The Ten Laws of Business
After thinking about business in general, I thought about the essence of success in business. This led me to identify the following “laws” of business success. One could probably add various other factors to these I have identified. Please do so.
Law 1: Understand the Big Picture!
We need to understand the context within which we are functioning. This entails understanding the macro environment in which we have neither control nor influence. We need to adapt to this. This environment would include the political, social, economic, and technological domains that influence us. We need to formulate responses to these factors.
Then we need to understand the industry within which we are functioning. This would mean that we understand the issues that are prevailing in the industry, how strong the competitive forces are, what factors are driving change, who the competitors are and what we can expect from them, and what the key success factors are.
Thirdly we need to understand the market. Who is the person we are or should be targeting as our customer? How should we segment the market? What are the needs and wants of this customer? This is crucial, because if we do not have this understanding, we will fail! We need to understand the world view of this customer, as our marketing stories need to aligned with this world view. Failure to do so wil lead to marketing failure.
Law 2: Drive Leadership and Management
Contrary to some authors, we need both. Managers are required, in spite of what we are sometimes told! And one should not be feeling insulted should we be referred to as a manager. Manfred Kets de Vries refers to the two roles in business. First we have the architectural roles, which typically equates to the job of the manager. Secondly we have the charismatic roles, which then equates to the job of the leader. The one without the other is meaningless. The reality is that we tend to be stronger on the one or the other, given who we are as people. But we should never view the one as less important than the other!
Law 3: People are Important
Jim Collins makes the point that it is first who, and then what. We should ensure that we have the best possible people in our companies, as the company is only as good as the people in it! I personally go out of my way to ensure that I appoint people that are better than I. That way I end up looking good.
In their Service Profit Chain, Heskett and his friends identify the employee as being of the utmost importance in the process of adding value to the customer, and of ultimately getting the returns and profits we strive towards. So when we recruit, do not try and get away from costs by recruiting people who come cheap. There tends to be a reason for their low cost!
Law 4: Culture drives the Organization
Culture refers to the way things are done here. It is based on values, attitudes, world views and mental models. We need to have a distinctive culture, a culture that binds us together. People working in the organization should have similar values that bind them together in a cohesive way. When we recruit, do bear in mind that you do not want people with similar world views. Divergent worldviews facilitates innovation and combats group think. To avoid chaos given these divergent world views, you do need a strong culture based on 3-6 core values that are held very strongly!
Law 5: Business Models provide the Value Creation Framework
Organizations should have a clear and coherent business model that clearly spells out how we will create value for our chosen customers, and what value we will thereby create for ourselves! Business models should also be protected against competitive actions by means of control points. A control point could something like becoming the industry standard, which Microsoft used to be for a very long period in time. Before we used to buy a piece of hardware, we used to ask whether it was compatible with Microsoft’s operating system. This situation made it very difficult for other players to compete against Microsoft.
Our business models should be constantly checked for relevance. Some authors go so far as to say that in most industries, if your business model is older than 5 years, you are probably not in what they call the Profit Zone (Slywotzky and Morrison).
Law 6: Strategies are required for Execution
Once we are clear about the above, we need to formulate strategies to enable us to add the value and compete successfully. We need to understand that our competitors are not sitting back and waiting for us to successfully implement our business model. These strategies need to be formulated whilst focusing on the customer, while still keeping the competitor in mind. Beware of having a fixation on the competitor to the exclusion of the customer. However, do not forget about the competitor as this will be equally as bad as ignoring the customer! Understand the strategies of the competitor, as you can rest assured they will make it their business to understand yours!
Formulate strategies at business level, as well as at the level of the respective functions, such as marketing, production, finance, etc. They should be supportive of the business strategy.
Law 7: Operating Models must be Efficient and Effective
Operating models refer to how we create value internally. These processes must be lean and mean. This is what we speak of when we refer to efficiency and effectiveness. Value must be created in the most productive way, whilst being the most cost efficient. SABMiller and Shoprite are two examples of South African companies that have very efficient operating models. SABMiller can be seen as using its low cost and very efficient operating model as a source of competitive advantage.
A typical question we need to ask ourselves are what processes (or activities) do we choose to do internally, and what processes do we outsource? Outsourcing of activities should be considered if someone else could do them better and cheaper than us.
Law 8: Cash Flow (and Returns) is King
A banking friend told me that turnover s vanity, profit is a perception, and cash is king! You need to ensure that the revenue model of your business model actually does make money! Making a small loss and trying to make up for it with volume is never a good strategy! This requires you know what your costs are and what each of your products cost. This might sound simple, but I am not so sure all companies, whilst knowing about the importance of this point, do actually know what the costs of their respective products are.
You also need to understand there is a difference between profit and cash. To optimise your cash flow, you need to develop debtors’ and inventory policies that enable this!
We also need to understand that profits and returns are a lag, the result of other activities. These other activities are seen as drivers, or lead factors, of profits. We need to understand what they are and we need to focus on them. Value is frequently intangible and we need to focus our scare time and resources on the factors that drive value.
Law 9: Innovate to be Different
Doing more of the same seldom leads to success. Copycatting your competitors will never be a sustainable strategy. We need to consistently and constantly look at innovating our business models and strategies, as well as our operating model. For this we need to divergent world views I spoke of earlier. There is a saying that what got you here, will not take you into the future successfully. The basis of our current success could and does frequently become the basis of our downfall. It has also been said that the dinosaurs became extinct due to their inability to innovate and change.
Do not try and be better. Be bold and try and be different. There is a difference.
For innovation, you need employees that can think strategically and critically. These are scare attributes, but very important ones!
Law 10: Alignment is Key
It is no use having a great business model if your strategies are not aligned with it. It is no use having a great business model if your operating model is not aligned with it. You need to ensure that your business model, strategies and operating model are aligned with your people and your ethos. If this is not the case, your organization will fail. You do not sell a Mercedes Benz by employing a person that achieved success by selling second hand VW Beetles of the 1960’s.
These are by no means meant to be the ultimate reasons for success. However, should you take care of these tenets, you would go far towards achieving success.