According to well-known professors William Pride, Robert Hughes, and Jack Kapoor, business is ‘the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs.’ A business, then, is an organization which seeks to make a profit through individuals working toward common goals. The goals of the business will vary based on the type of business and the business strategy being used. Regardless of the preferred strategy, businesses must provide a service, product, or good that meets a need of society in some way.
There are three key characteristics that must be met to have a business. First, businesses must be the result of individuals working together in an organized way. Second, businesses must satisfy a societal need. Third, businesses must seek to make a profit.
As Pride, Hughes and Kapoor note, businesses are comprised of individuals working together in an organized way in order to be successful. Businesses are organized around the resources needed to be successful, as well as the type of business that is being operated. Some businesses may be organized in a way that requires constant cooperation and communication with other employees. Other businesses may not require as much contact with other employees but may instead rely on automated workflows. They must decide the best way to be organized based on their individual goals.
Businesses must also satisfy a need for society. For example, a grocery store satisfies the need to be able to purchase food for ourselves and our families. Another example of satisfying a societal need is a gas station that provides needed fuel for most cars to operate.
Businesses must carefully consider what need they are meeting for society in order to strategically plan for success. For example, society may have a limited interest in purchasing a personal hovercraft for travel. Travel needs are currently met in other ways, so a business focused solely on personal hovercraft may struggle more than the gas station at meeting a definite need.
Starting a new business
Every year hundreds of thousands of Americans start new businesses. Some of it’s a natural consequence of a less friendly economy that seems to discount loyalty and experience and throws senior employees onto the street. In other cases folks feel like they are “wired” to be in business for themselves. If that’s the case you’ve probably been more or less self-employed since you were 15 years old. The idea of owning your own business, being your own boss who comes and goes as he pleases is appealing to many. Unfortunately few of us are really cut out for it. Experience teaches us that, depending on the industry, between fifty and ninety percent will fail within the first five years. Of those who succeed, you can boil all the reasons down to three things: they planned well, they had or found enough money, and they had sufficient determination. In addition, to these three essential ingredients, you also need to be a pretty good manager, marketer, salesman, financial guru, process guy, negotiator, and amateur lawyer. Many people are good as several of these things but not all. And if you’re like the rest of us you’ll either need to learn quickly or you’ll need to go get some additional team players to fill the gaps.
Creating a good business plan is the right place to start. It will help you define your expected customer base, realistically appraise the marketplace you are entering, and determine how you are going to fund the venture until it is a going concern. You’ll absolutely need a good business plan if you need investors (even if most are relatives) to help support your dream. Right behind this, and perhaps simultaneously, you’ll need a good marketing plan: How are you going to get the word out that you’re ready for customers? And don’t overlook the possibilities for free publicity. While were talking about marketing plans, get your elevator speech ready. Elevator Speech? It’s what you would tell someone about your business if you had just 20 seconds to do it. And it had better start and end with how your business helps your customers. If possible, before you leap, give both plans to a number of people who like you and care about your success and ask them for their realistic appraisal. And get real about the amount of time it’s going take you to execute your plan. No one else is in a rush to get you up and going. This includes your lawyer, if you incorporate, your accountant, your commercial landlord, your web designer, or your printer. The possible exception might be your marketing channels…if you are paying them to run ads.
Wouldn’t it be great if we could just take the risk, put in the hours, and be a smashing success right off the bat. Well maybe you can if you’re willing to do some serious market research before you risk it all. It works like this: You’ve got a product or service in mind that the world is just going to love, right? Well, let’s find out. Visualize your potential customers, make a list of 20 of them and ask for 30 minutes of their time to hit them with your scheme. Don’t even think about writing them a letter. Go for the main man/woman. Hey! Ross Perot still answers his own phone. You’re a budding entrepreneur, you better have a lot of courage. If they own storefronts just walk in unannounced and start right in on your pitch: “I’m thinking of opening a business that supports your business, can you spare a few minutes.” If they’re big guys or gals in offices, call them up. Tell them why you want a meeting, and ask for their help. Amazingly most will grant you an interview. Why? Because they too secretly want to go into business for themselves some day and they want to study those who are willing to try. Go make your pitch. Then get ready to listen. Really listen. Now ask them, if on the basis of what they’ve heard from you, would they buy from you, and if not why not? And what would it take on your part to get them to buy from you. And if so, how much, or how often? If you only get 10 prospective customers to talk to you, you will be at least three years further down the road to success and you may very well have the luxury of starting a business with a small base of real customers.
If you’re still willing to charge forward, let me take one last shot at introducing some realism into this quest: Sooner or later your new venture is going to require everything you’ve got: All your time, all your attention, and all your money and eventually all your credit. You will lose your friends. You may lose your family. No really believes this when they get started in a new venture but for some reason we just don’t seem get moving fast enough, or learn fast enough, or react fast enough, at least not until the wolf is nipping at our heels. “Nothing so concentrates the mind as the prospect of being hung in the morning” – Samuel Johnson. If you’re idea for a business isn’t really wonderful enough to bet all that, you need to get after the business of looking for your next job
Enough negativity. Lets look at how to do it. For that I’m going to send you off to several wonderful resource centers. After you look at all that do not overlook your city, county, state, and national governments. You live there and they are really partial to small businesses and startups…so learn how to talk the lingo and bid. In hard times they may be the only ones who can afford you.
Expanding an Existing Business
As the anonymous philosopher once observed, “You’re either growing or your dying”. But growing smoothly and well is a business art form. All growth must come from a firm’s capacity to grow. This capacity can be viewed as talent and money. Over time, healthy firms gain critical knowledge and skills. Whether these are in the heads of a lone individual entrepreneur or the collective knowledge of a mega-corporation, matters not. What matters is the rate at which these skills can be applied to delivering products or services, and equally as important the rate at which these skills can be effectively transferred to others. New methods and new technology can improve the speed of meeting customer needs, and are great places to start if you are tying to increase growth capacity. Still, at some time you will probably reach a point where you have to hire more people. Now we enter the most difficult arena.
Hiring new people raises a host of issues. If we hire experienced people to deal with our customers, how will we be able to sustain our corporate philosophy (attitudes, beliefs, and convictions)? If we hire inexperienced folks, how long and hard will it be to impart “our way” and make it stick. And there are practical limits on growth depending on the size of your business. Obviously, if you are tiny and have only one customer, adding a second customer gives you a tremendous growth rate. But once a company reaches $500 million or so the maximum sustainable growth rate is something less than 25 percent. Those who try to push that number invariably fall, sometimes with disastrous consequences. Why? If you try to add more than 25 percent new people to your company in a given year you will chew up too much time training and working with the inexperienced folks or you will have hired experienced folks who will take your customer relationships in places you do not want to go. If you are in a service business this 25 percent successful growth rate limitation can apply to businesses as small as 50 customer facing employees.
Micro cap companies face other growth issues. Hiring the first employee brings payroll taxes, workers compensation, and certain labor laws in to play. Pass the 25 employee threshold, and you are going to come under Title VII of the civil rights act, which will certainly impact your employment practices (how you hire, fire, promote, and reward your employees). Then get your first contract with the Federal government and you are subject to many additional reporting requirements. All of this adds a necessary but invisible drag on your ability to grow your business.
Then geography places certain limitations on growth. Open a second location and you have to have two managers since you can’t personally be in two places at once. Set up or buy an operation in another city and you are looking at slightly different codes and regulations to learn. Move into a new state and you’ve got a whole new set of taxes and laws to deal with. Open a branch in a foreign country and you can throw in cultural issues, as well as new laws and customs. Some find it easier to simply buy related businesses in other markets, but buying a business has its own unique set of activities and may prove equally as tough to deal with.
Most of the above assumes that the company is expanding its existing business product or service sales. But some to choose to expand by moving into other areas along their supply chain. For example, if you own a repair operation you might choose to open a parts department, or maybe sell the new equipment as well. Others might feel that they can pick up and unrelated business, particularly if the price is right, merge back office functions and make both businesses more profitable. Sometimes the best growth path is right under your nose and you’ve been ignoring it. One of my customers relates the following story: For months she was getting calls asking if she sold a product line that was in a related business. For months she cheerfully sent these customers up the street to another firm who handled the line. Then it dawned on her that she was giving business away. So she took on a supply of product and launched a second successful business. So this brings us to the most important growth principle of all: listen to your customers and they will show you the direction you need to grow.
Buying or Selling a Business
People sell businesses for a variety of reasons. Perhaps the owner or majority stockholder is ready to cash out and retire. This is often the case when none of the owner’s children are interested in continuing in the business. Sometimes it’s the spouse of a deceased owner who’s looking to sell. And I can think of an instance where the owner of a small chain of hardware stores sold out when he learned that Home Depot and Lowes Hardware were planning to move into his market…smart fellow.
Business buyers may be looking to launch a new career, trying to enter a new market area with the acquisition of an established business, or perhaps like Warren Buffet, just looking for a great investment opportunity.
Often both sellers and buyers contact investment bankers to help with the transaction. Investment bankers act as middlemen in helping to bring buyers and sellers together and often arrange loans, or other financing to facilitate the sale. They are also useful in helping to establish a reasonably fair price for the business. This can, and often does, involve fairly elaborate ratio analysis and projections for future sales. In some cases the valuation approach, and there are many, can depend on the reason for sale or the owners desire for a quick sale. Typical valuation examples include: Discounted Economic Income Method, Market Comparability, and the Asset Accumulation Approach. Business Valuation is complex and most buyers and sellers will want to get the expert advice of an investment banking firm or a law firm that specializes in mergers and acquisitions.
As a seller you will want to get the most value for your business. Just like you try to get your home ready for sale you also try to get your business ready for sale. For starters before you even contact a broker, get your books up-to-date, work hard to get accounts payables down as well as average days for accounts receivables. Settle any nuisance law suits. Nothing unsettles a potential buyer like looming potential liabilities, and you are going to have to give up a lot of value to settle the buyer down. Now get your numbers together showing historical financial performance, non-recurring items (settlements, asset purchases and sales), and partnership, affiliate, or franchise expenses. This would also be a good time to put some numbers together about employee and customer turnover. You’ll be expected to be able to explain your end of the business backwards and forwards, but you’ll also need to be confident, accurate, and knowledgeable in your assessment of your competition and suppliers.
The potential buyer works the other side of this process. In addition, the buyer has the requirement of making certain that all of the sellers representations are accurate, logical, conservative, and reasonable. Contact competitors and ask them what it’s like to compete with your target business. Similarly, contact key suppliers and ask them what’s its like to do business with the company. If there are major customers, you will want to ask them to what would improve the business relationship. Now consider the major business processes from taking orders to collecting cash and see if there is significant waste or redundancy…there usually is. If you are planning to add a business to an existing one you’ll need a detailed plan for what the merged business will look like after you eliminate overlapping processes.
The ultimate sales price will depend on the results of the negotiation process. The party with the most accurate data and the least sense of urgency will usually get the best end of the deal though both parties will have to be generally satisfied or it will not take place. If you find yourself at loggerheads over the deal try Peter Block’s approach to negotiating: Draw a cross on a piece of paper—label the upper left side “What I have to have to do this deal”. Then label the lower left side, “What I want to have in this deal”. On the upper right side “What the other guy has to have to do the deal” and on the lower right “What the other guy wants.” Fill in your side and ask your negotiating partner to fill in his side. If you can’t give what he has to have or visa versa, you are never going to have a deal. If you can both give the “have to haves” then trade off the “want to haves” and your there.
Saving a business
Your work long hours and endure hard times and eventually get your business on the plus side. Then the bottom seems to drops out. New orders decrease in frequency or get smaller. Where you were doing well before, now you are barely breaking even or worse, losing money. Now you find yourself scratching your head trying to figure out what happened. Maybe it’s a weak or weakening economy that’s making your customers unwilling to spend. Or maybe you have new competitors and don’t even realize it. If you’re in the repair service business you may find that manufacturers are producing products that are more reliable or that are becoming so cheap it isn’t worth the time and trouble to get them repaired. If you are a manufacturer you may be under siege by foreign competitors who are directly attacking our bread and butter product lines. Or your product line is simply going out of style. If you are a retailer you may be losing customers to Internet stores like Amazon.com or if you are a locally oriented business you may have experienced a category killer encroachment by Walmart, Home Depot, Office Depot, or some other similar depot. In one bazaar situation a fellow in the auto paint and body business moved his business from downtown Dallas to rural setting. Many of his clients were fleet operators who had used him for years. In the six weeks it took him to move his operation, all these customers found other shops that were closer, even though he offered to pick-up and deliver their vehicles without additional charge.
You tell yourself that the economy will turn around soon, or that your customers are loyal and will continue to buy from you. You see a momentary pick-up and you think your are out of the woods and boom, business slips again, only now perhaps its an even lower level. Maybe one or two large customers put some price pressure on you. You give a little, but then they’re gone. Will they come back?
This may sound simplistic but you must first figure out the real reasons that you are losing business and or customers. Start by contacting your customers and ask them why they aren’t ordering as much or as often if that’s the case. Ask your suppliers who has been ordering more materials or parts from them and why, if they know. If there are competitors that are getting stronger, find out why. If the business is weakening for everyone try to understand why this is occurring: product substitution, new retail shopping patterns, or simple economics (supply and demand). If it’s the latter you are going to be in a price war to drive out some of the competition. If they have more financial resources or better backing than you then they will win this war unless you do something differently. This would be a very good time to seriously reflect on your current and potential sources of competitive advantage and decide whether they will be sufficient to allow you to carry the day.
Once you understand what is happening to your business, why its happening, who’s doing it to you, and how, you’re ready to admit that your competitive position has become weaker and something has to change for your business to recover. That is going to require a new strategy. As Benjamin Franklyn once said, “The definition of insanity is doing the same thing over and over and expecting a different result”. Put another way, it’s quite common for once successful business owners to conclude that they just need to redouble their efforts and they will once again succeed. It’s human nature to go back to the strategies that once allowed us to be successful. You can see this in big companies who try to retrench by shedding non-core businesses. The most insane example of this that I can thing of involved Western Union who was losing profitability sold off it’s satellite and fiber optics divisions to protect it’s entrenched Mexican Money Order and Telex businesses. Whew!
If you are in a weak competitive position, you are going to have to change your strategy. Changing a strategy means new markets, new products, new services, new quality standards, new pricing, new capitalization, new partners, or some or all of the above. Fore example, if you are in a retail business or, increasingly, a service business that being eaten alive by a category killing depot or national chain: Move to where its still cheaper to you’re your business even though your prices are higher because of time and distance considerations. In the drug store business this distance needs to be at least 30 miles from the nearest Walmart –۴۰ miles would be even better. If you refuse to move then you’re going to have to offer something the big boys can’t or won’t: Different products that perhaps appeal specifically to customers in your locality: High school spirit items, locally produced crafts, or unique gift ideas. You may want to add on additional businesses like liquor and or beer sales. Here you take advantage of your knowledge of the local area to supply the items that the big boys can’t or won’t.
If you are a manufacturer who is under attack by foreign competitors and you lack patent protection, you may need to shift to custom and small run manufacturing. Sure it costs more to set up these custom runs but you can charge more and the foreigners either won’t be interested or won’t be able to respond as quickly. Here you will be able to take advantage of your industry knowledge and your physical location to work business that the cheap labor/material foreigners can’t. Or you may need to take advantage of your knowledge, skill base, and equipment and make products that people do want to buy. If you’ve been selling unfinished furniture and the Malaysian’s are eating your lunch, you may want to move to custom furniture manufacture or develop some unique, or high quality finishes that involve proprietary techniques. Better yet figure out how toyou’re your plant, people, and machines to build something other than furniture that is in demand.
If you are in the service business you can consider investing in labor saving equipment and pass on the savings to your customers. Perhaps you can add additional related services to your tire business, eg. Brakes, mufflers, inspections, or even engine rebuilds. Look up and down your industry: Who charges the big money and are they vulnerable. Who’s got a lock on the least expensive service and can they sustain it. What’s left that isn’t being addressed. You wonder how you find out the answers. Ask your customers what they would also wish you would sell, or service and decide if these things are being well served by other and whether they are in your capability to do or learn. Then get moving…You are not going to survive, much less thrive, unless you adapt!