What turns a business from failing to thriving?

If we combine the insights from what causes business to fail, and what makes businesses thrive, we arrive at the following formula:

  1. Have a big enough why

  2. Renew the business model

  3. Be strategic

  4. Have the right team with the right passion.

Have a big enough why

The starting point for anyone founding a business must be “why”? As someone has said, “an entrepreneur is someone who does what most people won’t to get what most people can’t.” The responsibility can be immense and the risks daunting, but the possible rewards run beyond what most people in regular employment can achieve. We will discuss the components of a “why” in another post.

Whilst the business owner should regularly review the business performance against his/her why, this comes into sharp focus when the business is on a downward trajectory. Is the why strong enough to compel the owner to stay at the controls as the business plummets? When should the owner cut his/her losses and bail out, either by closing the business or finding a ready buyer? When should the owner call in help in terms of expertise and a more objective perspective? An owner who is determined to turn the business around may want to take the actions discussed in the following sections.

Renew the business model

The key components of a business model are:

  1. A differentiated value proposition

  2. Unique processes that create and deliver this value to customers

  3. Distinctive competences employed to deploy distinctive resources to the execution of the unique processes

  4. Superior profitability

  5. Sustainable competitive advantage.

The value proposition concerns solutions that people want to their problems at a price they consider value for money within a relationship they appreciate. This requires the business to (1) understand what its target customers want in these three components; (2) identify its competitors’ value propositions; (3) differentiate its own value proposition from its competitors’; and (4) tailor its marketing mix to best secure sales.

Enterprise is about receiving inputs and combining them with know-how to create and deliver products and services that convey the solution to people’s problems. Enterprise is thus a set of coordinated processes that consume resources in the process of creating this value. The enterprise that can do this more efficiently than its competitors has an advantage in terms of the value generated and/or the costs incurred. This advantage lies in three elements: (1) the processes; (2) the resources consumed; and (3) the competences employed to execute the processes. A business that is organised to exploit to the full relevant competences and/or resources that are uncommon among competitors and costly to imitate will be able to execute the same processes as its competitors more efficiently and effectively. Furthermore, if these are deployed into superior processes that are unique to the business, the advantage is multiplied.

Effectiveness and efficiency are normally combined into “doing the right things right for the right outcome”, which for the business is superior profitability. That is, for the same capital employed, this business generates more profit than its competitors, thereby generating more cash that may be invested in strengthening its competitive advantage and growing its sales.

In short, the business that thrives has a virtuous circle in which distinctive competences are employed to deploy distinctive resources in the execution of unique processes to create and deliver differentiated value propositions that secure superior profitability and confer on the business sustainable competitive advantage.

In renewing the business model, the management team must identify how far short of this ideal its value creating system has fallen and identify the gaps it must close to restore the virtuous circle. This will undoubtedly incur a cost to deliver improved profitability, and the feasibility of this plan will determine whether the business can be salvaged.

Be strategic

Securing sustainable competitive advantage and maintaining vigilance for change are the chief components of strategic management. Whilst a responsible management team may give attention to developing strategy to secure competitive advantage, a mature management team will continue to assess the sustainability of its competitive advantage as changes occur in the marketplace, the industry serving it, and the wider context. With a clear understanding of how the cash generating system operates, the management team will know what levers to move to sustain its advantage and when the system needs to be renewed.

Install the right team

Enterprise is complex and success requires the integration of multiple disciplines including strategy, marketing, sales, operations, product and service development, finance, human resources, information, etc.. Whilst the business owner and/or CEO may strive to be generalists, they will rely on the expertise and experience of functional specialists in their management team. Whilst skills can be bought from the marketplace, competences are a blend of skills and behaviours that betray the values their holders hold. The chief task of the CEO is to cultivate a team whose competences and values align to the purpose of the business, as expressed in what it does (mission) where it is headed (vision) and who it strives to be (values). The chief tasks of management are to (1) understand how every action, inaction, reaction, and interaction contributes to the enterprise continuing to thrive in fulfilling its purpose; (2) enable its staff to apply the same test to their areas of responsibility. Thus management and staff become a team collaborating in driving the enterprise to thrive in fulfilling its purpose.