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What makes your business tick?
By Kevin Dwyer
Friday, 14th September 2007
 
Business of any kind can become a complex thing to manage if leaders let it -

A long list of issues such as, customer needs, pricing, services, channels, distribution, manufacturing, supply chain, procurement, safety, environment, policy, processes, corporate governance, risk management and planning confront them each day.

Whether in a statutory authority, a government department or private enterprise, it is important for leaders to maintain a steady course towards the goals of their organisation. To maintain course, leaders need not only to be very clear and inclusive about goal setting, but also about what it is that enables their business to reach their goals.

For example, what drives high fixed cost companies, high variable cost companies, high Research and Development (R&D) companies; nationwide retail sales companies and companies reliant on dissemination of knowledge are very different.

High fixed cost companies need to retain focus on high volumes at appropriate margins.

For example, airlines need a high level of sales to cover their fixed costs. Without high volume, they are unable to make enough profit to invest in infrastructure, equipment or even their customers and brand. If companies such as these lose focus on volume at an appropriate margin, their business enters a downward spiral unless fixed costs can be cut.

The danger of a focus on volume without the corollary of a margin that covers fixed costs leads companies to providing goods and services considering only their variable costs. In this scenario, large customers, getting low prices for their volume are in fact loss making when fixed costs are reallocated to them. This is common in my experience in large companies with high fixed costs.

High variable cost companies need to retain focus on prices and variable costs. Companies need to look for opportunities to add further value to their customers thereby enabling them to increase prices. Value may be added by increasing the product range or up-selling to a product with more benefits or by adding a supporting service.

Productivity is also very important. Using lower cost employees to do non productive work will improve productivity and cause profits to increase rapidly. Using mechanisation or automating processes and data handling will similarly increase productivity.

Companies deriving profit from intellectual property need to remain focused on the effectiveness and efficiency of their R&D, and pricing of their intellectual property.

Pharmaceutical companies which have not retained focus research and development as their engine for future profitability have seen more failures in trials and more expensive trials resulting in poorer financial performance. Instead of tracing a downward spiral to oblivion, many companies have been forced to merge consolidating the industry into a few large players.

Costs of developing a single drug have escalated up to five hundred million US dollars. In this environment, those who do not manage the risks and productivity of R&D processes will quickly develop financial difficulties.

Companies deriving profit from the ready availability of their service or product need to retain focus on supply chain, procurement and logistics.

Retailing companies need to have high brand awareness. However, more importantly, retail stores require efficient and effective distribution of stock to their stores. Without stock on the shelves customers with a choice of retail outlet will go elsewhere. Customers with no choice of retail outlet may choose to utilise another source of other goods as a substitute for the goods sold by the retail outlet.

Organisations who deliver value through the collection and dissemination of knowledge need to focus on the quality and timeliness of their dissemination of information.

In the intelligence community it is easy to read about the consequences of poor quality of information. However, it is not only the quality of intelligence that is important. A key determinant of the quality of service is the timeliness of information. Extremely good information, arriving a week late for anyone to act on is of little use to any of the services charged with keeping our community secure.

A bureau of statistics that provides information which is not trusted and years out of date provides little value to the community it serves. A corporate plan which is updated every three years provides diminishing value as each year passes. An annual report two years out of date provides little value to an investor.

In the day to day ritual of work, leaders must understand and communicate what lies at the core of their organisation's success. It is too easy for them and their subordinates to take their eye off that proverbial ball by concentrating on peripheral issues and opportunities. In doing so they are likely to create a recipe for a poor business.

Getting back to basics always seems to be a common solution to ailing companies. Perhaps it would be easier if leaders never forgot what it is that makes their business tick.

Kevin Dwyer is the founder of Change Factory. Change Factory helps organisations who do not like their business outcomes to get better outcomes by changing people's behaviour. Businesses we help have greater clarity of purpose and ability to achieve their desired business outcomes. To learn more or see more articles visit www.changefactory.com.au or email kevin.dwyer@changefactory.com.au ©2007 Change Factory
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