Proper diet and regular exercise are keys to good physical health. In business, there are also some keys to good health, specifically four things to consider: Market position, pricing analysis, operational efficiency, and capital allocation. Each deals with a different aspect of the business, but they have one thing in common. The goal of each is to drive earnings and cash into the company. Good business health requires fuel, and cash is that fuel.
What does Market Position entail? On the simplest level, it is the targeted customer’s perception of the company, products and services in relation to the competition. The Good Health Resolution is to position the company so that what you offer is both unique and valued by these specific customers. This includes the total scope of your resources. Strive to shape all assets into a “value delivery machine.” Make the total package virtually impossible to copy by competitors. If you can understand what your customers truly want and understand what the competition offers, you can create this unique and valued market position. The result: a strong customer base, maximum customer retention rate, and optimal margins.
The good health resolution of pricing is to be value-based. This means aligning what the customer receives with the price they pay, as the customer perceives it. If customers continue to perceive value, they are willing to pay the price. If you increase price, the value needs to be commensurate with the new price. This may involve product adjustments or additional services. Regardless, value-based pricing is the vehicle for flexibility on increasing prices. It provides opportunity for the greatest return on capital and effort. In other words, more cash into the business.
Operational good health means understanding how things get done, and running the business at peak efficiency. Every dollar lost or wasted in operational inefficiency is a dollar taken directly from the bottom line. Take the time to understand costs, processes, and what occurs each day in order to produce and deliver on your promises to the market. Involve employees to fully understand the implications of each activity. They do the work every day. They will most likely know what you can and should change in order to improve your efficiencies and margins. The goal with operational efficiency is to fulfill your promises to customers and the marketplace as a whole, but to do so with the lowest cost, highest margin system possible.
Capital Plan
Cash is king, and how you allocate capital can determine how long you have your kingdom. For good health, resolve to be informed and rational with regard to how you spend or invest your money. As your unique market position, value-based pricing, and operational efficiency begin to deliver a strong customer base, maximize margins, and strengthen cash flow, you will have decisions to make. Do I reinvest the money in the business? Do I take the money out as earnings? Do I return the money to investors as dividends? Do I place the money in some outside investment vehicle? Clearly, the answers to these questions are not simple, but they are important. What you do with capital directly impacts your ability to continue to grow and drive value for shareholders. Seek whatever advice you need to make sure your decisions in this area are informed and rational.
These good health resolutions should be practiced year-round, and should be part of a regularly scheduled strategic review process. A strong customer base and market position, optimized value-based pricing, and increasing shareholder value are critical to growing a business. Begin with a resolution to adopt these practices as underlying operating principles, and your growth curve should increase dramatically.
Ken Cook is managing director of Peer to Peer Advisors, an organization that facilitates business leaders helping each other. You can reach him at kcook@peertopeeradvisors.com.