Know your business
By Gary Dean, managing director of strategic consultancy, The Truffle Pig Consulting Co.
I am guessing that, as the end of 2022 approaches, even the most successful of businesses are thinking about the year ahead with justifiable apprehension – you don’t need me to tell you about the rollercoaster so I won’t, I will try and move your mind on to some key strategic tools that might help in the times ahead instead.
Several times I have written that strategy must be readily doable. If it is simply a wish list or remains as hope written on a paper or in a PowerPoint, for me it’s less then worthless.
TrufflePig is not a consultancy that acts like its gold-plated, has all the questions (but none of the answers) and tries to overwhelm with bubble charts or cuddly group hugs to explore meaning; I sincerely believe business is about being real, and yes sometimes even raw. Customers smell out phoney very quickly indeed.
My hope is to cover some key tools and concepts over the coming months, and to start with we go to one of the building blocks of strategic development; knowing your business.
Do you truly know in which dusty corners of your business the profits reside, and perhaps more importantly, can you find ways to maximise this? Which business segments are materially at the heart of how your business could develop profitably?
Seems like an obvious place to start but I have had many conversations with business owners over the years that cannot confidently answer these two ‘starters for 10’.
Identifying the segments that are the profit drivers in business is critical to putting together your strategic development plan, this is a fundamental building block without which, whatever you build, will not be stable.
Too many times I see companies serving customer segments which excite them because they generate good sales numbers, but, frustratingly, little profit. Don’t do it.
So, step one seems an obvious but frequently overlooked one, finding where your profit resides by an honest analysis of which market segments you serve, and which products to those segments earn the most margin.
And that margin should be measured honestly too. For example, if your calculation says your margin is 35% but you do not factor in delivery costs (and your sales team gives this away for free, which they will if you let them) then see how fast that margin collapses. I have sat with people who truly believed that a product line was a key money earner due to sales volume only to expose that after all the free freight they lost money on every shipment. Better to have never shipped (a nod to the wise, not every order is a good order).
Skipping this key step to pursue a market segment or product line that excites you is wasteful and endangers your whole business if you don’t know what it contributes to the bottom line. Getting stuck in the thick of things happens more than you might think as business owners focus on vanity products and projects without considering the prospects and how they will deliver to the bottom line over the next five years. Know why you are backing something and if it doesn’t make a considerable contribution, stop.
And I know that those experienced readers will say, rightly, the product mix always means there are high and low margin products, but they trade off each other and we have to offer them to bring in the customers.
That’s true, however your development strategy needs you to devote time and effort into those areas that do, or will, contribute the most to your business. Often the low hanging fruit is preferred as that’s the easiest, but is it the best choice? Always be honest.
To know your business, you need to go through this process, segmentation lies at the very heart of your business proposition and therefore its success. Done correctly it’s a truly valuable investment as it will reveal where your profitable niche is.
But segmentation is hard, you need to crunch a lot of data, you need to do analysis and to understand the market and its current and future opportunities. And you need to be prepared to act on what you discover, which might not always be comfortable, but do it and the first building block of strategic development is firmly in place.