, via e-mail, in newsletters, on the website, in brochures and other marketing materials.