Management: Setting direction from the top

Your company’s management team brings together experience, talent, and commitment. You want team members to find their direction from your company’s mission, values, and vision statements, as well as from the business goals and objectives that you plan to achieve. Highly skilled managers and owners are particularly important in industries that face increasing competition or fast-changing technologies (but try to think of an industry that doesn’t fit into one of these two categories today — hah).

Management determines what your company does in the future. Senior managers are officially charged with setting the direction and strategy for your company and laying the foundation for a new company, but all managers indirectly set a tone that encourages certain activities and discourages others. Your firm’s culture often is the key factor in the ability of lower-level management to have an effect on outcomes. Numerous studies have shown convincingly that culture starts at the top. Most business firms are definitely not participative democracies, and as a result, essentially no history of bottoms-up insurrections exists. Some firms are known for their autocratic culture: Question senior management, and you’re shown the door, pronto. Others are perhaps too loose, and the company resembles a child-care center more than a professional business organization. The trick is to establish and maintain a culture that’s right for the industry and its demands. (See Chapter 17 for more on this important topic.)

The following are some key questions to ask about the management and/or ownership of your company:

• How long have managers been around at various levels in your company? (Alternatively, what variety of experiences do you have as an owner?)
• Does your company plan to hire from the outside or promote from within?
• What’s the general tone set by you and your company’s management — frat house, convent, or somewhere in between?
• Do you have a management-development program in place? (Alternatively, how do you plan to develop your own skills, if you’re a sole proprietor?)
• What backgrounds do you or your managers have? Are you all cut from the same cloth, or are there some oddballs who can provide a touch of diversity in thinking and doing?
• How do you measure management performance in your company? Are you a strict results-only firm, or do you value process as equally important?
• How would you rate the general quality of your skills or those of your management team?

Organization: Bringing people together

The people who make up your company and its workforce represent one of your primary resources, both in terms of who they are and how you organize them. Although human resources (HR) are important to all companies, they play an especially key role for companies in service industries, in which people are closely tied to what you offer since the “product” itself is intangible. (We take a closer look at your organization in Chapter 16.)

Your organization starts with who your employees are, and that characteristic depends first on how well you select and train them. Beyond that, the work environment and your company’s incentive systems determine who goes on to become a dedicated, hard-working employee and who gets frustrated and finally gives up. The setup of your organization (its structure and how it adapts) can be just as important as who your employees are when it comes to creating a company team — even a small one — that performs at the highest levels, year in and year out. (See the nearby sidebar on Amazon for an example of the importance of an organization’s setup.)

The following are some key questions about your organization to consider:

• What words best describe the overall structure of your organization?
• How many reporting levels do you have between a front-line employee and your CEO?
• How often does your company reorganize?
• What are your employees’ general attitudes about their jobs and responsibilities?
• How long do employees stay with your company?
• Does your company have ways to measure and track employees’ attitudes and morale?
• What does your company do to maintain morale and positive job performance?
• Pretend you’re at the zoo. Which animal there best describes your firm?

Customer base: Pleasing the crowds

Your business success depends, to a great extent, on the satisfaction and loyalty of your customers. In Chapters 6 and 7, you discover who those customers are and what makes them tick, because understanding your customers and satisfying their wants and needs are critical to the future of your company.

Zappos was a pioneer in the online shoe retailing business. Early on its creative co-founder, the late Tony Hsieh, realized that his disruptive new business model needed something extra, since shoes and how well they fit (to say nothing of appearance) can be very different for every different buyer. He chose outstanding customer service as his differentiator. Customers could order multiple sizes of the same shoe, because sizing is not exactly a science. Also, there was a free return policy, no questions asked. Loyal customers loved the firm; in a relatively short period of time, sales grew to more than $1 billion. Tony constantly preached service; one line on the values statement read: “Build Open and Honest Relationships with Communication.” If a customer wanted to contact the firm via email, they could go for it — Zappos would respond to every single one that came in, even to the CEO. This and other then unique customer service practices were described by Mr. Hsieh in a famed Harvard Business Review article he authored; it’s worth a read if you’re interested in seeing how world-class customer service works (https://hbr.org/2010/07/how-i-did-it-zapposs-ceo-on-going-to-extremes-for-customers).

The following are some key questions to consider when you study your customer base:

• What does your company do to create loyal customers?
• How much effort do you put into tracking customers’ attitudes, satisfaction, and loyalty?
• What do you offer customers that keeps them coming back?
• How easy and economical is it for your company to acquire new customers?
• How many years does a typical customer stay with you?
• What are your competitors doing to build loyalty that you aren’t?

Research and development: Inventing the future

Research and development (R&D) often plays an important role in the long-term success of a company. R&D is particularly critical in industries where new and better products come along all the time. But your research and product-development efforts must align with your business strategy and planning to make the investments pay off.

Firms that discover, develop, and then market prescription drugs are faced with a constant problem: After a certain period of time, their Rx compounds “go generic” — that is, they lose their patent status and others can copy them. As a result, a key indicator of pharmaceutical companies’ future prospects is how well their “pipeline” of new products is filled. In 2020 Merck devoted more than $13 billion to R&D, more than 28 percent of its total revenue; Regeneron, a biotech firm, spent more than 30 percent. These are not atypical numbers either, because keeping the pipeline humming is what keeps the share price up.

The telecommunications industry is another big spender. Rarely would a firm in this sector allocate less than 10 percent of total revenue to the engineers in the new product development department as they hunt for the next big thing. Tech firms are also known for their propensity for M&A (mergers and acquisitions) action. It’s really hard to develop new things, especially for larger firms that are more bureaucratic in their attitude toward risk. One remedy is to outsource the R&D function by constantly scanning the horizon for something new that fits well with current directions, and then buy it.

If innovation is a critical success factor in your industry, keeping up with the Joneses isn’t a luxury: You either spend or bend — and possibly break. The following key questions help you examine the role of R&D in your company:

• To what extent does technology drive your industry?
• Does your company have a consistent, long-term commitment to R&D?
• How many dollars do you spend on basic research as opposed to applied research?
• How long have the key people on your research team been with you? Are you able to attract the new tech talent coming into the market?
• Does your company protect what it owns with ironclad copyrights and patents?
• Have you set up collaborative partnerships with universities, government agencies, or outside research labs?
• Do you have technology-sharing agreements (licensing) with other companies in your industry?

Digital presence: Competing in the 21st century

No matter who you are and what you’re planning for your business, you want to do it in the 21st century — right? If our assumption is correct, then we’ve got some advice for you: Think digital! Even Grandma is using the Internet to buy things and likely texting with her smartphone to the grandkids on their birthdays.

Digital commerce represents one of the great revolutions of modern times, up there with the Industrial Revolution of the late 19th century. It’s changing everything it touches, and as consumers become increasingly comfortable with its benefits and powers, they are demanding that suppliers — that means you and your business — get with it and join the parade. As you consider each and every aspect of your business plan — operations, marketing, finance, customer service, hiring, whatever — you absolutely need to understand how the digital revolution has invaded and altered the landscape.

Keep this uppermost in mind as you review your current situation analysis and map out better ways to compete (look at Chapter 8 for details on how to this). If you don’t, you will be as long gone as the 20th century.

Operations: Making things work

The operations side of your business has always been critical if you’re a company manufacturing physical products. However, the rise of “new economy” service sector firms (that is, suppliers of intangible products like finance, healthcare, education, online retailing, and so on) has cast a new light on operational excellence. This is due to the digital revolution. Today, it’s digitize or die for many business firms.

The products that you offer, be they tangible or intangible, depend entirely on the capabilities and resources of your operational facilities and workforce. It’s pretty obvious that if a fire destroys your factory, it’s going to cause headaches. But what if your website is thrown offline due to an unrecognized bug coming from an upgrade, or a hack by someone in [fill in your least favorite country]? Customers demand value in all markets today, and they simply won’t tolerate inefficiencies in any business.

Whether you make doughnuts or provide clients with data warehouses, produce cereal boxes or serial ports, run a bank or manage a hotel, operations are at the heart of your enterprise. We are truly in a New Industrial Revolution, and it is sweeping along everything in its path. It’s not just the making of physical goods that is being transformed by technology, but services provided by trained and credentialed professionals are also in the line of fire today. Many tasks traditionally done by accountants, attorneys, professors, and physicians, to name a few, can now be done more efficiently and at significantly lower cost by robotic systems. As well, the machine-like consistency of the work is also improving quality in such cases. In your own industry, what are the tasks for which the robots are coming? And are you prepared?

Operations in your company are driven, to some extent, by costs on one side and product or service quality on the other. The tension between controlling costs and improving quality has led many businesses to explore new ways to reduce costs and increase quality at the same time. New digital technologies are making this seeming contradiction possible.

How you run your operations is often at the heart of major business success stories. Way back when, Ford’s innovation of a moving assembly line allowed it to cut manufacturing costs dramatically, leading to lower prices for old Henry’s Model T that “put America on wheels.” More recently Sam Walton’s relentless push for continuous cost reduction in every aspect of the business, especially inventory management, allowed Walmart to become the world’s number one retailer via its motto of EDLP — that is, “everyday low prices.” And somewhat surprisingly, Walmart is now chasing Amazon and its super-efficient online retailing model that prizes operational excellence via cost-reducing technologies (see the earlier sidebar for Amazon’s approach).

The following are some questions on the operations side of your business to mull over:

• Does your company have programs for controlling cost and improving quality?
• Has your company taken full advantage of new digital technologies?
• Are your operating costs in line with those of the rest of the industry?
• How quickly can you scale production or expand services to meet new demand?
• Does your company use outside suppliers?
• Is your operations workforce flexible, well trained, and prepared for change? Have you explored the use of robots and/or AI to fulfill tasks?
• Can you apply your operations expertise to other parts of the business?

Marketing and sales: Telling a good story

At one time some business folks thought it was simply a “build it and they will come” world. This mentality could be found in many industries, especially high-tech. Engineers and scientists, with their natural skepticism of marketing puffery and promotional gimmicks, often thought this function was a waste of time and money. Better to put the resources into the lab. But the best product or service out there won’t take your company far if you don’t successfully market and sell it to your target audience. How you communicate to your markets, both current and potential, determines success.

This is true if the marketing and sales team consists of real people or if it’s an entirely digital force, using online methods like email or video conferencing, or even such state-of-the-art tools as virtual reality (VR) to connect. The overall marketing function — advertising, promotion, public relations (PR) — serves as your eyes and ears, giving you feedback on what customers think about and look for. It’s also your voice, telling your company’s story and putting your products and services in context, offering solutions, satisfying needs, and fulfilling wants in the marketplace.

The global market for snacks is approaching $500 billion. These are convenience foods that are eaten outside traditional meal times, portable and easy to consume on the go. They’re popular with consumer segments near the lower end of the income scale, business folks who travel and live on the road, and teenagers — especially teenagers. And it’s a very competitive market. The global beverage and snack firm PepsiCo owns the Doritos brand of flavored tortilla chips that are sold in disposable packages of varying size.

The marketers at Doritos in the United Kingdom decided they needed a better way to get to those finicky teens who loved an experience, it seems, as much as a product. They came up with an innovative new marketing campaign targeted to this demographic, termed “Make Your Play.” It offers fans a chance to win tickets to live music events, at no cost, and uses augmented reality technology to liven up things. The kids would have to locate one of the numerous posters the firm displayed throughout cities in the United Kingdom, and then scan a QR code found there onto their smartphone. Once done, this opened an audio reactive portal showing 3D objects that resembled Doritos chips and playing music by a current singer or group. How cool! After the 60-second-plus experience, viewers could use their smartphones to enter for a chance to win a ticket to a live performance by one of the entertainers featured in the video. Double cool if you win. And a win-win for Doritos and its partners in the music world as well.

The following are some questions to consider about how you currently market your product or service:

• Put together a small group of your customers and ask them for their honest opinion on your brand image. Thumbs up or down?
• When was the last time you updated your marketing image?
• Think about your current target audience (say, Baby Boomers or Generation Z) and then examine how you access the group. Are you using print newspaper ads for Gen Z with no online contact? Perhaps it’s time to change.
• Does your brand image use language or logos that inadvertently appeal to consumers who are not your prime target?
• What “origin story” do you have to tell customers about your firm and its offerings — or do you even have one?
• Take a look at your primary competitors and compare their marketing approach to yours. Which is more appealing? Why?

Distribution and delivery: Completing the cycle

To be successful, you have to make sure that your products and services actually get to their final destinations and into your customers’ hands. Distribution and delivery systems must come into play. No matter how good your products are, your customers have to be able to get them when and where they want them.

Your company most likely distributes its products and services through traditional channels — time-tested ways in which you and your competitors have always reached customers. On top of that, your distribution and delivery costs may represent a significant part of your total expenses. The standard costs often include warehouse operations, transportation, logistics, and product returns. If you operate in retail, you can end up paying for expensive shelf space as well. Supermarkets routinely ask for money up front before they stock a new item, and you pay more for the best shelf locations. After all, supermarkets control what customers see — and buy — as harried shoppers troop down the aisles with kids and carts in tow.

How — and where — customers shop is often just as important as what they buy, so when a different way to deliver products and services comes along, the new system revolutionizes a marketplace or even an entire economy. For some time now, the Internet has offered companies a new and powerful way to reach out to their customers more directly, increasing company clout and, at the same time, lowering distribution costs. The lockdowns created by the worldwide COVID-19 pandemic has turbocharged the move to online purchasing and delivery, changing forever how some industries reach and serve their customers. In the market for a used car? Carvana.com might be your choice; this online retailer not only displays its broad national inventory on its website, but it also takes trade-ins, arranges financing, and delivers right to your garage door — which would be the first time the buyer actually gets to see and touch the snazzy new toy.

It’s not just the distributors of more durable goods sold on e-commerce platforms like Amazon and eBay that connect to customers via the web today. Food purveyors, from restaurants to supermarkets, are just one example of new businesses now traveling this so-called D2C (direct to customer) route. And guess what? Customers love it! D2C has transformed distribution, and it’s here to stay. In fact, countless firms have adopted so-called “omni-channel” distribution systems, in which you, the customer, can select from multiple ways to get what you’ve just ordered. Delivered to your home? Got it (and want it express shipped; just click here!). Or do you want to pick it up yourself at the physical store? No problem. Worried about those nasties following delivery trucks and then pilfering the package off the front porch? You can have it delivered to a store with secure lockers nearby your home. Have you considered yet how these nontraditional channels might be right for your business?

It’s not just the distribution of products that has undergone change. The way a product is packaged also can have an impact on how what’s inside is perceived by customers. In Chapter 4 we note how the British-made Mini car (now owned by BMW) promoted its unusual shape and styling as central to its quirky image. In a prior edition of this book, we featured L’eggs, the pantyhose made by Hanes, which revolutionized that market through an innovative new package design (if you don’t know, the name says it all). Today take a look at the beverage bins of your favorite food market and inspect the many new packaging choices there, from dairy products to soda, beer, and much more.

If your business consists of physical products, give some thought to how a new packaging design might attract buyers. It’s not just the shape but also the materials used — the texture and feel can also make a difference. But don’t forget that brick-and-mortar retailers are selling space, so they won’t be too happy if your dandy new design takes up too much room on the shelf without generating greater sales volume.

What if your business is a service rather than a producer of something physical — say, an online provider of some good? The preceding advice can be applied to your business as well. Do you remember AOL, Yahoo, Lycos, or Excite? They were the leading Internet portals back around the year 2000. But then came Google. That firm’s home page has long been the envy of many. It is pristine, uncluttered, minimal. When it was first floated in 1999, it contrasted sharply with other portals that seemed more like Times Square at midnight than a web page; for those others, every pixel seemed to bulge with a blaring message. Today the Google design remains — pure and beckoning. What subliminal message does your home page send — a Middle Eastern bazaar? Not that there’s anything wrong with that if it fits with how you want to be perceived. But if not? Maybe the time is ripe to give your intangible business some new “packaging.”

The following are some questions about the distribution and delivery of your product or service:

• What are the costs associated with your inventory system?
• Can you reduce inventories by changing the way that you process orders?
• How much time does it take you to fill a customer order, and can you reduce the time?
• What are relative costs in these channels? Which are most effective?
• How much control do your distributors have over your company?
• Can you use any new channels to reach your customers more directly?

Financial condition: Keeping track of money

The long-term financial health of your company determines the overall health of your company, period. You simply can’t survive in business for long without having your financial house in order. Come to think of it, the expenses that you have to track when looking at company finances aren’t all that different from the issues that you face in running your own household.

If you’re just starting in business, for example, how much money your company can get its hands on up front (your initial capital) is a key to survival. When your company is up and running, you need to make sure that more money comes in than goes out (a positive cash flow) so that you can pay all your bills. (Remember those times when the mortgage and utility bills were due, but payday hadn’t come yet?)

Figuring out how to keep your company financially fit is critical to planning your business (look at the example of Nucor Steel we highlight in a nearby sidebar). When you take the time to look over your important financial statements, you give your company the benefit of a regular financial checkup. The checkup is usually routine, but every once in a while you uncover an early-warning symptom — lower-than-expected profits, for example, or an out-of-line promotional expense. Now all your financial vigilance is worth it.

The following is a list of questions to ask about your company’s financial health. (If you don’t know how to answer these questions, delegate some time to spend with Chapters 11 and 12.)

• How fast are your revenue and profits growing?
• How often are you carefully monitoring your company’s cash flow?
• Does your company have ready access to cash reserves such as a line of credit? How much?
• Does your company — and every business unit or area — have a line-by-line budget for the coming year?
• Do you consistently track key financial ratios for the company? What external sources monitor these?
• How does your company’s financial picture compare with that of the competition?